Par Mark L. Nachbar
In Corporate Executive Board v. Virginia Department of Taxation,1 the Virginia Circuit Court (“Court”) found that the use of the statutory cost of performance rule to source sales other than sales of tangible personal property2 was appropriate for determining Corporate Executive Board’s (CEB’s) in-state sales. CEB had requested that it be allowed to use a market approach to source its sales using the billing zip codes of its customers. The Court found that CEB did not meet its burden of proof to show that statutory method caused inequitable results.
CEB is a Virginia-based service company and provider of data and analytical service content delivered electronically to customers in state and out of state of Virginia and internationally. The majority of the costs to assemble and disseminate the data are conducted in Virginia. Under the statutory formula, because the majority of the costs of performance were in Virginia, the situs of the sales would be Virginia.
CEB requested alternative apportionment relief to use a market-based sourcing method, which it claimed would better reflect its level of activity in the state and would be more reflective of the benefits received by its customers and the state. Additionally, CEB asserted that the statutory sales factor and apportionment method was distortive. As part of its argument, CEB presented expert testimony that “customer based sourcing is not unique to its proposal and reflects the overwhelming trend in the country.” CEB pointed to the fact that the combination of customer-based sourcing in many states, combined with cost of performance sourcing in Virginia, resulted in double taxation of its income. CEB used this position to assert that Virginia’s statutory apportionment formula caused inequitable results.
On the surface, this case would seem to be cut and dry; alternative apportionment requests are often denied, and it is a high bar to meet the burden of proof. What is surprising is the stark contrast this case has when compared to recent decisions in Dish v. South Carolina DOR,3 DirecTV v. South Carolina,4 and AT&T v. Oregon Department of Revenue5 where the courts ruled that only costs pertaining to where the content is delivered should be considered in determining costs of performance. The result in each of these cases was to source the revenue based on customer location.
Another interesting detail of this case is the Court’s dicta with respect to CEB’s receipts from customers who paid the subscription fee but did not access the content. The Court found that in these circumstances, the place in which the content is developed is more indicative of the generation of the revenue than the billing address of the subscriber. Perhaps this position would be relevant to a stance opposing market sourcing when the data is not accessed by a customer.
1 Corporate Executive Board v. Virginia Department of Taxation, Virginia Circuit Court of Arlington County, (September 1, 2017) Doc. 2017-68801.
2 VA Code Ann. Sec. 58-1-146.
3 Dish v. South Carolina Department of Revenue, Docket No. 14-ALJ-17-0396-CC (May 20, 2016).
4 DIRECTV, Inc. & Subsidiaries v. South Carolina Department of Revenue, South Carolina Court of Appeals, No. 2015-001509 (August 30, 2017).
5 AT&T Corp. v. Oregon Department of Revenue, 357 Ore. 691 (September 11, 2015).