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
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.
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