Opinion ID: 4575069
Heading Depth: 2
Heading Rank: 1

Heading: Location of FCC Licenses

Text: ¶ 19. VNT argues that the licenses are localized in New York because they convey “privileges than can only be exercised in a particular place”—namely, the right to broadcast in a specific geographic area and the corresponding right to deny others the ability to broadcast. Regulation § 1.5833-1(a)(1) provides that business income shall be apportioned to Vermont based on the extent to which the income “is derived from any trade, business, or activity conducted” within the state. Nonbusiness income, however, is allocated in full to the state where the income producing assets are “located” or have a “situs.” Regulation § 1.5833-1(e). If the assets have neither a location nor a situs, the income is allocated to the business’s commercial domicile. Id. ¶ 20. Here, there is no dispute that the sale of the licenses qualified as nonbusiness income. The issue is whether the Commissioner erred in concluding that the income-producing assets—i.e., the licenses—were neither located in nor had a situs in New York. The Commissioner concluded that the licenses did not have a location because intangible property, by definition, has no physical location, and the mere fact that the licenses conveyed rights that could be exercised in New York did not mean they were located there. According to the Commissioner, the licenses 8 also did not acquire a New York situs because VNT never engaged in business activities with the licenses there, which means that VNT never availed itself of New York’s laws. ¶ 21. VNT argues that in interpreting the Regulation, the Commissioner conflated “situs” with the concept of “nexus.” According to VNT, whereas nexus is the “constitutional standard that considers the sufficiency of connections between a taxpayer and the state seeking to impose a tax,” the term situs in Regulation § 1.5833-1 “simply asks where an asset is located for purposes of allocating nonbusiness income.” Citing New York ex rel. Whitney v. Graves, 299 U.S. 366 (1937), VNT argues the FCC licenses are located in New York because they grant a right that can only be exercised there. ¶ 22. “We approach regulatory construction in the same manner as we do statutory interpretation.” In re Williston Inn Grp., 2008 VT 47, ¶ 14, 183 Vt. 621, 949 A.2d 1073 (mem.). “[O]ur overall goal is to discern the intent of the drafters.” Conservation Law Found. v. Burke, 162 Vt. 115, 121, 645 A.2d 495, 499 (1993). “[W]e do so by examining the plain meaning of the regulatory language, with other tools of construction should the plain meaning rule prove unavailing.” In re Conservation Law Found., 2018 VT 42, ¶ 15, 207 Vt. 309, 188 A.3d 667 (quotation and alteration omitted). ¶ 23. However, because agencies, rather than the Legislature, draft regulations, “[w]e employ a deferential standard of review of an agency’s interpretation of its own regulations.” State v. Grenier, 2014 VT 121, ¶ 20, 198 Vt. 55, 110 A.3d 291 (quotation omitted). “Our deferential level of review, however, does not equate with mere judicial passivity . . . .” In re Wal-Mart Stores, Inc., 167 Vt. 75, 80, 702 A.2d 397, 400 (1997) (quotation omitted). We still conduct an independent review and will overturn an agency’s interpretation of its own promulgated regulation that exceeds the authority granted under the state enabling statute, that conflicts with past agency interpretations of the same rule, that results in unjust, unreasonable, or absurd consequences, or that demonstrates compelling indications of error. 9 In re Conservation Law Found., 2018 VT 42, ¶ 16 (quotation and citations omitted). ¶ 24. Consistent with this deferential standard of review, we conclude that the Commissioner correctly determined that “situs” is a term of art referring to where intangible property is constitutionally subject to taxation. Applying this term of art, the Commissioner did not err in determining the licenses did not have a New York situs.
¶ 25. VNT first argues that the term “situs” in Regulation § 1.5833-1 is synonymous with location. We disagree. The Regulation’s plain meaning, the presumption against superfluous language, and VNT’s own argument indicate that situs is a term of art referring to where intangible property is constitutionally subject to taxation. ¶ 26. Beginning with the plain text, the Regulation, phrased slightly differently, directs nonbusiness income to be allocated to the state of a business’s commercial domicile provided that the income-producing assets have neither a “location” nor a “situs.” Regulation § 1.5833-1(e). It is a basic presumption of statutory interpretation “that language is inserted in a statute advisedly.” Trombley v. Bellows Falls Union High Sch. Dist. No. 27, 160 Vt. 101, 104, 624 A.2d 857, 860 (1993). We accordingly “construe statutes to avoid rendering one part mere surplusage.” In re Jenness & Berrie, 2008 VT 117, ¶ 24, 185 Vt. 16, 968 A.2d 316. ¶ 27. Applying the presumption in this case, we must presume that the Department intended the words “location” and “situs” in the Regulation to carry different meanings. Otherwise, the parts of the Regulation referencing situs would be “mere surplusage.” Id. This presumption is confirmed by the fact that “location” and “situs” have different meanings. Whereas “location” refers to a physical position, see Location, Black’s Law Dictionary (11th ed. 2019), “situs” is “[t]he location or position (of something) for legal purposes,” Situs, Black’s Law Dictionary (11th ed. 2019). For taxation purposes specifically, “situs” is a term of art referring to where an intangible asset is constitutionally subject to taxation. See First Bank Stock Corp. v. 10 Minnesota, 301 U.S. 234, 237-38 (1937); Wheeling Steel Corp. v. Fox, 298 U.S. 193, 209-10 (1936). ¶ 28. “[D]ue process requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.” Miller Bros. Co. v. Maryland, 347 U.S. 340, 344-45 (1954). A state’s authority to tax is accordingly based on the “protection, opportunities and benefits [it] confers.” Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 778 (1992) (quotation omitted). “The simple but controlling question is whether the state has given anything for which it can ask return.” ASARCO Inc. v. Idaho State Tax Comm’n, 458 U.S 307, 315 (1982) (quotation omitted). ¶ 29. Based on these constitutional principles, tangible property is exclusively subject to tax “within the territorial jurisdiction of the taxing state,” First Bank Stock Corp., 301 U.S. at 240, because the taxing state has provided “the benefit and protection of laws enabling the owner to enjoy the fruits of his ownership,” Curry v. McCanless, 307 U.S. 359, 364-65 (1939) (“The power of government and its agencies to possess and to exclude others from possessing tangibles, and thus to exclude them from enjoying rights in tangibles located within its territory, affords adequate basis for an exclusive taxing jurisdiction.”). ¶ 30. This rule, however, is “meaningless when applied to intangibles which, since they are without physical characteristics, can have no location in space.” First Bank Stock Corp., 301 U.S. at 240; see also McCanless, 307 U.S. at 365 (“Very different considerations, both theoretical and practical, apply to the taxation of intangibles, that is, rights which are not related to physical things.”). To determine where intangible property is subject to taxation, we indulge in a “metaphor,” Graves, 299 U.S. at 372, and assign such property a fictionalized tax situs for the purpose of “symbolizing . . . those considerations which are persuasive grounds for deciding that a particular place is appropriate for the imposition of [a] tax.” First Bank Stock Corp., 301 U.S. at 240-41; Wheeling Steel Corp., 298 U.S. at 209 (“[B]y reason of the absence of physical 11 characteristics [intangibles] have no situs in the physical sense, but have the situs attributable to them in legal conception.”). ¶ 31. Intangibles are generally subject to tax at the owner’s domicile. Graves, 299 U.S. at 371-72; see also Wheeling Steel Corp., 298 U.S. at 209 (“[W]e have held that a state may properly apply the rule mobilia sequuntur personam and treat [intangibles] as localized at the owner’s domicile for purposes of taxation.”). This is so because intangible rights “are but relationships between persons, natural or corporate,” and the power of government over them “can be made effective only through control over and protection afforded to those persons whose relationships are the origin of the rights.” McCanless, 307 U.S. at 366. ¶ 32. Despite “wide application” of the general principle that intangible property is subject to taxation at the owner’s domicile, “an important exception has been recognized.” Wheeling Steel Corp., 298 U.S. at 209. Intangibles acquire a business situs—“as distinguished from the legal domicil[e] of their owner,” First Bank Stock Corp., 301 U.S. at 238—“when the taxpayer extends his activities with respect to his intangibles, so as to avail himself of the protection and benefit of the laws of another state, in such a way as to bring his person or property within the reach of the tax gatherer there.” McCanless, 307 U.S. at 367; Graves, 299 U.S. at 37172 (recognizing that intangibles are “taxable only at the domicile of the owner” unless they have acquired a “business situs” elsewhere). ¶ 33. By using the terms “location” and “situs” in Regulation § 1.5833-1, the Department clearly intended to distinguish between tangible and intangible assets and incorporate the abovementioned constitutional principles to determine where nonbusiness income is subject to taxation. The Regulation directs nonbusiness income derived from tangible assets—i.e., assets with a location—to be allocated to the state where the assets are located because, constitutionally speaking, tangible property is exclusively subject to taxation at its location “within the territorial jurisdiction of the taxing state.” First Bank Stock Corp., 301 U.S. at 240. The concept of location 12 is “meaningless,” however, when considering where intangible assets are subject to taxation. Id. The Regulation accordingly introduces the concept of “situs” to determine where nonbusiness income derived from intangible assets is subject to taxation and incorporates the constitutional rule that intangibles are “taxable only at the domicile of the owner” unless they have acquired a situs elsewhere. Graves, 299 U.S. at 371-72. ¶ 34. This reading of the Regulation—that “situs” is a term of art referring to where intangible property is constitutionally subject to taxation—is the only way that, under the Regulation, nonbusiness income derived from intangible assets could ever be allocated to a state other than a business’s commercial domicile, which is exactly the result that VNT advocates for. VNT argues the FCC licenses are allocated to New York, which is not the state of its commercial domicile. However, if—as VNT argues—the term situs in the Regulation is synonymous with location, then, under the Regulation, intangible assets would always be allocated to the state of commercial domicile because intangible assets, by definition, do not have a physical location. Wheeling Steel Corp., 298 U.S. at 209. Because the FCC licenses are intangible assets, and therefore have no location, the only way they could be allocated to New York is if they have acquired a situs there. Despite arguing that the word situs in the Regulation is synonymous with location, the result VNT seeks requires that situs be interpreted as a term of art.
¶ 35. The remaining question is whether the Commissioner erred in concluding the FCC licenses did not have a situs in New York. The Commissioner reasoned that the licenses did not have a situs in New York because VNT never used the licenses in business activity there. That the licenses granted rights to broadcast in New York was also not sufficient to establish a situs because the broadcast areas “were simply market areas drawn on the map by the FCC.” ¶ 36. Citing Graves, VNT argues that an intangible asset has a situs, regardless of any actual business use, if the asset grants a right that can only be exercised in a particular place. 13 Because the FCC licenses grant a right to broadcast in New York, VNT argues that the licenses have a situs there. Applying the deferential standard of review associated with an agency’s interpretation of its own regulation, we conclude that VNT has not demonstrated that the Commissioner erred in concluding the FCC licenses did not have a New York situs. ¶ 37. It is certainly true that in Graves, the United States Supreme Court held that an intangible asset may have a situs, regardless of any business use, if the intangible grants a right that “is fixed exclusively or dominantly” at a particular place. 299 U.S. at 372-73. This statement, however, must be placed in context. To do so, we return to some basic principles about taxation. The concept of situs is a way of “symbolizing . . . those considerations which are persuasive grounds for deciding that a particular place is appropriate for the imposition of [a] tax.” First Bank Stock Corp., 301 U.S. at 240-41. A state’s ultimate power to tax is based on the “protection, opportunities and benefits [it] confers.” Allied-Signal, Inc., 540 U.S. at 778 (quotation omitted). “The simple but controlling question is whether the state has given anything for which it can ask return.” Idaho State Tax Comm’n, 458 U.S. at 315 (quotation omitted). ¶ 38. Consistent with these principles, in Graves, the United States Supreme Court recognized that an intangible asset may acquire a situs if either (1) the intangible is used in “the actual transactions of a localized business” or (2) the intangible grants a right that is “fixed exclusively or dominantly” at a particular place. 299 U.S. at 372. In the first instance, an intangible acquires a situs because the taxpayer has “extend[ed] his activities with respect to his intangibles, so as to avail himself of the protection and benefit of the laws of another state, in such a way as to bring his person or property within the reach of the tax gatherer there.” McCanless, 307 U.S. at 367. ¶ 39. In the second instance, however, the intangible has a situs regardless of whether the intangible is actually used in business. Graves, 299 U.S. at 373 (explaining that “[t]he nature of th[e intangible] right is not altered by the failure to exercise it”). What is implied in the Court’s 14 analysis in Graves is that the intangible has been created or protected by a state’s laws. The intangible at issue in that case was a membership in the New York State Stock Exchange. In determining that the membership had a situs in New York regardless of any actual business use, the Court pointed out the multiple benefits that New York law had provided, explaining that the membership embraced: the privilege of a member to transact business on the Exchange as well as a valuable right of property which is the subject of transfer with the approval of the Exchange and may survive resignation, expulsion or death. In both aspects the right is held and can be exercised only in subjection to the constitution, by-laws and rules of the Exchange. The Exchange is a market place. The privilege which inheres in the membership is the right to conduct transactions at that market place. That privilege of conducting the business of the buying and selling of securities on the floor of the Exchange is the dominant feature of the membership or “seat.” Id. at 372-73 (footnote omitted). Graves and basic constitutional principles of taxation indicate that intangible assets can have a situs, regardless of any business use, if the right associated with the intangible is fixed in a particular place and that place’s laws have provided protection and benefits. Again, “[t]he simple but controlling question is whether the state has given anything for which it can ask return.” Idaho State Tax Comm’n, 458 U.S at 315. ¶ 40. Considering all of these principles, the Commissioner determined that the FCC licenses did not have a situs in New York by virtue of granting rights to broadcast there. Throughout his decision, the Commissioner explained that the FCC licenses granted rights that were created and protected by the FCC, not New York. Because the rights were created by the FCC, the Commissioner concluded that New York did not protect or benefit VNT’s passive investment and, therefore, the licenses did not acquire a situs there. Given the deferential standard of review and the Commissioner’s thorough reasoning as to why the FCC licenses did not have a situs in New York, VNT has failed to demonstrate any “compelling indications of error.” In re Conservation Law Found., 2018 VT 42, ¶ 16 (quotation omitted). 15