District of Columbia v. Pierce Associates, Inc., 80-1102.
| Decision Date | 30 December 1981 |
| Docket Number | No. 80-1102.,80-1102. |
| Citation | 440 A.2d 325 |
| Parties | DISTRICT OF COLUMBIA, Appellant, v. PIERCE ASSOCIATES, INC., Appellee. |
| Court | D.C. Court of Appeals |
Richard G. Amato, Asst. Corp. Counsel, Washington, D. C., with whom Judith W.
Rogers, Corp. Counsel, Charles L. Reischel and James E. Lemert, Deputy Corp. Counsels and Richard L. Aguglia, Asst. Corp. Counsel, Washington, D. C., were on brief, for appellant.
Before NEBEKER, MACK and FERREN, Associate Judges.
This case presents two questions concerning the business income tax laws of the District of Columbia: (1) In determining taxable income of a construction company doing business both inside and outside the District, may the Department of Finance and Revenue apportion the income by reference to a single, "sales factor" formula? (2) May the Department apportion and tax, as business income, the insurance proceeds that a Virginia company received for flood damage to its Virginia plant? The trial court implicitly answered "no" to both questions by granting appellee's motion for summary judgment and awarding appellee a tax refund of $71,144.10 plus interest. We agree. We conclude that D.C.Code 1973, § 47-1580a, as interpreted by the Supreme Court in General Motors Corp. v. District of Columbia, 380 U.S. 553, 85 S.Ct. 1156, 14 L.Ed.2d 68 (1965) (), precludes the District from applying only a sales factor in apportioning business income. We also conclude that the District, by virtue of the plain language of its own regulation, 16 D.C.R.R. § 309.5(a)(1), may not tax as business income the insurance proceeds that appellee received for damage to its Virginia plant. Accordingly, we affirm.
Appellee, Pierce Associates, Inc. (Pierce), is a mechanical contractor in the business of furnishing and installing plumbing, heating, air conditioning, and ventilation systems in buildings under construction in the District of Columbia, Maryland, and Virginia. Unlike most mechanical contractors, who subcontract their sheetmetal and sprinkler work, Pierce manufactures its own sheetmetal ducts, automatic sprinklers, and specialties. It has invested more than $1,000,000 in its manufacturing facility, which is located in Virginia. During the taxable years 1975-77, Pierce employed an average of 150 persons at its Virginia plant for an average annual payroll totaling approximately $3,000,000.
Because it conducts business in the District of Columbia, Pierce must pay corporation franchise taxes to the District based on net business income. See D.C.Code 1973, § 47-1580.1 The question is, how much of Pierce's net business income, derived from operations in three jurisdictions, is subject to this tax?2 Because Pierce, like many businesses, does not keep separate accounts of the income attributable to activities inside and outside the District, respectively, the District must apply a formula to determine the amount of net income allocable to District business. Pierce and the District do not agree on the formula to be used.
For taxable years 1975-77, Pierce apportioned its total business income in accordance with the three-factor formula set out in 16 D.C.R.R. § 309.5(e).3 According to this formula, the taxpayer first derives the "property factor"
(value of business property within D.C.),4
(value of total business property)
the "payroll factor" (D.C. payroll),5 and the
(total payroll)
"sales factor" (sales within D.C.).6 Second
(total sales)
the taypayer creates a fraction, the numerator of which is the sum of the three factors "and the denominator of which is three, reduced by the number of factors, if any, having no denominator." Id.; note 3 supra. Finally, the taxpayer multiplies total business income by this fraction and pays tax on the resulting amount. Pierce accordingly calculated that its tax liability for the three years 1975-77 totaled $135,635.15.7
The Department of Finance and Revenue disagreed with Pierce's choice of formula and thus with its calculation. For each taxable year during the 1975-77 period, the Department used a single, "sales factor" in apportioning the income of construction and contracting businesses such as Pierce, an approach authorized by 16 D.C.R.R. § 309.-5(j)(2).8 To determine Pierce's taxable income, therefore, the Department divided the company's dollar volume of sales within the District by its total sales, and then multiplied Pierce's total net business income by the resulting fraction. The Department also included in Pierce's net business income an additional $78,852.48 representing the insurance proceeds Pierce received for flood damage to its Virginia plant. The Department then determined that Pierce's tax liability for the three-year period totaled $201,032.04 and accordingly assessed a deficiency of $65,396.89 plus $5,747.21 in statutory interest.
Pierce paid and protested the deficiency assessment, but the government declined to abandon the single, sales factor formula. Pierce filed suit and moved for summary judgment, as did the District. The court denied the District's motion while granting judgment of $71,144.10 in Pierce's favor, plus interest at the rate of four percent from the date of overpayment to the date of refund. The District timely noted its appeal. See D.C.Code 1973, § 11-721(a)(1); D.C.App.R. 4 II(a)(1).
We consider, first, whether the Department of Finance and Revenue has power to apportion the income of a business, conducted within and without the District, by using a single, sales factor formula.
In General Motors, supra, the Supreme Court stated that D.C.Code 1961, § 47-1580a "requires that the net income of a corporation doing business inside and outside the District be deemed to arise from sources situated in like fashion." Id. at 557, 85 S.Ct. at 1159. The Court continued:
To understand the meaning of this limitation, we need but take the simple example of a corporation which has its manufacturing facilities located wholly in Maryland and sells all of its products in the District of Columbia. Application of the Commissioners' [sales factor] formula would result in the allocation of 100% of the corporation's income to the District. Yet there can be no doubt that the business of the corporation is carried on both within and without the District, viz., manufacture in Maryland and sales in the District. The statute does not say that net income shall be deemed to be derived from sources within and without the District only where the sales of any corporation are made both within and without the District, which is the effect of the Commissioners' regulation. The statute is phrased more broadly and commands apportionment of income to sources within and without the District whenever "the trade or business of any corporation . . . is carried on or engaged in both within and without the District." As it is clear that some part of the trade or business of this hypothetical corporation is carried on without the District, the conclusion follows that the Commissioners must "deem" some part of the income of this corporation to be derived from sources outside the District. [Id. at 557-58, 85 S.Ct. at 1159 (emphasis in original).]9
General Motors is dispositive of this case. By maintaining a plant valued at approximately $1,000,000 in Virginia and paying an average of $3,000,000 per year in wages there, Pierce is doing business in that state. The District's Department of Finance and Revenue, therefore, "must `deem' some part of the income of this corporation to be derived from sources outside the District." Id. at 558, 85 S.Ct. at 1159.
The District argues that General Motors is inapplicable because Pierce's manufacturing operations are merely "incidental" to its contracting business. Relying on United States v. State of New Mexico, 581 F.2d 803, 810-11 (10th Cir. 1978) and Dravo Contracting Co. v. James, 114 F.2d 242, 246-47 (4th Cir. 1940), cert. denied, 312 U.S. 678, 61 S.Ct. 450, 85 L.Ed. 1117 (1941), the District claims that it may tax all income derived from service contracts even when the contractor uses materials which "have been fabricated in other states, either by the contractor or by others." Id. at 246.
We do not read General Motors so narrowly as to permit a distinction between taxation of goods produced elsewhere for outright sale in the District, and taxation of goods produced elsewhere for incorporation into construction work here. In any event, United States v. State of New Mexico, supra, and Dravo Contracting Co., supra, are inapplicable because both concerned state gross receipts taxes (i.e., taxes on gross income from sales of goods and services), not taxes on net business income.10 When a state taxes gross receipts, the assessor need not consider expenses such as payroll and property because, by definition, he must tax gross — not net — income from sales. In the present case, however — as in General Motors, supra — the Department must consider the geographical distribution of expenses as well as income in order to allocate net income attributable to transactions in the District.
Accordingly, under D.C.Code 1973, § 47-1580a, as interpreted by General Motors, supra, the District may not apply a single, sales factor formula to businesses having operations inside and outside the District.11 Here, the trial court awarded a $71,144.10 tax refund plus interest to Pierce based on the three-factor formula. We affirm the trial court's judgment, for, during oral argument, counsel stated that the District did not seek a remand if this court did not sustain its use of the single, sales factor.
The District also argues that the insurance proceeds Pierce received as compensation for flood damage to its Virginia plant are business income subject to apportionment. We disagree. According...
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District of Columbia v. Pierce Associates, Inc.
...insurance proceeds that the taxpayer received for flood damage to its Virginia manufacturing facility. District of Columbia v. Pierce Associates, Inc., 440 A.2d 325, 330-31 (D.C. 1981). On that issue alone, the District petitioned for rehearing. After consideration of the petition, the taxp......