The District of Columbia Office of Administrative Hearings held that the two financial institution subsidiaries of Petitioner, a credit and charge card issuer company, should have included in their payroll factor denominator only the payroll attributable to the financial institution entities. In other words, when calculating their payroll factor, Petitioner’s financial institution subsidiaries should have excluded any payroll generated by Petitioner’s non-financial institutions, in spite of filing as part of a combined group that included both types of entities. Petitioner filed corporation franchise tax returns in the District of Columbia on a combined basis with its 22 members (two of which were financial institutions). While the general D.C. apportionment formula is single sales factor, the apportionment formula for financial institutions also includes a payroll factor.
Petitioner and the Office of Tax and Revenue disagreed on the payroll factor denominator’s calculation. Petitioner contended that the payroll factor denominator for the two financial institution should include all of the entities in the combined group, relying on regulations in place before the apportionment formula was changed. The OTR assessed the taxpayer, limiting the denominator to only the financial institutions’ payroll (i.e., only the entities with a payroll factor). The OTR relied on administrative guidance it had previously issued when D.C. switched from a four-factor apportionment formula—which included a payroll factor—to the single sales factor formula. Ultimately, the Office of Administrative Hearings held for the OTR, deferring to agency interpretation and concluding that Petitioner did not show that the tax was disproportionate to the amount of business it transacted in the District.