On January 10, the Mississippi Supreme Court granted the Mississippi Department of Revenue's (MDOR) petition for certiorari to review the Court of Appeals' holding that the MDOR has the burden of proving that the use of an alternative apportionment method was appropriate in determining the taxpayers' Mississippi taxable income. Equifax, Inc. and Equifax Credit Info. Services, Inc. v. Dep't of Revenue, 2012 WL 1506006 (Miss. Ct. App. May 1, 2012). The Court of Appeals had reversed the chancery (trial) court's determination that there was a rebuttable presumption in favor of the MDOR's use of alternative apportionment and remanded the case because the trial court applied an incorrect standard of review. The appropriate burden of proof when proposing an alternative apportionment method has recently garnered significant attention around the country, so courts and taxpayers in other states will also be paying close attention to the Mississippi Supreme Court's forthcoming decision.
The primary services provided by the taxpayers, Equifax, Inc. and Equifax Credit Information Services, Inc., were credit reports, credit scores, and fraud alerts. These transactions primarily occurred electronically and took approximately three seconds from the time the customer requested the credit report or score to the time that they received the information. During the four-year audit period, the taxpayers had approximately 800 customers located in Mississippi and employed three residents in Mississippi, but did not have an office in the state.
Applying the standard apportionment method for service companies doing business in states that have adopted UDITPA, commonly known as the cost of performance method, the taxpayers determined that they had no income subject to tax in Mississippi. The MDOR disagreed, arguing that the apportionment method used by the taxpayers did not fairly reflect the extent of their business in Mississippi. Therefore, the MDOR applied an alternative apportionment method consisting of market-based sourcing, and issued an assessment against the taxpayers based on the taxpayers' large number of customers in Mississippi. The taxpayers appealed the assessment to the Mississippi Tax Commission Board of Review, which upheld the assessment in a reduced amount. The taxpayers then appealed to the three-member Tax Commission, which upheld the Board's reduced assessment. The taxpayers paid the assessment under protest, and appealed the assessment to the Hinds County Chancery Court. The chancery court affirmed the assessment and determined that there was a rebuttable presumption in favor of the MDOR. The taxpayers then appealed to the Mississippi Court of Appeals.
The Court of Appeals focused on whether the chancery court applied an incorrect standard of review. Typically, the standard of review for an appeal from a Mississippi administrative agency decision is the arbitrary and capricious standard. Thus, a reviewing court may reverse the decision of an administrative agency only if the decision: (1) was unsupported by substantial evidence; (2) was arbitrary and capricious; (3) was beyond the power of the administrative agency; or (4) violated the complaining party's statutory or constitutional rights. Mississippi law, however, provides that a different appellate standard of review should be used when considering MDOR findings. Specifically, Miss. Code Ann. § 27-77-7(5) provides that "the chancery court shall give deference to the decision and interpretation of law and regulations by the Department of Revenue as it does with the decisions and interpretation of any administrative agency, but it shall try the case de novo and conduct a full evidentiary judicial hearing on the issues raised (emphasis supplied)." The chancery court cited the arbitrary and capricious standard as the appropriate standard of review and stated that a rebuttable presumption existed in favor of the MDOR's decision and findings. Applying § 27-77-7(5), the Court of Appeals held that instead of applying the arbitrary and capricious standard, the chancery court should have heard the case de novo, just as if the chancery court were sitting as the MDOR. Giving deference to the MDOR's decision would, according to the intermediate appellate court, interfere with the chancery court's ability to try the case anew.
Although the Court of Appeals reversed and remanded the chancery court's decision on procedural grounds, the Court also held that the Department has the burden of proving that the standard apportionment formula did not fairly represent the activities of the taxpayers within Mississippi, and that the MDOR's alternative apportionment formula to be used was reasonable. In reaching this decision, the Court of Appeals looked to courts in California, Tennessee and Utah because, although Mississippi has not adopted UDITPA, the MDOR regulation that allows the agency to use an alternative apportionment method is modeled after UDITPA Section 18.
The Mississippi Supreme Court's forthcoming decision may have implications that extend beyond the substantive issue of whether cost of performance or market-based sourcing should be used for multistate taxpayers. The appropriate burden of proof when proposing an alternative apportionment method has been a hot topic recently in other states as well. For instance, the South Carolina Court of Appeals held that the party seeking to override the legislatively-determined apportionment method bears the burden of proving that the method is not appropriate and that an alternative method more accurately reflects the taxpayer's business activity within the state. CarMax Auto Superstore West Coast, Inc. v. South Carolina Dep't of Revenue, No. 4953 (S.C. Ct. App. March 14, 2012).
Our firm is also currently handling a similar issue in Tennessee for a taxpayer. For additional information, please contact Brett Carter in our Nashville office.
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