Reed Smith Client Alerts

On February 7, 2019, the Supreme Court of Virginia affirmed the Arlington Circuit Court’s denial of a corporate taxpayer’s request to use an alternative method of apportionment.1  The taxpayer had alleged that Virginia’s statutory method of apportionment did not properly reflect its income from business and sources in the Commonwealth because under the costs of performance sourcing rule all of the taxpayer’s receipts from sales of services were sourced to Virginia even though 95 percent of its market was located outside of the Commonwealth.  Despite the existence of substantial double taxation, the Court held that the statutory method of apportionment did not produce an unconstitutional or an inequitable apportionment of the taxpayer’s income.

The Corporate Executive Board Company (CEB) is headquartered in Arlington, Virginia and provides research and advisory services to large businesses around the world.  During the 2011 – 2013 tax years, CEB derived over 95 percent of its revenue from sales to customers outside of Virginia.  Based on Virginia’s statutory method of apportionment, in addition to reporting the majority of property and payroll in the Commonwealth, CEB assigned 100 percent of its sales to Virginia under Virginia’s “costs of performance” sourcing rule, which deemed all of CEB’s sales to be Virginia sales.  CEB also paid tax in dozens of other jurisdictions and assigned a large percentage of its sales to those states, as well.

CEB filed a refund claim requesting to use an alternative method of apportionment that would substitute a market-based rule for sourcing its receipts from sales of services for the statutory costs of performance sourcing rule. The Department of Taxation denied CEB’s administrative claim. The Arlington Circuit Court granted summary judgment in favor of the Department on September 1, 2017. CEB appealed to the Supreme Court of Virginia.