Can Taxpayers Find an Advantage in Vodafone Nowhere Income Argument?

By , and on September 29, 2014

It is difficult, but not impossible (and quite satisfactory), to find a silver lining for taxpayers in the alternative apportionment opinion Vodafone Americas Holdings Inc. v. Roberts, M2013-00947-COA-R3CV, 2014 WL 2895900 (Tenn. Ct. App. June 23, 2014).  In this much discussed case, the Tennessee Court of Appeals affirmed a variance from the statutory cost of performance sourcing method for the apportionment formula on the basis that this method failed to meet the higher goal of fairly representing the business Vodafone derives from Tennessee. As part of the rationale for the variance, the Commissioner and Court of Appeals relied on the need to avoid “nowhere income.”  As long as each state has independent sovereign authority to adopt the apportionment methodology of its choice, using the risk of nowhere income as a reason to support application of discretionary authority to vary from a statutory formula is contrary to the law and policy supporting alternative apportionment authority as well as basic concepts of our federal system.  However, until this case is overturned, looking to how other states tax income is relevant in Tennessee in determining whether Tennessee’s statutory formula should be applied.  The horse has left the hen house and taxpayers should take advantage of this.  Specifically, if a taxpayer finds that, based on the existing statutory formulas, its receipts are included in the numerator of both Tennessee and another state, the taxpayer should seek relief to remove these receipts from the Tennessee numerator.  This avoids the double taxation burden that is the flip side of Tennessee’s nowhere income fears.

It is useful to look specifically at what the court said.  In Vodafone, the court noted that:

“Because [the Commissioner’s authority to issue a variance] applies when the statutory formula does not ‘fairly represent the extent of the taxpayer’s business activities in this  state,’ the variance can apply where the state is entitled to receive more taxes as well as a situation where the taxpayer is entitled to pay less taxes. The fact that other states do not tax the Tennessee receipts indicates that it is not unfair for Tennessee to do so.” Id. at 23.

In the accompanying footnote, the Court of Appeals notes that the goal of UDITPA (the model statute which Tennessee’s variance statute is based) is to ensure that no more than 100 percent of a businesses’ corporate income is subject to tax in all jurisdictions and positing that “[t]axing otherwise untaxed income does not run afoul of this goal.” Id. at fn. 20.

Thus, in the same paragraph, the court both acknowledges that the variance should equally be used to reduce Tennessee taxes when appropriate and uses a reference to whether other states tax the Tennessee receipts as a relevant benchmark.

As of the drafting of this post, Vodafone is in the process of seeking review of the decision by the Tennessee Supreme Court. Assuming the decision of the Court of Appeals is precedential going forward, taxpayers in Tennessee should consider holding the Commissioner to his own argument in Vodafone.  If nowhere income creates a presumption of fairness, then somewhere income should create a presumption of unfairness and taxpayers should be entitled to a variance.

Practice Note: The authors unquestionably prefer that the Supreme Court reverse this fatally flawed ruling.  However, if the court of appeals’ reasoning stands, taxpayers should take every opportunity available to demonstrate why Tennessee’s results oriented approach could bite the State on its bum.

The full slip opinion is available here.

Diann SmithDiann Smith
Diann Smith focuses her practice on state and local taxation and unclaimed property advocacy. Diann advises clients at any stage of an issue, including planning, compliance, controversy, financial statement issues and legislative activity. Her goal is to find the most effective method to achieve a client's objective regardless of when or how an issue arises. Diann emphasizes the importance of defining a client's objective - whether it is finality of a frequently audited issue, quick resolution of a stand-alone tax liability, or avoiding competitive disadvantages in the application of a tax. The defined objective then governs the choice of the path to a solution. Read Diann Smith's full bio.


Eric CarstensEric Carstens
  Eric D. Carstens focuses his practice on state and local tax matters, assisting clients with state tax controversy, compliance and multistate planning across all states for a variety of tax types and unclaimed property. Eric engages in all forms of taxpayer advocacy, including litigation, legislative monitoring and audit defense. He works closely with several of the Firm's taxpayer coalitions focused on specific state tax policy issues such as the taxation of digital goods and services and unclaimed property. Read Eric D. Carstens' full bio.


Stephen P. KranzStephen P. Kranz
Stephen (Steve) P. Kranz is a tax lawyer who solves tax problems differently. Over the course of his extensive career, Steve has acquired specific skills and developed a unique approach that helps clients develop and implement holistic solutions to all varieties of tax problems. He combines strategic thinking with effective skills for the courtroom, the statehouse and the conference room. Read Stephen P. Kranz's full bio.

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