(Pay)rolling with the punches: DC Office of Administrative Hearings keeps payroll factor denominator limited to financial institution payroll

The District of Columbia’s Office of Administrative Hearings found that the petitioner’s two subsidiary financial institutions, a credit card and charge card company, should have included in their payroll factor denominator only the payroll attributable to the entities of the financial institution. In other words, when calculating their payroll factor, the subsidiaries of the Applicant’s financial institutions should have excluded any payroll generated by the Applicant’s non-financial institutions, despite being part of a combined group that included both types of entities. The petitioner filed corporate 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 DC allocation formula is a single sales factor, the allocation formula for financial institutions also includes a payroll factor.

The petitioner and the Office of Tax and Revenue disagreed on the calculation of the payroll factor denominator. The petitioner argued that the denominator of the payroll factor for both financial institutions should include all entities in the combined group, relying on the regulations in place prior to the change in the allocation formula. The OTR contributed to the taxpayer by limiting the denominator to the sole payroll of financial institutions (that’s to say., only entities with payroll factor). The OTR relied on administrative guidance it had previously issued when DC moved from a four-factor allocation formula – which included a payroll factor – to the single-sales factor formula. Ultimately, the Office of Administrative Hearings sided with the OTR, deferring to the agency’s interpretation and concluding that the claimant had failed to demonstrate that the tax was disproportionate to the amount business he was doing in the district.

Summary Judgment Order, In the Matter of the Companies and Subsidiaries of American Express, DC Administrator. Office of Hearings, Case No. 2020-OTR-00029; 2020-OTR-00030 (April 19, 2022), reconsideration motion(June 15, 2022).

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