COM., DEPT. OF TAXATION v. Delta Air Lines

Present: All the Justices

COMMONWEALTH OF VIRGINIA,
DEPARTMENT OF TAXATION

v. Record No. 980824 OPINION BY JUSTICE CYNTHIA D. KINSER
February 26, 1999
DELTA AIR LINES, INC.

FROM THE CIRCUIT COURT OF ARLINGTON COUNTY
Paul F. Sheridan, Judge

Delta Air Lines, Inc. (Delta), is a corporation

organized and existing under laws of the State of Delaware.

Although Delta’s principal place of business is in Atlanta,

Georgia, Delta is qualified to do business in the

Commonwealth of Virginia. Delta’s business activities in

Virginia include the carriage of persons and property on

aircraft that land at and depart from airports situated in

the Commonwealth. Delta also flies aircraft over Virginia

that do not take-off from or land at any airports located

within the Commonwealth. These flights are known as

“overflights” and are the subject of this appeal.

Delta’s overflights neither use nor have contact with

any ground facilities or services in Virginia, including

officials or agencies of the Commonwealth. All

communications with aircraft during overflights are

conducted either by the air traffic controllers of the

Federal Aviation Administration or by licensed dispatchers
at Delta’s operations control center. In short, Delta does

not avail itself of any benefit provided in the

Commonwealth during its overflights.

The primary dispositive issue in this appeal is

whether the Commonwealth of Virginia, Department of

Taxation (the Department), can include Delta’s overflight

miles in the numerator of the formula used to determine

Delta’s Virginia corporate income tax liability. This

issue requires an analysis of whether Delta’s overflights

constitute business activities “in the Commonwealth”

pursuant to Code §§ 58.1-409, -410, -414, and –416.

Because these overflights occur “over the Commonwealth”

rather than “in the Commonwealth,” we will affirm the

judgment of the circuit court in favor of Delta on this

issue.

We also address the question whether the circuit court

erred by finding that Delta’s application to correct an

erroneous tax assessment for two tax years was not timely

filed pursuant to Code § 58.1-1825. We will reverse the

judgment of the circuit court on this issue because we

conclude that the applicable statute of limitations

commenced to run from the date that the Department mailed

or delivered the second “Notice of Assessment” to Delta.

I.

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 For the tax years ending June 30, 1987, June 30, 1988,

June 30, 1989, and June 30, 1990, Delta used a three-factor

method to apportion its income for the purpose of

determining its Virginia income tax liability. See Code

§ 58.1-408. The three factors used were a property factor,

payroll factor, and sales factor. Only the formula for

calculating the property and sales factors is at issue in

this appeal.

The property factor’s numerator included the value of

Delta’s property utilized in Virginia: (1) ground property

such as baggage carts, tugs, and other similar equipment;

and (2) flight property, i.e., Delta’s aircraft. The

denominator consisted of the value of Delta’s property

everywhere. Delta used a mileage formula to determine the

value of the aircraft to be included in the property

factor. The numerator of the mileage formula was comprised

of the miles traveled by Delta’s aircraft from Virginia’s

border to an arrival airport located in Virginia and the

miles traveled from a departure airport located in Virginia

to the Commonwealth’s border. Delta did not include the

overflight miles in the numerator of the mileage formula.

The denominator contained miles flown by Delta’s aircraft

everywhere. To compute the sales factor, Delta used the

3
same mileage formula to determine passenger and cargo

revenue.

Delta used this method to determine its Virginia

income tax liability not only for the four tax years

involved in this appeal but also for prior tax years. In

fact, the Department audited Delta for the tax years ending

June 30, 1983, June 30, 1984, and June 30, 1985. As a

result of that audit, the Department became aware of the

fact that Delta did not include its overflight miles in the

numerator of the mileage formula that it used to calculate

the property and sales factors, but the Department did not

propose any change in Delta’s apportionment method.

However, after the Department audited Delta for the tax

years ending June 30, 1987, and June 30, 1988, the

Department issued an audit report in which it included

Delta’s overflight miles in the numerator of the mileage

formula, thereby increasing the amount of Delta’s income

tax liability. 1

______________________
1
The Department has not promulgated any regulations
regarding overflight miles. However, in an issue paper
titled “Apportionment of Airline Income,” dated September
8, 1989, the Department acknowledged that there is no
statutory formula specifically applicable to the airline
industry and that the airline industry is, therefore,
subject to the three-factor formula. The Department also
stated in the paper that statutory authority allows the
Department to use an alternative method of apportioning

4
 On October 25, 1989, the Department issued a “Notice

of Assessment” to Delta for additional income tax due for

each of those tax years. In accordance with Code § 58.1-

1821, Delta protested the assessments. In a letter dated

September 21, 1990, the Tax Commissioner concluded that the

assessments were “correct and . . . now due and payable,”

and advised Delta that it would receive an updated bill

reflecting accrued interest. Public Document Number (P.D.

No.) 90-173. The Tax Commissioner also informed Delta that

the Department had previously addressed the issue

concerning overflight miles in P.D. No. 90-158.

On October 24, 1990, the Department sent Delta two

additional documents for the tax years ending June 30,

1987, and June 30, 1988. Each one of those documents was

titled “Notice of Assessment” and listed the “Date of

Assessment” as “10-25-89 AS OF 10-24-90.” The total amount

due and payable in each “Notice of Assessment” was the sum

of the corporate income tax assessed in each of the October

1989 notices plus accrued interest. At the bottom of each

October 1990 “Notice of Assessment,” the Department added

the words “Updated Bill.”

___________________
income only when a corporation requests such a method, the
statutory method is inequitable, and the tax under the

5
 Subsequent to receiving the second “Notice[s] of

Assessment,” Delta filed another protest. The Tax

Commissioner responded to the protest on March 19, 1991, in

P.D. No. 91-41, and again upheld the validity of the

assessments. In that response, the Tax Commissioner did

not indicate that the October 24, 1990 notices were not to

be construed as “Notice[s] of Assessment.”

On February 21, 1991, the Department sent Delta a

“Consolidated Bill Statement” reflecting the total amount

of assessed taxes due and owing for the tax years ending

June 30, 1987, and June 30, 1988, plus accrued interest.

On May 6, 1991, Delta paid $759,202 to the Department under

protest. Delta then filed an application to correct an

erroneous tax assessment in the circuit court on October

22, 1993.

The Department also audited Delta’s corporate income

tax returns for the tax years ending June 30, 1989, and

June 30, 1990. On September 16, 1992, the Department

issued “Notice[s] of Assessment” to Delta for additional

income taxes due for those two years based on the

Department’s inclusion of overflight miles in the numerator

of the mileage formula. In a letter dated December 14,

___________________
alternative method is lower than the tax under the

6
1992, Delta protested the assessments contained in the

September 1992 notices. On February 25, 1993, the Tax

Commissioner, in P.D. No. 93-38, upheld the legality of the

assessments. Delta then paid $798,505 to the Department on

March 24, 1993. That figure represented the amount of the

additional income taxes plus accrued interest for the tax

years ending June 30, 1989, and June 30, 1990. Thereafter,

Delta amended its application to correct an erroneous tax

assessment to include the 1989 and 1990 tax years.

After a bench trial on July 7, 1997, the circuit

court, in a memorandum opinion and judgment order dated

January 27, 1998, determined that Delta was not required to

include its overflight miles in the numerator of the

mileage formula. Accordingly, the court held that Delta

was entitled to a refund in the amount of $485,885 and

$219,618, for the tax years ending June 30, 1989, and June

30, 1990, respectively, plus interest from the date of

Delta’s payments to the Department. However, the court

concluded that Delta’s application to correct an erroneous

tax assessment for the tax years ending June 30, 1987, and

June 30, 1988, was time-barred. We granted the Department

this appeal and Delta’s assignment of cross-error.

___________________
statutory method.

7
 II.

Because Delta derives income from business activities

that it conducts both within and without the Commonwealth,

Delta is required to “allocate and apportion its Virginia

taxable income as provided in §§ 58.1-407 through 58.2-

420.” Code § 58.1-406. To effect this apportionment of

income, Delta must use a three-factor method consisting of

a property factor, a payroll factor, and a sales factor.

Code § 58.1-408. The numerator of the property factor is

the “average value of the corporation’s real and tangible

personal property owned and used or rented and used in the

Commonwealth during the taxable year.” Code § 58.1-409.

The denominator “is the average value of all the

corporation’s real and tangible personal property . . .

located everywhere.” Id. “The value of movable tangible

personal property used both within and without the

Commonwealth shall be included in the numerator to the

extent of its utilization in the Commonwealth.” Code

§ 58.1-410. Finally, “[t]he sales factor is a fraction,

the numerator of which is the total sales of the

corporation in the Commonwealth during the taxable year,

and the denominator of which is the total sales of the

corporation everywhere during the taxable year . . . .”

Code § 58.1-414. Sales “are in the Commonwealth if . . .

8
[t]he income-producing activity is performed in the

Commonwealth . . . .” Code § 58.1-416(1).

The issue in this case involves the meaning of the

phrase “in the Commonwealth” as used in these statutes.

Since the Department is charged with the responsibility of

administering and enforcing the tax laws of the

Commonwealth under Code § 58.1-202, its interpretation of a

statute is entitled to great weight. Webster Brick Co.,

Inc. v. Dep’t of Taxation, 219 Va. 81, 84-85, 245 S.E.2d

252, 255 (1978). The Department contends that the phrase

“in the Commonwealth” encompasses overflights and that the

circuit court erred by not accepting its interpretation of

the phrase. The Department also points out that its tax

assessments are presumed correct and that “the burden is on

the taxpayer to prove that the assessment is contrary to

law or that the administrator has abused his discretion and

acted in an arbitrary, capricious or unreasonable manner.”

Commonwealth, Dep’t of Taxation v. Lucky Stores, Inc., 217

Va. 121, 127, 225 S.E.2d 870, 874 (1976).

The circuit court found that the phrase “in the

Commonwealth” is unambiguous, and we agree. When a

statute, as written, is clear on its face, this Court will

look no further than the plain meaning of the statute’s

words. City of Winchester v. American Woodmark Corp., 250

9
Va. 451, 457, 464 S.E.2d 148, 152 (1995). The phrase “in

the Commonwealth” is not synonymous or interchangeable with

the phrase “over the Commonwealth.” “The preposition in is

simply not the same as the preposition over.” Republic

Airlines, Inc. v. Wisconsin Dep’t of Revenue, 464 N.W.2d

62, 66 (Wis. Ct. App. 1990); see also Northwest Airlines,

Inc. v. State Tax Appeal Bd., 720 P.2d 676, 678 (Mont.

1986).

Indeed, the General Assembly has made such a

distinction between the words “in” and “over” in other

statutes. For example, a pilot can arrest any person “who

interferes with . . . the operation of the aircraft in

flight over the territory of this Commonwealth or to a

destination within this Commonwealth.” Code § 5.1-20.

(Emphasis added.) Similarly, Code § 4.1-209(1)(d)

authorizes the issuance of licenses to sell beer and wine

in aircraft while in transit “anywhere in or over the

Commonwealth.” 2 (Emphasis added.)

______________________
2
Other examples include Code § 5.1-17, which makes it
unlawful for a person to hunt “during such time as such
person is in flight in an aircraft in the airspace over the
lands or waters of this Commonwealth,” and Code § 5.1-37,
which refers to airports and other air navigation
facilities “in, over and upon any public waters of this
Commonwealth.”

10
 “We . . . assume that the legislature chose, with

care, the words it used when it enacted the relevant

statute, and we are bound by those words as we interpret

the statute.” Barr v. Town & Country Properties, Inc., 240

Va. 292, 295, 396 S.E.2d 672, 674 (1990). Accordingly, we

conclude that the plain meaning of the phrase “in the

Commonwealth” as used in Code §§ 58.1-409, -410, -414, and

–416 does not include Delta’s overflights since, during

such flights, Delta’s aircraft neither land at nor depart

from an airport situated in Virginia and Delta does not

utilize any benefit or service provided in the

Commonwealth.

This conclusion does not, however, resolve this

appeal. The circuit court found that the Department will

allow an airline to apportion its income by utilizing a

formula based on either mileage or departures. 3 Since Delta

______________________
3
In P.D. 90-158 and 93-38, the Department stated that
use of a formula based on departures was an acceptable
alternative to a method utilizing mileage. However, in its
September 1989 issue paper, the Department expressed the
following concerns with regard to a departures method:

[T]he use of a departure factor would be a significant
change in policy from the department’s historic use
and acceptance of mileage factors in one form or
another. . . . In view of the anticipated reaction of
the airline industry[,] . . . it is recommended that a
regulation project be initiated to formally propose
the use of departures for airline property and sales

11
has elected to use the mileage formula and has not disputed

the legality of the departures method, the Department

asserts that Delta cannot contest the Department’s

inclusion of overflight miles in the numerator of the

mileage formula. We find no merit in the Department’s

position.

Delta is not challenging the validity of a forumla to

apportion income based on mileage. Instead, it is

contesting the Department’s application of that formula in

which the Department included overflight miles in the

numerator of the fraction used to calculate the property

and sales factors. If Delta were precluded from

challenging the validity of the Department’s methodology

just because it has elected to use a mileage formula, the

legality of the Department’s present position would

continually evade judicial review. Cf. Globe Newspaper Co.

v. Superior Court, 457 U.S. 596, 603 (1982)

(“[J]urisdiction is not necessarily defeated . . . if the

underlying dispute . . . is one ‘capable of repetition, yet

___________________
factors so that the airline industry would have the
opportunity to make its views known under the
Administrative Process Act.

The Department has not yet promulgated any regulations
regarding the use of a departures method for the
apportionment of income by the airline industry.

12
evading review.’” (quoting Nebraska Press Assn. v. Stuart,

427 U.S. 539, 546 (1976))). Moreover, for the tax years at

issue in this case, Delta used the method that it had

previously employed, and the Department had accepted in

prior audits, to determine Delta’s Virginia income tax

liability. The Department did not advise Delta of its new

position with regard to taxing overflights until it issued

the October 1989 audit report. Thus, we conclude that

Delta is not estopped from challenging the Department’s

methodology and assessment of additional income taxes.

Finally, the Department assigns error to the remedy

that the circuit court employed after finding in favor of

Delta. The Department asserts that the proper remedy would

have been to calculate Delta’s Virginia income tax

liability by using the alternative departures formula.

However, the Department did not request that the circuit

court adopt this remedy. The only issue before the court

was whether Delta’s overflight miles should be included in

the numerator of the mileage formula used to calculate the

property and sales factors. Moreover, the record is devoid

of evidence with regard to the amount of Delta’s tax

liability if a departures method were utilized. Thus, as

authorized in Code § 58.1-1826, the circuit court correctly

ordered a refund of taxes to Delta.

13
 We now address Delta’s assignment of cross-error.

Delta contends that the circuit court erred in determining

that Delta’s application to correct an erroneous tax

assessment was not timely filed with regard to the tax

years ending June 30, 1987, and June 30, 1988. Delta

acknowledges that the applicable limitation period for

filing such an application for relief is “three years from

the date such assessment is made.” Code § 58.1-1825. The

circuit court held that the three years started running on

October 25, 1989, the date of the first notices sent by the

Department to Delta for these two tax years. However,

Delta contends that the three years should have been

computed from October 24, 1990, the date of the second

“Notice[s] of Assessment.”

The term “assessment” is defined in Code § 58.1-

1820(2) to

include a written assessment made pursuant to notice
by the Department of Taxation . . . . Assessments
made by the Department of Taxation shall be deemed to
be made when a written notice of assessment is
delivered to the taxpayer by an employee of the
Department of Taxation, or mailed to the taxpayer at
his last known address.

The Department has further addressed the terms “assessment”

and “Notice of Assessment” in the following portion of a

definitional regulation:

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 1. When referring to taxes administered by the
Department, the terms “assess” and “assessment”
mean the act of determining that a tax (or
additional tax) is due and the amount of such
tax. An assessment may be made by the Department
or by the taxpayer (self-assessment).

2. When an assessment is made by the Department,
a written notice of the assessment must be
delivered to the taxpayer by an employee of the
Department or mailed to the taxpayer at his last
known address. The date that such notice is
mailed or delivered is the date of the assessment
for the purpose of any limitations on the time in
which administrative and judicial remedies are
available and for any other administrative
purposes.

3. The written notice of an assessment made by
the Department is made on a form clearly labeled
“Notice of Assessment” which sets forth the date
of the assessment, amount of assessment, the tax
type, taxable period and taxpayer. Subsequent
statements which merely report payments and
additional accrued interest are not assessments
or notices of another assessment. An assessment
may be preceded by correspondence proposing
adjustments to a filed return based on an audit
or other information received by the Department.
Such correspondence is not an assessment but is
intended to provide taxpayers an opportunity to
correct any errors before an assessment is made.

23 VAC 10-20-160(E).

The Department contends that the 1990 “Notice[s] of

Assessment” were merely updated bills because the “Date of

Assessment” was still listed as October 25, 1989, the total

amount of taxes owed was the sum of the original amounts

assessed in the 1989 notices plus accrued interest, the

“Bill No[s].” remained the same, and the phrase “Updated

15
Bill” appeared on the face of the documents. The

Department also relies upon the fact that Delta received

the 1990 notices after the Department issued P.D. No. 90-

173 in which it advised Delta that an updated bill would be

forthcoming.

Delta, however, argues that the 1990 notices should be

construed as “Notice[s] of Assessment.” Delta first points

to the fact that the forms used by the Department in 1990

were titled “Notice of Assessment” and were identical to

the ones issued by the Department for the 1989 assessments.

Additionally, Delta notes that it filed a protest within 90

days of the date of the assessments pursuant to information

provided to it on the 1990 notices. The Tax Commissioner

responded to that protest in P.D. No. 91-41 without

asserting that the notices were not to be construed as

“Notice[s] of Assessment.” Finally, Delta asserts that the

Department did not adopt its present position until Delta

filed its application to correct an erroneous tax

assessment.

This Court addressed an analogous situation in Knopp

Bros., Inc. v. Dep’t of Taxation, 234 Va. 383, 362 S.E.2d

897 (1987). The taxpayer in that case had received a

letter from the Department, mailed on July 18, 1978, that

summarized the results of an audit and contained “copies of

16
‘assessments.’” Id. at 385, 362 S.E.2d at 898. After the

taxpayer objected to the audit results, the Department

conducted several more audits. Eventually, on October 27,

1981, the Department sent the taxpayer a “Notice of

Assessment” that showed the “Date of Assessment” as April

1, 1981. Id., 362 S.E.2d at 899. In that notice, the

Department included the total amount of taxes, penalty, and

interest due, and advised the taxpayer that it had 90 days

within which to file a written protest to the assessment.

Following another audit, the taxpayer received a “Notice of

Corrected Assessment” dated April 12, 1983. The taxpayer

then filed an action to correct an erroneous tax

assessment. Id. The trial court held that the Department

made the original assessment on July 18, 1978, and that the

statute of limitations began to run on that date, thus

making the taxpayer’s action untimely. Id. at 386, 362

S.E.2d at 899.

On appeal, we framed the issue as “whether any of the

announcements of a tax due made by the department after the

1978 assessment were merely adjustments of an original

assessment or were themselves original assessments which

would establish a new period of limitation for filing

suit.” Id. Citing Code § 58.1-1820(2), we concluded that

the 1981 document contained all the indicia of “a written

17
assessment made pursuant to notice.” Id. at 387, 362

S.E.2d at 899. We further stated that “[t]he department’s

. . . contention that the document is not an assessment at

all, but merely an adjustment of some original assessment

made earlier, is in direct conflict with the department’s

description of the document made at the time it was

issued.” Id. Accordingly, we ruled that the action was

timely filed and reversed the judgment of the trial court.

Id., 362 S.E.2d at 900.

The Department contends that the decision in Knopp

Bros. is not controlling primarily because the Department

had sent that taxpayer several statements showing

conflicting amounts due, unlike the present situation, and

because 23 VAC 10-20-160(E) was not in effect when the

Department made the assessment in Knopp Bros. We do not

agree.

Contrary to the Department’s position, we believe that

23 VAC 10-20-160(E) does not change the result in Knopp

Bros. The regulation states that the Department’s written

notice of an assessment “is made on a form clearly labeled

‘Notice of Assessment.’” It further provides that

“[s]ubsequent statements which merely report payments and

additional accrued interest are not assessments or notices

of another assessment.” The April 1981 notice that the

18
taxpayer in Knopp Bros. received was on a form labeled

“Notice of Assessment” and was not merely a subsequent

statement showing payments and accrued interest.

In the present case, the 1990 notices that the

Department sent to Delta were on forms clearly labeled

“Notice of Assessment.” In fact, the forms were identical

to those used by the Department when it issued the 1989

“Notice[s] of Assessments,” which the Department asserts

should be used to calculate when the statute of limitations

began to run. Even though the 1990 notices contained the

additional words “Updated Bill” and referenced the “Date of

Assessment” as “10-25-89 AS OF 10-24-90,” the Department

did not delete the title “Notice of Assessment” and did not

indicate, in any manner, that these 1990 notices were not

to be construed as “Notice[s] of Assessments.” Indeed, the

fact that the Department responded to Delta’s protest to

the 1990 notices is in conflict with the Department’s

present position that those notices should not be treated

as “Notice[s] of Assessment.”

Relying on 23 VAC 10-20-160(E), the Department,

nevertheless, asks us to construe the 1990 notices as

merely subsequent statements reporting additional accrued

interest. The Department sent such a statement to Delta on

February 21, 1991, for these two tax years. That

19
document’s appearance was entirely different from the

“Notice of Assessment” forms used by the Department for the

1989 and 1990 notices, and, in fact, was titled

“Consolidated Bill Statement.” Thus, we conclude, as we

did in Knopp Bros., that the 1990 “Notice[s] of Assessment”

contained “all the external decorations of ‘a written

assessment made pursuant to notice,’ Code § 58.1-1820(2).”

234 Va. at 387, 362 S.E.2d at 899.

Pursuant to Code § 58.1-1820(2) and 23 VAC 10-20-

160(E), the date that the “Notice of Assessment” is mailed

or delivered to the taxpayer is the date that the

assessment is made for the purpose of determining when any

applicable period of limitations begins to run. Therefore,

we conclude that Delta’s application to correct an

erroneous tax assessment, filed on October 22, 1993, for

the tax years ending June 30, 1987, and June 30, 1988, was

timely filed within three years from the October 24, 1990

“Notice[s] of Assessment”.

III.

For these reasons, we will affirm the circuit court’s

judgment refunding taxes and interest to Delta for the tax

years ending June 30, 1989, and June 30, 1990. We will

reverse and remand the judgment with respect to the

determination that Delta’s application to correct an

20
erroneous tax assessment for the tax years ending June 30,

1987, and June 30, 1988, was time-barred. On remand, the

circuit court shall determine the amount of refund to which

Delta is entitled for those two tax years. 4

Affirmed in part,
reversed in part,
and remanded.

______________________
4
Because of our interpretation of the phrase “in the
Commonwealth,” we do not need to address the remaining
issues raised by the Department.

21