Ruling 95-12, Corporation Business Tax / Apportionment / Receipts Factor

FACTS:

A company ("the Company") is engaged in the business of selling and renting construction equipment, such as scaffolding and cranes, in a number of states, including Connecticut. It sells and rents such equipment for use on the reservation of a federally-recognized Indian tribe ("the Tribe"). The reservation is within the exterior limits of the state of Connecticut (endnote 1). Sometimes, the Company sells and rents the equipment directly to the Tribe or to individuals who are enrolled members of the Tribe. Such equipment is delivered to or shipped to the Tribe, or individuals who are enrolled members of the Tribe, to a location on the reservation for use in construction or other activities related to Indian gaming. Other times, the Company sells or rents the equipment directly to contractors, who are not affiliated with the Tribe, to be used by the contractors in construction which takes place on the reservation and is related to Indian gaming. Such equipment is delivered or shipped to a location off the reservation, but within the exterior limits of the State of Connecticut. The Company currently files corporation business tax returns and apportions its net income using the three-factor formula.

ISSUES:

Whether the receipts from the sale or rental of the equipment by a company directly to a federally recognized Tribe (or an individual who is an enrolled member of the Tribe) are includible in the numerator and the denominator of the company's receipts factor of its apportionment fraction for purposes of the corporation business tax, where the reservation of the Tribe is within the exterior limits of the State of Connecticut.

Whether the receipts from the sale or rental of the equipment by a company to a contractor who uses the equipment in construction which takes place on the reservation of a federally recognized Tribe are includible in the numerator and the denominator of the company's receipts factor of its apportionment fraction for purposes of the corporation business tax, where the reservation of the Tribe is within the exterior limits of the State of Connecticut.

DISCUSSION:

Conn. Gen. Stat. §12-218 provides that a corporation which is taxable both within and without this state shall apportion its net income (endnote 2). Net income of a corporation derived from the sale or rental of tangible personal property must be apportioned by means of an apportionment fraction, to be computed as the sum of the property factor, the payroll factor and twice the receipts factor, divided by four. Conn. Gen. Stat. §12-218(c). The receipts factor is defined, in pertinent part, to be:

Conn. Gen. Stat. §12-218(c)(3).

To determine whether the gross receipts in issue are assignable to the state (i.e., included in the numerator of the receipts factor), we must determine, with respect to the sales of the equipment in issue, whether the property is delivered to or shipped to a purchaser within the state and, with respect to the rentals of the equipment in issue, whether the equipment is situated in the state. To do so, we must determine if the reservation land is within the State of Connecticut.

The phrase "within the state" is not defined in chapter 208. In determining its meaning, however, we must construe it in accord with common law principles, Leavenworth v. Marshall, 19 Conn. 1, 4 (1848); see Bridgeport Housing Auth. Police Force v. Bridgeport, 85 F.R.D. 624 (D. Conn. 1980), and "according to the commonly approved usage of the language." Conn. Gen. Stat. §1-1(a). Statutory definitions of similar phrases may be considered. See Dugas v. Beauregard, 155 Conn. 573, 577-78, 236 A.2d 87 (1967) (drawing on definition of term provided in another statute); Link v. Shelton, 186 Conn. 623, 433 A.2d 902 (1982) (looking to the same phrase in an unrelated statute appropriate in defining a term because where legislature uses the same phrase it is considered to intend the same meaning). A similar phrase is defined in chapter 219, the Sales and Use Taxes Act. Pursuant to §12-407(14), '''[in this state' or 'in the state' means within the exterior limits of the state of Connecticut and includes all territory within these limits owned by or ceded to the United States of America." (endnote 3)

In a matter with facts similar to the instant matter, the New York Department of Taxation and Finance likewise opined that for purposes of computing the allocation fraction under the New York Business Corporate Franchise Tax for a New York corporation doing business on the St. Regis Mohawk Indian Reservation, the portion of the reservation which was located in the United States (a portion of it being located in Canada), and which was physically located in the state of New York, was to be treated as "within New York." TSB-A-93C (October 12, 1993), 1993 N.Y. Tax LEXIS 464.

The corporation which was the subject of the New York Advisory Opinion, was a New York corporation, all of the shareholders of which were St. Regis Mohawk Tribe members, which managed the bingo operations on the reservation. The New York Business Corporation Franchise Tax, like the Connecticut corporation business tax, is a franchise tax imposed on corporations (with exceptions not relevant here) doing business in New York, including employing capital, owning or leasing property within New York, or maintaining an office in New York. N. Y. Tax Law §209.1. Like corporations subject to the Connecticut corporation business tax, corporations subject to the New York tax which do business both within and without New York must apportion their entire net income using a three factor formula, one of the factors of which is a receipts factor (endnote 4). Like the receipts factor under Conn. Gen. Stat. § 12-218, the receipts factor under the New York law includes, in its numerator, sales of personal property which are shipped to points within the state and rentals from property situated in the state. N. Y. Tax Law § 210.3(a)(2).

Such interpretation of the phrase is also consistent with the intention of the statute. The purpose of the apportionment statute is to measure the business activity of the taxed corporation occurring in the Connecticut. Spector Motor Service, Inc. v. Walsh, 135 Conn. 37, 57, 61 A.2d 89 (1948), rev'd on other grounds, 340 U.S. 602, 95 L. Ed. 573 (1951). As to the Company in issue, sales and rentals which it makes, directly or indirectly, to the Tribe or to individuals enrolled as members of the Tribe, whether such sales or rentals occur on or off the reservation, constitute business activity of the Company occurring in Connecticut because the status of the Tribe as a separate sovereignty has no meaning to the Company, it being neither a federally recognized Tribe nor an enrolled member thereof. The fact that the equipment in issue may be sold or rented to the Tribe or an individual enrolled as a member of the Tribe or used on the reservation, does not place the Company's activity outside Connecticut. Cf. Connecticut Bank & Trust Co. v. Tax Commissioner, 178 Conn. 243, 248, 423 A.2d 883 (1979) (tax exempt nature of property held by a corporation subject to tax does not otherwise imbue immunity from tax on the corporation).

We are mindful of the fact that for some purposes (e.g., taxation of receipts from sales occurring on the reservation), the reservation may be treated as a geographical area separate and apart from a state so as to prohibit a state from taxing transactions occurring on the reservation. See Ruling No. 95-11. However, states are not required to treat the reservation as a separate taxing jurisdiction for all purposes. In Cotton Petroleum Corp. v. New Mexico, 490 U.S. 163, 104 L. Ed. 2d 209, 109 S. Ct. 1698 (1989), the Supreme Court held that for purposes of interpreting the Commerce Clause of the United States Constitution as it applies to state taxation, Tribal reservations are not states. In Cotton Petroleum, the appellant was a non-Indian company which was in the business of extracting and marketing oil and gas. Some of its production occurred under leases of acreage located on the Jicarilla Apache Reservation, located in northwestern New Mexico. New Mexico imposed an unapportioned severance tax equal to 8 percent of the value of Cotton Petroleum's production, including production from wells located on the reservation. In addition, the Jicarilla Apache Tribe imposed its own severance tax equal to 6 percent of production from wells located on the reservation. Accordingly, Cotton Petroleum paid an 8 percent severance tax on production from wells located in New Mexico, but not on the reservation (as did other producers who had production from wells located in New Mexico), but a 14 percent severance tax on production from wells located on the reservation (i.e., the 8 percent New Mexico tax and the 6 percent Tribe tax). In first addressing whether New Mexico was preempted from taxing Cotton Petroleum on the production from leases located on the reservation, the Court concluded that the state was able to tax oil and gas lessees operating on the reservation (endnote 5) and that whatever marginal effect the tax levied on Cotton Petroleum might have on the demand for on-reservation leases, such was not enough to preempt the tax. The Court then turned to whether the reservations must be considered a state, thereby requiring New Mexico to apportion the severance tax because '''insofar as [New Mexico's severance taxes] are imposed without allocation or apportionment on top of Jicarilla Apache Tribe taxes' [they] impose 'an unlawful multiple tax burden on interstate commerce'. Brief for Appellants 33." 490 U.S. 163, 187-188. The Court, however, dismissed such argument and held the reservation should not be treated as a state for purposes of the tax apportionment under the Commerce Clause.

RULING:

For purposes of the receipts factor of the apportionment fraction, where the reservation of a federally recognized Tribe is within the exterior limits of the State of Connecticut:

(1) gross receipts of a company, which is subject to the corporation business tax and which is eligible to apportion its net income under Conn. Gen. Stat. §12-218, from sales or rentals of equipment directly to the Tribe (or an individual who is an enrolled member of the Tribe) are includible in the numerator and the denominator of the company's receipts factor for purposes of determining its apportionment fraction; and

(2) gross receipts of a company, which is subject to the corporation business tax and which is eligible to apportion its net income under Conn. Gen. Stat. §12-218, from sales or rentals of equipment to contractors who use such equipment in construction which takes place on the reservation and is related to Indian gaming, are includible in the numerator and the denominator of the company's receipts factor for purposes of determining its apportionment fraction.

Endnotes:

1. The exterior limits of the state of Connecticut are described more fully in Private Laws of Connecticut, Vol. IV (1836-1857) at 839 and Vol. X (1885 and 1889) at 152, 368 and 717 (establishing the boundaries between Connecticut and Rhode Island); 1913 Conn. Spec. Acts 330 [in Special Laws of Connecticut, Vol. XVI (1911 and 1913) at 1003] (establishing the boundaries between Connecticut and Massachusetts); and 1913 Conn. Spec. Acts 365 [in Special Laws of Connecticut, Vol. XVI (1911 and 1913) at 1104] (establishing boundaries between Connecticut and New York); and Conn. Gen. Stat. § 6-2.

2. While the subject of this Ruling is the interpretation of the term "state" for purposes of Conn. Gen. Stat. § 12-218(c)(3), we note that such interpretation is also applicable for Conn. Gen. Stat. § 12-218, generally.

3. Should there be any question whether the reservation of a federally-recognized Tribe were within the exterior limits of the State of Connecticut, the Department would look, for guidance, to the appropriate records concerning land boundaries, including the records of the United States Department of the Interior and Tribal-State Compacts under the Indian Gaming Regulatory Act, Pub. L. No. 100-497 (as codified 25 U.S.C. §2701 et seq.).

4. The New York Corporation Franchise Tax consists of a tax on so-called "subsidiary capital" (e.g., essentially stock investments in 50 percent or more owned corporations) plus the greater of: (1) a minimum tax; (2) a tax imposed on allocated net income; (3) a tax imposed on allocated capital; or (4) a minimum taxable income (which is defined as investment income, multiplied by a special allocation formula, plus the remaining minimum taxable income (so-called "business income") multiplied by the three factor formula, less depreciation adjustments). N. Y. Tax Law §§210.1, 210.3(a).

5. More recently, in Oklahoma Tax Commission v. Chickasaw Nation, 515 U.S. ___, 132 L. Ed. 2d 400 (1995), the United States Supreme Court recognized that a state had authority to tax the income of a tribe member from activities conducted on the reservation if the tribe member resided off the reservation. The Court, citing to New York ex. rel. Cohn v. Graves, 300 U.S. 308 (1937), pointed to the "well established principle of interstate and international taxation":

"That the receipt of income by a resident of a territory of a taxing sovereignty is a taxable event is universally recognized. Domicil itself affords a basis for such taxation. Enjoyment of the privileges of residence in the state and the attendant right to invoke the protection of its laws are inseparable from responsibility for sharing the costs of government . . . . These are rights and privileges which attach to domicile within the state . . . . Neither the privilege nor the burden is affected by the character of the source from which the income is derived."

132 L. Ed. 2d at 412.

LEGAL DIVISION

December 20, 1995