Mississippi Court Of Appeals Holds Department Of Revenue Has Burden Of Proving Alternative Apportionment Method

In a case involving the application of sales factor sourcing methods, the Mississippi Court of Appeals has held that the Mississippi Department of Revenue had the burden of proving that the use of alternative apportionment on the taxpayer's income to Mississippi was appropriate.1 The Court of Appeals rejected a lower court determination that there was a rebuttable presumption in favor of the Department's use of the alternative apportionment method. Because the lower court did not use the correct standard of review, the Court reversed and remanded the case.

Background

The taxpayer, a Georgia corporation in the business of consumer credit reporting, employed three Mississippi residents and had approximately 800 Mississippi+based customers, but did not have any property located in the state. The taxpayer's primary services were providing credit reports, credit scores and fraud alerts. These transactions usually occurred electronically and took approximately three seconds from the time the customers requested the credit report or score to the time they received the information. Applying the standard method of apportionment for service companies,2 the taxpayer concluded that it had no income subject to tax in Mississippi, arguing that none of its income+producing activity occurred in Mississippi. The Department determined that the standard apportionment method used by the taxpayer did not reflect the extent of its business in the state. Accordingly, the Department used an alternative apportionment method consisting of market+based sourcing, and issued an assessment against the taxpayer driven by the significant number of the taxpayer's Mississippi customers. On appeal to the Mississippi Tax Commission Board of Review,3 the Board upheld the assessment in a reduced amount. The taxpayer paid the assessment, under protest, and appealed the assessment to a county chancery court. In affirming the assessment, the chancery court determined there was a rebuttable presumption in favor of the Department. The taxpayer subsequently appealed this judgment to the Mississippi Court of Appeals.

Department Had Burden of Proof

The Mississippi Court of Appeals did not address the substantive issue of whether cost of performance or market+based sourcing should be used for this taxpayer. Rather, the Court determined that the chancery court did not apply the correct standard of review. In reversing and remanding the decision, the Court held that the Department had the...