By Stephen Burroughs and Andrew Appleby

The Tennessee Court of Appeals held that the Commissioner had the authority to require Vodafone, a wireless communications provider, to use an alternative apportionment method for Tennessee franchise and excise tax purposes. Vodafone used Tennessee’s statutory cost-of-performance (COP) method to source its telecommunication service receipts. Using Tennessee’s statutory COP method, Vodafone sourced its receipts outside the state because “a greater proportion of the earnings-producing activity” occurred outside Tennessee. Ignoring the statutory COP method, the Commissioner sourced Vodafone’s receipts using customer billing addresses in the state because the statutory COP method resulted in an 89% decrease in Vodafone’s sales factor and created substantial “nowhere income.” In Tennessee, the Commissioner may exercise its alternative apportionment authority only in “limited and specific cases” that involve “unusual fact situations which ordinarily are unique and nonrecurring.” The court ruled that the dramatic reduction in Vodafone’s sales factor constituted a specific and unusual situation—despite the situation being common to all service providers without significant operations or capital assets in Tennessee. Further, the court held that the COP method did not clearly reflect Vodafone’s in-state activity, but did so without analyzing Vodafone’s in-state activity. Citing to the sales factor reduction and presence of “nowhere income,” the court ruled that when the “statutory formula ‘misfires,’” alternative apportionment is appropriate “where the state is entitled to receive more taxes….” The alternative apportionment application in this case is reminiscent of the Mississippi Equifax case, which raised the ire of taxpayers and legislatures alike. Vodafone Americas Holdings Inc. v. Roberts, Comm’r of Revenue, No. M2013-00947-COA-R3-CV (Filed June 23, 2014).