Case Title: General Motors Corp. v. Commonwealth

Citation: 

Docket Number: 032533

State: virginia

Court: Virginia Supreme Court

Date: 2004-09-17T00:00:00Z

Document:
Present:  All the Justices 
 
GENERAL MOTORS CORPORATION 
 
OPINION BY 
v.  Record No. 032533 
JUSTICE LAWRENCE L. KOONTZ, JR. 
 
September 17, 2004 
COMMONWEALTH OF VIRGINIA, 
 DEPARTMENT OF TAXATION 
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY 
Dennis J. Smith, Judge 
 
In this appeal, we consider whether the interpretation of 
the term “cost of performance” by regulations promulgated in 23 
VAC § 10-120-250 by the Commonwealth of Virginia Department of 
Taxation (the Department) is consistent with the use of that 
term in Code § 58.1-418 for purposes of determining the Virginia 
taxable income of a financial corporation. 
BACKGROUND 
The material facts are undisputed or have been stipulated.  
The case arises from a series of administrative proceedings in 
which General Motors Corporation (General Motors), a Delaware 
corporation duly authorized to do business within this 
Commonwealth, sought corrections of the assessments of its 
Virginia corporate income taxes by the Department for the tax 
years 1988, 1989, 1990, and 1991.  Although the Department 
revised the assessments and lowered General Motors’ tax 
liability for those tax years, a number of issues remained 
unresolved.  Consequently, pursuant to Code § 58.1-1825, General 
 
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Motors filed an application for correction of erroneous 
assessment of its corporate income taxes in the Circuit Court of 
Fairfax County (the trial court).  The parties thereafter 
resolved the various issues raised by General Motors in its 
application with the exception of the issue presented in this 
appeal with regard to the assessments for tax years 1990 and 
1991. 
Relevant to the assessments for those tax years, General 
Motors asserted in its application that the Department erred by 
disallowing third-party costs General Motors had included in 
calculating the “cost of performance” ratio used to determine 
the Virginia taxable income under Code § 58.1-418 of General 
Motors Acceptance Corporation (GMAC), a subsidiary of General 
Motors doing business in Virginia.  The parties stipulated that 
GMAC is a “financial corporation” within the intendment of Code 
§ 58.1-418.  They further stipulated to the amounts paid to 
third parties as claimed by General Motors, and disallowed by 
the Department, as part of GMAC’s total cost of performance.  
Under the specific facts of this case, there is no dispute that 
disallowing the third-party costs in question would increase the 
percentage of GMAC’s total income subject to Virginia taxation. 
General Motors maintained in the trial court that the 
Department lacks the statutory authority to disallow such third-
party costs from the cost of performance ratio calculation 
 
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because Code § 58.1-418 does not specifically require “cost of 
performance” to be based only upon “direct costs.”  The 
Department responded that 23 VAC § 10-120-250 “is a practical 
interpretation of section 58.1-418 as [the Department] cannot 
effectively monitor third parties to determine what part of 
their performance, if any, occurs within Virginia.” 
The trial court concurred in the view expressed by the 
Department, finding that the regulation was reasonable and not 
“plainly inconsistent” with the language of the statute.  See 
Code § 58.1-205.  Accordingly, the trial court ruled that 
General Motors had not presented evidence that the assessment of 
taxes was erroneous with respect to the Department’s exclusion 
of third-party costs from the “cost of performance” ratio 
calculation.  We awarded General Motors this appeal. 
DISCUSSION 
Well-established rules govern our consideration of the 
issue raised in this appeal.  The Tax Commissioner is empowered 
to issue regulations relating to the interpretation and 
enforcement of the laws governing taxes administered by the 
Department.  Code § 58.1-203(A).  Moreover, “[a]ny regulation 
promulgated . . . shall be sustained unless unreasonable or 
plainly inconsistent with applicable provisions of law,” Code 
§ 58.1-205(2), and the Department’s construction of a tax 
statute in such regulations, while not binding upon this Court, 
 
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is entitled to great weight.  Department of Taxation v. Wellmore 
Coal Corp., 228 Va. 149, 154, 320 S.E.2d 509, 511 (1984).  It is 
equally well established, however, that if the language of a 
statute is clear and unambiguous, a regulatory interpretation by 
the Department that is in conflict with the plain language of 
the statute cannot be sustained.  See Carr v. Forst, 249 Va. 66, 
71, 453 S.E.2d 274, 276 (1995). 
In relevant part, Code § 58.1-418(A) states: 
The Virginia taxable income of a financial 
corporation . . . shall be apportioned within and 
without this Commonwealth in the ratio that the 
business within this Commonwealth is to the total 
business of the corporation.  Business within this 
Commonwealth shall be based on cost of performance in 
the Commonwealth over cost of performance everywhere. 
 
In simplest terms, this statute requires a financial 
corporation to determine its Virginia taxable income by 
calculating the cost of performance attributable to its business 
operations within Virginia, dividing that figure by the total 
cost of performance of its operations everywhere, and then using 
that ratio to determine what portion of its total income is 
taxable as Virginia income.  By this means only income 
attributable to business conducted in Virginia is taxed by 
Virginia in instances of corporations such as GMAC doing 
business within and without Virginia. 
In promulgating 23 VAC § 10-120-250, the Department has 
defined “cost of performance” as used in Code § 58.1-418 as “the 
 
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cost of all activities directly performed by the taxpayer for 
the ultimate purpose of obtaining gains or profit.”  The 
regulation further provides that cost of performance does not 
“include activities performed on behalf of a taxpayer, such as 
those performed on its behalf by an independent contractor.”  
The effect of this regulation is to exclude from the cost of 
performance ratio calculation under Code § 58.1-418 all indirect 
expenses of business operations from both the taxpayer’s cost of 
performance in the Commonwealth and its total cost of 
performance everywhere. 
General Motors asserts, as it did in the trial court, that 
23 VAC § 10-120-250 contravenes the plain meaning of Code 
§ 58.1-418.  The effect of the regulation, General Motors 
contends, is to improperly narrow the scope of the statute to 
include only direct costs of performance in the ratio 
calculation.  General Motors further asserts that had the 
General Assembly intended to limit the calculation of the cost 
of performance ratio to direct costs, it would have done so 
expressly.  Carr, 249 Va. at 71, 453 S.E.2d at 276.  Because the 
term “cost of performance” has a plain and definite meaning, 
General Motors contends that the trial court should not have 
approved of the narrowing of that meaning by 23 VAC 
§ 10-120-250.  See Shelor Motor Co., Inc. v. Miller, 261 Va. 
473, 479, 544 S.E.2d 345, 349 (2001). 
 
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The Department responds that the trial court correctly 
ruled that 23 VAC § 10-120-250 is both reasonable and consistent 
with the provisions of Code § 58.1-418.  This is so, the 
Department asserts, because while apportionment of a taxpayer’s 
direct cost of performance between its Virginia operations and 
those elsewhere “can be readily ascertained,” it would be 
difficult to properly apportion the cost of operations performed 
by a third-party contractor who could be located anywhere in the 
world, who may or may not choose to cooperate with the 
Department and would not necessarily have any obligation to do 
so.  Thus, the Department concludes that excluding costs of 
activities performed on behalf of the taxpayer by third parties 
is a reasonable limitation on “cost of performance” and 
consistent with the use of that term in Code § 58.1-418.  We 
disagree with the Department. 
The language of Code § 58.1-418 is clear and unambiguous.  
By its express terms, the ratio to be used to apportion a 
financial corporation’s income for purposes of Virginia taxation 
is the “cost of performance in the Commonwealth over cost of 
performance everywhere.”  Nothing in this language limits costs 
of performance to direct costs or suggests that the Department 
may exclude costs incurred for activities performed on behalf of 
a taxpayer by a third party.  Thus, it is self-evident that the 
 
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narrowed definition of “cost of performance” in the regulation 
is not consistent with the plain language of the statute. 
We recognize that it may be true, as asserted by the 
Department, that the determination whether third-party costs are 
to be ascribed to the taxpayer’s business operations within 
Virginia or elsewhere presents a degree of practical difficulty 
for the Department’s auditors.  However, that is a matter to be 
addressed by the General Assembly rather than this Court. 
CONCLUSION 
For these reasons, we hold that the trial court erred in 
ruling that 23 VAC § 10-120-250 was not plainly inconsistent 
with Code § 58.1-418.  Accordingly, we further hold that the 
Department erred in excluding amounts paid by GMAC to third 
parties from the cost of performance ratio.  The parties have 
stipulated to the proper calculation of that ratio in the event 
that the costs asserted by General Motors are included in that 
calculation.  Accordingly, we will reverse the judgment of the 
trial court and remand the case for entry of an appropriate 
order consistent with the views expressed in this opinion and 
the prior stipulations of the parties to correct the erroneous 
 
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assessment of General Motors’ corporate income taxes for tax 
years 1990 and 1991.* 
Reversed and remanded. 
                     
* In light of our conclusion that 23 VAC § 10-120-250 is not 
consistent with Code § 58.1-418, we need not consider General 
Motors’ further assignment of error asserting that the 
regulation violates the Commerce Clause of the United States 
Constitution.