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.
2
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
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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.”
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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,
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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.
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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.)
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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
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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
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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.
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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