California Carves Out Special Tax Apportionment Rules for Space Travel

Chris Gaetano
Published Date:
Oct 17, 2017

The state of California added "space transportation," that is the movement of people or property into space, to the list of unusual industries subject to special apportionment rules for determining how much income the state can tax, according to Bloomberg BNA. Apportionment rules apply when firms have nexus (are capable of being taxed) in more than one state, and are used to determine how much income each state can tax. In California, companies that generate more than 50 percent of their gross business receipts from space transportation activities needed to use a single-sales factor apportionment formula to determine how much they owed the state: the fraction of the total in-state sales earned during the taxable year over the total sales earned both in and out of state for the taxable year. 

This test, however, can be difficult to apply in the cases of private space travel, which is already a multi-billion dollar industry. So, instead, space transportation will be taxed according to miles traveled within the state. The special rules involve calculations of mileage ratios for each space contract, determined by dividing the total projected mileage traveled in the state for all launch vehicles by total mileage from launch to separation of all launch vehicles. 

This mileage ratio includes vertical miles: for determining the numerator of the mileage ratio, California assumes that launches in the state will have a value of 62 miles above the Earth's surface, where the boundary between orbital and suborbital space lies. For launches outside the state, that value would be zero. The regulation notes that if the exact mileage is not available due to secrecy or confidentiality issues, the mileage ratio denominator is "conclusively presumed" to be 310 miles above the Earth, multiplied by the number of launches under the applicable contract. 

Once the mileage ratio is calculated, the taxpayer then multiplies that ratio by the revenue recognized under the applicable contracts, resulting in the product of each contract. Finally, the products of each contract is then added up, resulting in the sum total of the projected mileage from all launch contracts that taxpayer has in an applicable tax year. This number is the numerator of the mileage factor. The denominator is the total revenue recognized from all launch contracts in the applicable tax year.  

These new rules are meant to reduce the need for space transportation companies, which have grown into a multi-billion dollar industry, to take tax positions based on uncertain or untested applications of the Uniform Division of Income for Tax Purposes Act, which is generally how apportionment is calculated. 

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