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Commonwealth, Dept. of Taxation v. Lucky Stores, Inc., 217 Va. 121, 225 S.E.2d 870

Facts

Lucky Stores, Inc., a California corporation, operated two department stores in Virginia and was assessed income taxes based on a statutory three-factor formula. After paying the taxes under protest, Lucky filed a petition claiming the assessment was erroneous and that the statutory method subjected it to taxation on income not reasonably attributable to its Virginia activities. The trial court initially ruled in favor of Lucky, stating that the denial of an alternative accounting method was arbitrary. However, the case was appealed to the Supreme Court, which examined whether Lucky's Virginia operations were part of a unitary business with its operations in other states.

Following payment under protest of the assessments based on the statutory formula, the taxpayer filed a petition for correction of erroneous tax assessment, Code s 58 Code s 58 -1130, in December 1973 against the Commonwealth of Virginia, Department of Taxation, alleging the assessment and collection of the taxes were erroneous and illegal in that the use of the statutory method subjected the taxpayer to taxation on a greater portion of its income than was reasonably attributable to its Virginia activities.

Issue

Whether Lucky Stores, Inc.'s operations in Virginia were part of a unitary business with its operations outside Virginia, and whether the statutory three-factor formula for apportioning income was properly applied.

The controversy centers around whether the taxpayer's operation in Virginia was part of a nationwide unitary business or whether the Virginia business activity was separate so that its profits and losses could be segregated for purposes of income taxation.

Rule

The court applied the principle that a multistate business is unitary when operations in one state benefit from and are benefited by operations in another state, and that the statutory method of apportionment must not produce an unconstitutional result.

The corporate income taxpayer under Code s 58 Code s 58 -151.051 (s 58-132 during 1970 and 1971) has no absolute Right to use an alternative method of allocation and apportionment.

Analysis

The court found that Lucky's operations in Virginia were indeed part of a unitary business, as there was mutual dependency between the Virginia stores and the corporation's operations in other states. The court noted that the statutory three-factor formula did not produce a significant disparity in taxable income compared to Lucky's proposed separate accounting method, thus upholding the Tax Commissioner's decision to apply the statutory method.

The undisputed facts in this case demonstrate that Lucky's operation within Virginia in 1970 and 1971 was ‘dependent upon’ and was ‘contributory to’ the operation of Lucky outside Virginia.

Conclusion

The Supreme Court reversed the trial court's decision, concluding that the application of the statutory three-factor method was appropriate and did not result in an unconstitutional tax burden on Lucky Stores, Inc.

Consequently, the judgment of the trial court will be reversed, the petition for correction of erroneous tax assessment will be denied, and the proceeding dismissed.

Who won?

Commonwealth of Virginia, as the Supreme Court reversed the lower court's ruling in favor of Lucky Stores, Inc.

The Commissioner has not misapplied the law nor has he abused his discretion nor has he acted arbitrarily or capriciously in requiring Lucky to use the statutory three-factor method.

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