Virginia Supreme Court addresses apportionment issues

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February 2019


The Virginia Supreme Court recently ruled that the costs of performance apportionment methodology as applied to a service company headquartered in the state did not violate the Commerce Clause or Due Process Clause of the US Constitution.

The takeaway

The outcome is not altogether surprising as the Virginia Supreme Court previously had considered and rejected alternative apportionment relief on similar grounds in its 1976 Lucky Stores decision. However, since much has changed in multistate apportionment since Lucky Stores ─ in particular, the explosive growth in states’ adoption of market sourcing ─ the thinking was that the Court might deem that the double taxation was in fact the result of Virginia’s cost of performance sourcing for service businesses like CEB.

In practical terms, the decision likely will make it more difficult for taxpayers whose taxable income may be distorted due to Virginia’s cost of performance rules to obtain apportionment relief from the Department of Taxation. There do not appear to be known cases in the history of Virginia Code § 58.1-421 where the Department has granted true alternative apportionment relief, and the Department may cite CEB in rejecting future claims with seemingly even stronger facts than CEB’s. At the same time, the Court’s decision may spur the business community to press the General Assembly to enact market sourcing in 2020 or future years.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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