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COM., DEPT. OF TAXATION v. BJ McAdams, Inc.
Citation: 317 S.E.2d 788Docket: Record No. 811921
Court: Supreme Court of Virginia; June 15, 1984; Virginia; State Supreme Court
Virginia's Supreme Court addressed the legality of imposing a corporate income tax on B.J. McAdams, Inc., an Arkansas-based interstate common carrier, regarding its earnings derived from transportation over Virginia highways. The court needed to assess if McAdams had "income from Virginia sources" as per Code § 58-151.02(g) and whether the Virginia tax scheme posed an undue burden on interstate commerce, violating the Commerce Clause. The Virginia Department of Taxation had previously communicated to McAdams its obligation to file income tax returns and warned of penalties for non-compliance, including the loss of necessary operational permits. McAdams sought a declaratory judgment and injunctive relief against state officials after being informed of these tax liabilities. The court eventually dismissed the State Corporation Commission from the case, determining it was not essential for resolving the issues. It ruled that McAdams' activities in Virginia were minimal and closely tied to its interstate operations, referencing prior case law to conclude that McAdams did not generate income from Virginia sources, thus exempting it from the state’s corporate income tax. The Commonwealth agreed not to collect taxes or impose penalties while appealing the ruling, and McAdams consented to file annual sealed tax returns until the court ordered otherwise. Subsequently, a declaratory judgment was issued in favor of McAdams, and the Commonwealth pursued an appeal. During the relevant period, McAdams was properly licensed to operate as an interstate carrier, but it had no income from property in Virginia, did not possess any local assets, and did not engage in sales or contracts within the state. McAdams' operations in Virginia represent a minor portion of its overall business activities. The data shows that from 1974 to 1979, the percentage of intercity miles driven in Virginia compared to total intercity miles was consistently low, ranging from 1.23% to 3.14%. Additionally, the number of pick-ups and deliveries in Virginia was minimal, averaging 35 deliveries and 7 pick-ups annually from 1973 to 1977, with a slight increase in subsequent years. Notably, there were no intrastate transactions; 95% of McAdams' mileage in Virginia consisted of "bridge miles," indicating travel through the state without local pick-ups or deliveries. The Commonwealth acknowledges the predominantly interstate nature of McAdams' business but asserts that the proportion of miles driven in Virginia should be used to calculate the income derived from Virginia sources, which would be subject to state income tax. The proposed tax formula considers Virginia miles relative to total miles and applies the state income tax rate to McAdams' net income. Relevant Virginia tax codes outline that foreign corporations generating income from Virginia sources are subject to state taxes, with specific definitions of what constitutes "income from Virginia sources." Previous case law, such as Commonwealth v. Imperial Coal Co., established that a tax on net income is permissible only if the corporation is doing business in Virginia and earning income from Virginia-based activities. The court found that the corporation's Virginia operations were incidental to its primary interstate commerce. Virginia's previous legal framework required that a business must be "substantial in its essence" and separable from interstate commerce to be subject to state taxation. Imperial Coal did not meet this "doing business in this State" criterion, thus exempting it from Virginia income taxes. However, the Commonwealth argues that the legal landscape has shifted since Imperial Coal, as the "doing business" prerequisite has been removed from tax law, leaving only the "income from Virginia sources" standard. This new standard defines taxable income as that "attributable to a business, trade, or occupation carried on in this State." McAdams contends that this change does not fundamentally alter the operative taxation criteria, asserting similarity between "doing business" and "business carried on." The court refutes this claim, noting that the "doing business" test was heavily influenced by legal precedent aimed at protecting interstate commerce from state taxation burdens. This perspective was altered post-Northwestern States Portland Cement Co. v. Minnesota, which validated state net income taxes on interstate commerce revenues. Following this decision, Virginia amended its tax law in 1960 to eliminate the "doing business" test, focusing instead on the "income from Virginia sources" standard, which requires a sufficient nexus for constitutional compliance. Such a nexus can be established through the benefits a foreign taxpayer receives from the state, such as access to highways and police protection, without needing to quantify their value. The court cites various precedents, including National Geographic Society v. California and Miller Bros. Co. v. Maryland, to illustrate that these benefits can justify state taxation. It also references Spector Motor Service, Inc. v. O'Connor, which previously deemed certain state taxes unconstitutional but was later overruled by Complete Auto Transit, Inc. v. Brady, signaling a shift in how interstate commerce can be taxed. A state tax can be constitutionally imposed on businesses engaged solely in interstate commerce, provided that four conditions are met: 1) a sufficient nexus to the state; 2) non-discrimination against interstate commerce; 3) fair apportionment of the tax; and 4) a relationship between the tax and services rendered by the state. Recent changes in Virginia's tax laws have rendered previous case law, specifically Imperial Coal, irrelevant. Current Virginia income tax laws applied to interstate commerce are deemed constitutional and a reasonable return for services provided to interstate carriers. The onus is on the taxpayer to prove that the tax scheme fails to meet the Complete Auto requirements, which McAdams has not done. Amendments made in 1977 introduced a de minimis provision exempting carriers with less than 50,000 miles traveled annually or fewer than twelve round trips into Virginia from income tax liability. However, McAdams' usage of Virginia highways exceeds these thresholds. Consequently, the prior declaratory judgment was based on incorrect principles, leading to its reversal and a remand for a new judgment requiring McAdams to file Virginia income tax returns as mandated by law.