Vermont National Telephone Co. (VNT) owes Vermont taxes on its $ 24 million gain from the sale of FCC licenses covering areas of upstate New York.
The Vermont Supreme Court on October 15 upheld the Vermont Tax Department’s determination that non-commercial income from the sale of intangibles – the FCC licenses – was allocated to Vermont because the state was the business domicile of VNT (Vermont Nat’l Telephone Co. v. Dep’t of Taxes, 2020 Vt. 83 (10/15/20)).
In 2003, the FCC auctioned licenses granting the right to broadcast in the 700 MHz frequency of the electromagnetic spectrum in specific geographic areas. VNT purchased two FCC licenses in 2003 for investment purposes. These licenses granted the company the exclusive right to broadcast in parts of upstate New York. In 2013, VNT sold the licenses resulting in a capital gain of approximately $ 24 million.
In its Vermont tax return, VNT reported the capital gain from the sale of the licenses as “non-commercial income” attributed entirely to non-Vermont sources. In 2015, the Vermont Department of Taxes audited VNT and assessed the corporate capital gains tax on the sale of licenses. The department concluded that the licenses were neither located nor located in New York. The department determined that because VNT had never engaged in licensing activities in New York, the licenses had not acquired a situs there. The department concluded that VNT’s business domicile was in Vermont. A state trial court upheld the department’s decision.
Location and situation
On appeal, VNT argued that the licenses were located in New York because they conferred privileges that could only be exercised in a particular location. Assuming the licenses were not located in New York City, VNT argued that its business home is in Connecticut. (Non-business income is fully attributed to the state where the income-generating activities are located or have a situs. If the assets have no location or situs, the income is attributed to the state of the business domicile of the business).
The department concluded that the licenses had no location because intangibles, by definition, did not have a physical location, and the mere fact that the licenses provided rights that could be exercised in New York did not. didn’t mean they were there. According to the department, the licenses also did not acquire a site in New York because VNT never did business with the licenses there. VNT argued that in interpreting the regulation, the department confused “situs” with the concept of “link”. VNT argued that the licenses were located in New York City because they granted a right that could only be exercised there.
VNT initially argued that the term “situ” was synonymous with place. The court disagreed. Situs, he noted, is an art term referring to where intangible property is constitutionally subject to taxation. The regulation directs that non-commercial income be attributed to the state of a company’s business domicile provided that the income-producing assets have neither a “location” nor a “situ”. We assume, the court continued, that the ministry wanted the words “location” and “situs” in the regulations to have different meanings. Otherwise, the parts of the regulation referring to situs would be a “mere surplus”. Location refers to a physical position. Situs is the location or position of something for legal purposes. Situs is an art term referring to where an intangible asset is constitutionally subject to tax.
Intangibles, since they are devoid of physical characteristics, cannot have a location in space. Intangible assets do not have a situs in the physical sense, but have a situs attributable to them in the legal design.
Intangible assets, the court observed, are generally subject to tax at the home of the owner. Intangible assets acquire a commercial site when the taxpayer expands his activities with regard to his intangible assets, so as to avail himself of the protection and benefit of the laws of another state, so as “to put his person or his goods within reach of the collector there. Intangible assets are only taxable at the home of the owner, unless they have acquired a business located elsewhere.
Since the FCC licenses were intangible assets and therefore had no location, the only way to assign them in New York was to have a site there. The department ruled that the licenses did not have a site in New York because VNT never used the licenses in connection with commercial activities there. VNT argued that an intangible asset has a situs, independent of any actual business use, if the asset confers a right that can only be exercised in a particular location. Because the FCC licenses granted a broadcast right in New York City, VNT argued that the licenses had a situs there.
In New York ex rel. Whitney vs. Graves, the United States Supreme Court has recognized that an intangible asset can acquire a site if (1) the intangible asset is used in “the actual transactions of a localized business” or (2) the intangible asset grants a right that is “exclusively or predominantly fixed” in a particular place. In the second case, the tribunal’s analysis suggests that the intangible asset was created or protected by the laws of a state. The department explained that FCC licenses grant rights created or protected by the FCC, not New York. Consequently, the licenses did not acquire a situs there. VNT has failed to demonstrate convincing indications of error.
As the licenses have no location or situs, the capital gain from the sale of the licenses was allocated to VNT’s commercial domicile. The department found that VNT’s business domicile during the years in question was in Vermont.
VNT argued that the most important factor (in determining business domicile) was “the center of authority and control”. Applying this test, VNT argued that its business home was in Connecticut, as that was where the president made “high-level strategic decisions” and the board of directors met.
According to the regulations, the business domicile is defined as “the principal place from which the business is directed or managed”. The main business domiciliation request is to determine where the business is managed or directed. The location, the court noted, where the board of directors meets is certainly a relevant factor in considering business domicile, “but it is neither determinant nor carries more weight than any other factor.” The department did not err in finding that VNT’s business domicile was in Vermont. The ministry found that VNT’s day-to-day operations were conducted from its office in Vermont because in that office the CFO had filed all VNT income tax returns, paid sales tax and paid withholding tax. . Most business records were kept in the Vermont office and the majority of VNT employees were subject to the Vermont withholding tax. In contrast, VNT had no properties in Connecticut, had no employees, and did not store any business records there.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Robert Willens is president of the New York-based Robert Willens LLC tax and consulting firm and an assistant professor of finance at Columbia University Graduate School of Business.