Corporate Close-Up: Boldly Going Where No Tax Man Has Gone Before: California Adopts Special Apportionment Rules for Commercial Space Transport


As Michael Huerta, administrator of the Federal Aviation Administration, said at the 20th Annual Commercial Space Transportation Conference in Washington, D.C., "Space transportation, as you all know, is no longer the exclusive domain of the government.” Industry is “democratiz[ing] … space” with more launches from more launch sites than ever before. Innovative companies with a foot in the modern day space-race (Blue Origin, SpaceX, and Virgin Galactic, to name a few) are entering the lucrative final frontier, offering up commercial space travel and transport services for a fee. How lucrative, you ask? In 2010, revenue from 23 commercial launches worldwide generated an estimated $2.45 billion. In 2015, estimated revenues generated from eight commercial space launches in the US alone reached $617 million.

“Private space travel is an exciting new venture taking place quite literally out of this world, and with new adventures come new tax questions,” said Robert Merten, III, Associate at Eversheds Sutherland’s Sacramento office and co-author of the California Corporate Income Tax and Pass-Through Entities Navigators (subscription required).

Over the last decade the burgeoning commercial space industry has been calling for a better way to determine their tax liabilities. On Sept. 28, 2017, the California Franchise Tax Board (FTB) answered, promulgating Regulation Section 25137-15. This section of the California Code of Regulations officially adds the “space transportation” industry to the list of industries subject to special apportionment under the Uniform Division of Income for Tax Purposes Act (UDITPA). Merten notes that “California Revenue and Taxation Code Section 25137 expressly permits departures from the default apportionment rules of UDITPA in ‘unusual fact situations’ like traversing the final frontier. California law fully recognizes that tax apportionment cannot take a one-size-fits-all approach, and this is a perfect example of Section 25137 at work.” The failure of the standard apportionment rules (using the location where the benefit of a rendered service is received) to determine the amount of space transport business income subject to tax in California was the impetus behind the new law, according to the FTB.[1]

These new rules will reduce the need for space transportation companies to take tax positions based on uncertain or untested applications of UDITPA. Quoting Merten, “California companies are leading the way in private space travel, so it’s no surprise to see this regulation project take off.”

The Standard Apportionment Rules

Before Regulation Section 25137-15, companies generating more than 50 percent of their gross business receipts from space transportation activities used a standard single-sales factor apportionment formula to allocate income to California. Under UDITPA, the sales factor is a fraction consisting of total in-state sales earned during the taxable year (the numerator) over the total sales earned both in-state and out during the taxable year (the denominator). Regulation Section 25137-15, effective for tax years beginning on or after Jan. 1, 2016, applies the standard UDITPA sales factor rules (codified in Revenue and Tax Code  Sections 25124 through 25137), however special sourcing rules apply to the sales factor numerator for qualifying space transportation companies.

The New Kid on the Block: The New Sales Factor Numerator and When to Apply It

Qualifying space transportation companies will now be taxed on the number of miles traveled within the state, with gross receipts sourced to California based on a mileage factor weighted at 80 percent of the sales factor numerator and a departure factor weighted at 20 percent. Regulation Section 25137-15 defines qualifying “space transportation companies” as those with at least 50 percent of their gross business receipts attributable to the successful, or attempted, movement of people or property into space.

The Mileage Factor: What You Need to Know

To determine the mileage factor, taxpayers must calculate the mileage ratio for each contract in a given tax year in which the taxpayer recognizes revenue.

The mileage ratio is where things get a little complicated. To calculate the mileage ratio for a given contract, taxpayers must divide the total projected mileage traveled in California of all launch vehicles launched—or planned to be launched—under the contract (the mileage ratio numerator) by the total mileage from launch to “separation” of all launch vehicles launched under the contract (the mileage ratio denominator). Regulation Section 25137-15 defines “separation” as the geographical point where a payload physically separates from a launch vehicle. For purposes of determining the numerator of the mileage ratio, launches in California will have a value of 62 miles above the surface of the earth (also known as the Karman Line: the boundary line separating orbital and suborbital space),[2] and launches outside of California will have a value of zero. If the projected mileage of a given contract is not available due to secrecy or confidentiality imposed by government authorities, the mileage ratio denominator is “conclusively presumed” to be 310 miles above the earth multiplied by number of launches under the applicable contract.

Once the taxpayer calculates the mileage ratio of each contract, they must multiply each mileage ratio by the revenue recognized under the applicable contract, resulting in the product of each contract. The final step is adding up the products of each contract which results in the sum total of the projected mileage from all launch contracts a taxpayer has in an applicable tax year. This number is the numerator of the mileage factor.

The denominator of the mileage factor is the total revenue recognized from all launch contracts in the applicable tax year. 

The Departure Factor: The Easy Part

To determine the departure factor, taxpayers must divide the total number of launches in California for each contract in given tax year during which the taxpayer recognizes revenue by the total number of launches dictated by each contract, regardless of tax year or location of launch, under which the taxpayer recognizes revenue.

This new method of apportioning and allocating business income generated from space transportation activities will prevent California-based companies from being excessively taxed on revenue generated by out-of-state launches, while requiring out-of-state companies to pay their fair share for using California launch stations. Currently, two sites are used most frequently for commercial launches in the US: Vandenberg Air Force Base in California and Cape Canaveral Air Force Station in Florida. Other states with bases from which commercial launches are authorized include Virginia: Mid-Atlantic Regional Spaceport at Wallops Flight Facility; Alaska: Kodiak Launch Complex on Kodiak Island; Oklahoma: Oklahoma Spaceport in Burns Flat; and New Mexico: Spaceport America in Las Cruces.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Which state will introduce special apportionment rules for space transport companies next?

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[1] Speaking to the standard apportionment rules, FTB notes that “In cases where goods or property are transported into space, it is unclear where the benefit of such services is located. The proposed regulation at CCR Section 25137-15 clarifies how income from space transportation services should be apportioned and resolves this uncertainty by providing clear and consistent rules for space transportation companies.”

[2]  Orbital space is generally defined as an altitude where lift from the forward thrust generated by rocket fuel is no longer needed, since centrifugal force takes over; conversely, suborbital space is defined as the altitude where it would be impossible to keep a spacecraft aloft without forward thrust.