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

Heading: Tax Assessment

Text: ¶ 18. The Commissioner held, pursuant to Regulation § 1.5833-1, that the capital gain from the sale of the licenses was subject to Vermont tax because the licenses had neither a location nor a situs, and VNT’s commercial domicile was in Vermont. VNT argues that the Commissioner erred in holding that the capital gain was subject to Vermont tax because (1) the licenses are located in New York; and (2) assuming the licenses have no location, VNT’s commercial domicile is in Connecticut, not Vermont.
¶ 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
¶ 41. Because the FCC licenses have neither a location nor a situs, the capital gain from the sale of the licenses is allocated to VNT’s commercial domicile. Regulation § 1.5833-1(e). The Commissioner concluded that the “true test” for commercial domicile is “to consider all the facts, to determine where the actual conduct of busines operations occurs, and which state gives the greatest protection and benefits to the corporation.” (Quotations omitted.) Applying this test, the Commissioner concluded, based on extensive factual findings, that VNT’s commercial domicile in 2012 and 2013 was in Vermont: Vermont was the location of the principal office, the place where high-level policy was implemented, where the conduct of day-today operations occurred, where the greatest number of office staff and business employees worked, and where the business records were kept, and was the state that gave the greatest protection and benefits . . . . ¶ 42. VNT does not challenge any of the Commissioner’s factual findings on appeal. Instead, VNT argues that the Commissioner improperly gave “equal weight” to “nonessential factors” in concluding that its commercial domicile was in Vermont. Citing the United States Supreme Court’s decision in Wheeling Steel Corp. v Fox., 298 U.S. 193 (1936), VNT argues that the most important factor is “the center of authority and control.” Applying this test, VNT argues its commercial domicile is in Connecticut because that is where its president makes “high-level strategic decisions” and the board of directors meets. ¶ 43. As described above, supra, ¶ 23, “[w]e employ a deferential standard of review of an agency’s interpretation of its own regulations.” Grenier, 2014 VT 121, ¶ 20. We begin with some basic background principles on the concept of commercial domicile, which arose to address where intangible property owned by corporations should be taxed. Intangible property is generally subject to tax at the owner’s domicile. Graves, 299 U.S. at 371-72. Because “a corporation is deemed for most purposes to be domiciled in the state of its incorporation, intangibles are usually 16 taxable in that state.” S. Pac. Co. v. McColgan, 156 P.2d 81, 93 (Cal. Dist. Ct. App. 1945). The rationale for this rule is that corporations generally carry on their business “in the state of incorporation and generally [have their] principal place of business there.” Id. As such, “the corporation benefit[s] from the functions of government in respect to its activities generally, and in relation to its intangibles, more in that state than in any other.” Id. ¶ 44. This rule, however, is based on a fiction, and in some circumstances, “[l]egal fiction should be made to yield to reality.” Cargill, Inc. v. Spaeth, 10 N.W.2d 728, 733 (Minn. 1943). When a corporation “does not operate at its legal domicile,” but “maintains in another state its principal business office, from which its management functions,” the corporation is said to acquire a commercial domicile. Kevin Assocs., L.L.C. v. Crawford, 2003-0211, p. 9 (La. 1/30/04); 865 So. 2d 34, 40; see also Anniston Sportswear Corp. v. State, 151 So. 2d 778, 782 (Ala. 1963) (“[W]hen [a corporation] does not operate at its legal domicile and maintains in another state its principal business office . . . the latter place is considered as its ‘commercial domicile.’ ”); Cargill, Inc., 10 N.W.2d at 733 (“A corporation may make its actual, as distinguished from its technically legal, home in a state other than that of its incorporation.”). A corporation is subject to taxation at its commercial domicile because it is there that it receives the benefits provided by the government and may therefore “be required to pay its fair and just share of the cost of such benefits.” Anniston Sportswear Corp., 151 So. 2d at 782. ¶ 45. With these background principles in mind, we turn to the question at issue here. What VNT disputes is the relevant test for determining where a corporation acquires a commercial domicile. It asserts that the dispositive factor is the location of high-level decision making and the Commissioner improperly weighed other less important factors. Under Regulation § 1.5833-1(e), commercial domicile is defined as “the principle [sic] place from which the business is directed or managed.” The term commercial domicile was first defined in Wheeling Steel Corp. v. Fox. See Sinclair Pipe Line Co. v. State Comm’n of Revenue & Taxation, 339 P.2d 341, 344 (Kan. 1959) 17 (“The matter of a commercial domicile of a corporation and the power to tax has been considered by the Supreme Court of the United States in several cases.” (citing Wheeling Steel Corp., 298 U.S. 193)); N. Baton Rouge Dev. Co. v. Collector of Revenue, 304 So. 2d 293, 297 (La. 1974) (explaining that commercial domicile “is generally understood as defined in Wheeling Steel Corp. v. Fox”); Assoc’d P’ship I, Inc. v. Huddleston, 889 S.W.2d 190, 198 (Tenn. 1994) (“The term, ‘commercial domicile,’ originated in the U.S. Supreme Court decision, Wheeling Steel Corp. v. Fox.”). ¶ 46. In Wheeling Steel Corp., the United States Supreme Court held that a Delaware corporation had a commercial domicile in West Virginia. 298 U.S. at 211-12. The Court explained that the corporation maintained “its general business offices” in West Virginia, which was where the corporation kept “its books and accounting records,” directors held their meetings, and officers conducted “the affairs of the corporation.” Id. at 211. The general business office was the corporation’s “center of authority” that made it “the actual seat of its corporate government.” Id. at 212. ¶ 47. In interpreting Wheeling Steel Corp., courts have emphasized that the principal inquiry for commercial domicile is to consider where the business is managed and directed. Memphis Nat. Gas Co. v. Beeler, 315 U.S. 649, 652 (1942) (holding that corporation had commercial domicile in Tennessee because “[i]t manage[d] its business from its office” there); S. Nat. Gas Corp. v. Alabama, 301 U.S. 148, 153-54 (1937) (concluding that corporation’s commercial domicile was in Alabama because the “ ‘entire management’ was conducted from its principal office at the place”); Anniston Sportswear Corp., 151 So. 2d at 782(explaining that commercial domicile is at company’s “principal business office, from which its management functions”); N. Baton Rouge Dev. Co., 304 So. 2d at 297 (“[T]he ‘commercial domicile’ exists where the principal place of business is located and from which the corporation’s activities function and are managed.” (quotation omitted)); Assoc’d P’ship I, Inc., 889 S.W.2d at 198 (“[T]he 18 commercial domicile of a corporation is the place from which the business is managed or directed . . . .”). ¶ 48. To determine where a business is managed or directed, courts consider a variety of factors, including, but not limited to, where employees and officers work, where orders are received and fulfilled, where the books and bank accounts are located, and, of course, where the board of directors meets. Memphis Nat. Gas Co., 315 U.S. at 652 (explaining that company managed business in Tennessee because that is “where it ke[pt] its accounts, provide[d] for the payroll of employees on its line in Tennessee and other states, and prepare[d] and sen[t] out bills for gas delivered in Tennessee and other states”); S. Nat. Gas Corp., 301 U.S. at 154 (explaining that management was conducted in Alabama because that is where company received and fulfilled orders); Assoc’d P’ship I, Inc., 889 S.W.2d at 198 (considering where officers and employees worked, management meetings were held, books kept, and bank accounts located). ¶ 49. Where the board of directors meets is certainly a relevant factor in considering commercial domicile, but it is neither determinative nor does it carry more weight than any other factor. Crawford, 865 So. 2d at 42 (explaining that location of board meetings “alone is not determinative of commercial domicile”). In fact, the notion that the location of the board of directors meetings is the most important factor runs counter to the basic concept of commercial domicile, which is to look beyond the “fiction” that a corporation is domiciled in its state of incorporation and instead require it “to pay its fair and just share of the costs of . . . benefits” provided in the state where it actually operates. Anniston Sportswear Corp., 151 So. 2d at 782; see also S. Pac. Co., 156 P.2d at 99 (“[T]he contention that, as a matter of law the only state that can possibly be held to be its commercial domicile is that state where its board of directors meets, is as unrealistic, unsound, and artificial as the concept that the corporation for all tax purposes is domiciled in the state of incorporation.”). 19 ¶ 50. Considering the definition of commercial domicile, and the various precedents interpreting this term, the Commissioner did not err in concluding that VNT’s commercial domicile was in Vermont. Consistent with this precedent, the Commissioner considered numerous factors to determine that VNT’s commercial domicile was in Vermont because that is where it conducted business operations and received the most benefits. Specifically, the Commissioner found that VNT’s day-to-day business was conducted out of its Springfield, Vermont office because at that office, the Chief Financial Officer, among other things, filed all of VNT’s 2012 and 2013 Vermont non-income tax returns, paid sales tax, and paid payroll withholding tax. Most of the business records for the years 2012, 2013, and 2014—including sales records, financial statements, withholding-tax filings, W-2s and W-3s, and supporting work papers—were kept in the Springfield office. In 2012 and 2013, a majority of VNT’s employees, fifty-seven out of fiftynine, were subject to Vermont withholding tax, which meant that VNT had over fifty “employees in each year who were either resid[ing] in Vermont or working in Vermont.” The Commissioner also noted that in its 2013 Connecticut corporate return, VNT affirmatively stated, under the penalty of perjury, that its principal place of business was in Vermont. By contrast, the Commissioner found that during those same years, VNT had no property in Connecticut, had no employees there, and did not store any business records there. Furthermore, the Commissioner found that the record was unclear as to “how many board meetings were held in Connecticut in 2012 and 2013.” VNT does not challenge any of these findings.