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VA DEPT OF TAXATION v. DELTA AIRLINES, INC. (59821)


VA DEPT OF TAXATION

v.

DELTA AIRLINES, INC.


February 26, 1999
Record No. 980824

COMMONWEALTH OF VIRGINIA, DEPARTMENT OF
TAXATION

v.

DELTA AIR LINES, INC.

FROM THE CIRCUIT COURT OF ARLINGTON COUNTY
Paul F. Sheridan, Judge
Present: All the Justices
OPINION BY JUSTICE CYNTHIA D. KINSER


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
Sects. 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 Sect. 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.

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
Sect. 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 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]

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
Sect. 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."

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, 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.

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 Sects. 58.1-407
through 58.2-420." Code Sect. 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 Sect. 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
Sect. 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
Sect. 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 Sect. 58.1-414. Sales "are in the Commonwealth if
. . . [t]he income-producing activity is performed in
the Commonwealth . . . ." Code
Sect. 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 Sect. 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
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
Sect. 5.1-20. (Emphasis added.) Similarly, Code
Sect. 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.)

"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
Sects. 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 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 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 Sect. 58.1-1826, the circuit
court correctly ordered a refund of taxes to Delta.

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 Sect. 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 Sect. 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:

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 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
‘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 Sect. 58.1-1820(2), we concluded that the 1981
document contained all the indicia of "a written 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 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 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 Sect. 58.1-1820(2)." 234 Va. at
387, 362 S.E.2d at 899.

Pursuant to Code Sect. 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 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.

 

FOOTNOTES:

[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 income only when a corporation requests such a
method, the statutory method is inequitable, and the tax under
the alternative method is lower than the tax under the statutory
method.

[2] Other examples include Code
Sect. 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 Sect. 5.1-37, which refers to
airports and other air navigation facilities "in, over and
upon any public waters of this Commonwealth."

[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 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.

[4] Because of our interpretation of the phrase "in
the Commonwealth," we do not need to address the remaining
issues raised by the Department.

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