The Virginia Department of Taxation’s method for assessing the petitioner’s taxes is constitutional as applied under the “dormant” Commerce Clause and the Due Process Clause of the U.S. Constitution.
The crux of the disagreement between the parties is whether the tax is fairly apportioned. The parties agree that Virginia’s method of assessing the petitioner’s corporate income is internally consistent, so the question is whether the tax is externally consistent.
No U.S. Supreme Court precedent holds that the dormant Commerce Clause or the Due Process Clause requires one of two taxing states to recede simply because both have lawful tax regimes reaching the same income. The content for the petitioner’s core product was developed by its employees working in Virginia. The servers on which the product resides are located in Virginia. Each time a customer uses the core product, the customer reaches into Virginia to consult materials developed in Virginia and stored in Virginia. Thus, the Tax Department’s apportionment of income did not reach beyond that portion of value that is fairly attributable to economic activity within the taxing state. Virginia’s apportionment formula does not create a “grossly distorted” result.
In addition, 23 VAC § 10-120-280(B)(4)(b) doesn’t apply to allow relief here. Any double taxation is not “attributable” to Virginia. The petitioner’s double taxation is “attributable” to changes adopted more recently by other states in their apportionment formulas, and in particular to the increased trend of using single-factor sales apportionment. Virginia adopted its apportionment formula as part of an effort to provide a uniform method of division of income for tax purposes among the several taxing jurisdictions. The Commonwealth has adhered to its formula for nearly 60 years. The record also fails to establish that other states’ sourcing methods are “unique.”