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Jamie C. Yesnowitz
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The Louisiana Board of Tax Appeals recently determined the proper sales and property factor apportionment treatment for franchise tax purposes of retail installment contracts (RICs) purchased by a financing institution.1
According to the Board, the value of the interest from RICs generated in Louisiana should be included in the numerator of the sales factor, but the value of the RICs should not be included in the numerator of the property factor.
The taxpayer, Toyota Motor Credit Corporation, is a financing institution located in California that acquires, owns, and services RICs from dealers that sell motor vehicles to their customers on credit. A RIC is a finance agreement between a consumer who wants to purchase a vehicle on credit and a motor vehicle dealer. Toyota directs and manages all of its lines of business, including its acquisition and servicing of RICs, from California. Except for activities at Toyota’s Dealer Sales and Services Offices (DSSOs) and Customer Service Centers, Toyota’s finance, accounting, tax, human resources, legal, and other back office services are conducted at Toyota’s California headquarters.
The process of obtaining a RIC works as follows: a customer who wants to purchase a vehicle from a Louisiana dealership fills out a credit application from the dealer, the dealer submits the application to Toyota (to its Louisiana DSSO) to determine creditworthiness, at which point Toyota can accept or decline the application, or make a counteroffer. If the credit application is accepted by Toyota, the dealer and the customer negotiate the purchase of the vehicle. The RIC identifies the dealer as the seller and the customer as the buyer with the vehicle as the collateral. The dealer is not required to sell the RIC to Toyota, and Toyota does not have to buy the RIC after the car is sold. During the tax periods at issue, Toyota acquired approximately 85% of the offered RICs from the dealers.
For the three tax periods from April 1, 2005, through March 31, 2008, Toyota paid Louisiana franchise tax that was calculated by including the interest paid on the RICs by Louisiana customers in the numerator of its sales factor and the value of the RICs generated in Louisiana in the numerator of its property factor. Toyota later filed three refund claims for the same tax periods and argued that inclusion of these amounts in the sales factor and property factor numerators was in error. After the Louisiana Department of Revenue denied the refund claims, Toyota filed petitions for review. The Board consolidated the three claims and held a hearing on cross motions for summary judgment.
Franchise tax apportionment
The Louisiana franchise tax applies to all Louisiana corporations and any foreign corporations doing business in the state.2
Louisiana law requires foreign corporations to apportion their franchise tax base using a two-factor apportionment formula.3
The first factor is the ratio of sales made to customers in Louisiana compared to all sales.4
The second factor is the ratio of the taxpayer’s property and assets located or used in Louisiana compared to all of its property and assets.5
The Board determined that the facts in the instant case were nearly identical to those in its previous decision in GMAC, Inc. and Nuvell Credit Co. v. Bridges6
and, therefore, relied heavily on the analysis in this decision. In GMAC
, the Board determined that the interest paid on the contracts generated in Louisiana would be included in the numerator of the sales factor, but the value of the contracts themselves would be excluded from the numerator of the property factor. After careful consideration of the arguments of counsel as well as the statutes, regulations, and applicable case law, the Board decided to follow this approach.
Interest included in sales factor
The Board agreed with the Department that Toyota should include the interest on the RICs generated in Louisiana in the numerator of its sales factor. La. Rev. Stat. Ann. Sec. 47:606.A(1)(h) provides that “interest on customers’ notes and accounts shall be attributed to the state in which such customers are located.” Also, La. Rev. Stat. Ann. Sec. 47:606.A(1)(i) provides that “[o]ther interest and dividends shall be attributed to the state in which the securities or credits producing such revenue have their situs, which shall be at the business situs of such securities or credits, if they have been so used in connection with the taxpayer’s business as to acquire a business situs, or in the absence of such a business situs shall be at the commercial domicile of the corporation.”
Toyota argued that the interest it received from the RICs qualified as “other interest” as provided in Subsection (i). According to Toyota, the interest that it received should have been sourced to California because the RICs either had a situs in California, or if the RICs did not have a business situs, Toyota’s commercial domicile was based in California. The Department, however, argued that the interest from the RICs was “interest received on customers’ notes and accounts” and should be properly sourced to the customers’ location in Louisiana in accordance with Subsection (h).
The Board agreed with the Department and relied heavily on a Louisiana regulation which addresses the proper sourcing of interest on customers’ notes and accounts.7
The regulation provides in relevant part that “[i]nterest on customers’ notes and accounts can generally be associated directly with the specific credit instrument or account upon which the interest is paid and shall be attributed to the state at which the goods were received by the purchaser or services rendered.”8
The Board rejected Toyota’s argument that once a dealer assigns the RIC to Toyota, the interest payment made by the customer is no longer “interest on customers’ notes or accounts” under Subsection (h) because Toyota did not sell the vehicle to the customer. According to Toyota, Subsection (h) did not apply because the dealers actually sold the vehicles to the customers and Subsection (i) should be used. The Board explained, however, that nothing in the statute or regulation requires that the interest be paid to the original seller of the goods or services in order for the interest to be classified as ‘interest on customers’ notes or accounts.” Since the RICs generated in Louisiana from vehicle sales would indicate that the overwhelming majority of the vehicle purchasers also are located in Louisiana, the Board concluded that the interest must be included in the numerator of Toyota’s sales factor under Subsection (h).
RICs excluded from property factor
The second issue before the Board was whether the RICs should be attributed to Louisiana or California, the state of Toyota’s commercial domicile. The Board considered two provisions within the property factor statute that covers the proper apportionment of various classes of property and assets.9
La. Rev. Stat. Ann. Sec. 47:606.A(2)(c) provides that “[t]rade accounts and trade notes receivable shall be allocated by reference to the transactions from which the receivables arose, on the basis of the location at which delivery was made in the case of sale of merchandise or the location at which the services were performed in case of charges for services rendered.” Also, La. Rev. Stat. Ann. Sec. 47:606.A(2)(e) is a catchall provision stating that “[n]otes and accounts other than those notes and accounts described . . . above shall be allocated to the state in which they have their business situs, or in the absence of a business situs, to the state in which is located the commercial domicile of the taxpayer.”
The Department argued that the RICs fall under Subsection (c) and should be sourced to Louisiana because the vehicles subject to the RICs were delivered by the dealers to customers in Louisiana. Toyota asserted that the RICs were not “trade accounts” or “trade notes receivable” because Toyota was not the seller of the vehicles, and so under Subsection (e), the value of the RICs would not be sourced to Louisiana. Based on the plain reading of Subsection (c), the Board initially noted that there was no requirement in this statute for the taxpayer to be the direct seller of the goods or the service provider for an account or receivable to be a “trade” account or “trade note receivable.” Without anything further, the analysis would be similar to the analysis discussed above for the inclusion of interest in the numerator of the sales factor. However, the Department promulgated a regulation providing that “[t]rade accounts and trade notes receivable are construed to mean only those accounts and notes receivable resulting from the sale of merchandise or the performance of services for customers in the regular course of business of the taxpayer
Thus, under the regulation, the dealer’s assignment of a RIC to Toyota converted the RIC from a “trade account” as defined under Subsection (c) to a “catchall” note and account under Subsection (e) because Toyota did not sell the vehicles to customers in its regular course of business.
The Board gave significant weight to the regulation because of the Louisiana Supreme Court’s decision in Central Louisiana Electric Co. v. Louisiana Public Services Commission
The Court in that case held that “the weight of opinion is to the effect that administrative agencies are bound by their own rule
s, at least by their own rules which are promulgated to affect the rights and liabilities of members of the public.”12
Because the Department’s regulation provides that the receivable must arise from the taxpayer’s sale of merchandise, and Toyota did not sell the vehicles, the Board agreed that the RICs should be sourced to California, rather than Louisiana, in determining Toyota’s franchise tax property ratio. Under Subsection (e), the RICs were sourced to California pursuant to either the business situs or commercial domicile test (the Board did not specify which test would apply here given the result would have been the same).
This decision provides guidance on how Louisiana taxpayers should source interest income related to notes for sales factor purposes and the value of the note itself for property factor purposes, when the note is purchased from another party and is being serviced. Perhaps the most interesting aspect of this case is the deference to the administrative regulation in the property factor analysis. This is similar to the analysis performed by the U.S. Supreme Court in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc
, the U.S. Supreme Court determined that deference should be given to administrative organizations for reasonable interpretations of the statute.
In the instant case, the existence of the language “of the taxpayer” in the property factor regulation is the reason why the Board reached a different conclusion for the property factor issue compared to the sales factor issue. If it were not for the property tax regulation, Toyota presumably would have lost its argument to exclude the RICs from its property factor numerator. Thus, the Board’s deference to the Department’s property factor apportionment regulation is particularly significant, with potential implications for the Department to consider. First, if the Department decides its interpretation of a particular regulation is no longer desired, the Department can simply remove the language “of the taxpayer” from the regulation. Toyota and other similarly-situated taxpayers likely would then be required to include the RICs and other types of notes in the numerator of the property factor. Second, using Chevron
deference gives more weight to the Department’s own regulations rather than the statute itself as long as that interpretation is reasonable. The Department easily could attempt to extend its reach beyond its regulations to interpretations of other documents, such as instructions, revenue information bulletins, and notices.
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