Corporate Executive Board Company v. Virginia Department of Taxation

The Corporate Executive Board Company (CEB) (plaintiff), headquartered in Virginia, provided online tools that business executives used to analyze their companies’ functions. CEB did business in many states and foreign countries. Over half of CEB’s employees worked in Virginia, and its content was stored in servers located in Virginia. Virginia adopted the Uniform Division of Income for Tax Purposes Act and used a three-factor apportionment formula—which considered property, payroll, and sales—to apportion a company’s income for tax purposes. For the sales factor, Virginia treated the sales of intangible and tangible goods differently. Sales of tangible goods were counted in the state where the customer was located, and sales of intangible goods were counted in the state where the income-producing activity was performed. If the income-producing activity used to create an intangible good occurred in multiple states, Virginia used a cost-of-performance test and would count the activity as part of the company’s Virginia-derived income if, based on the costs incurred by the company, a greater portion of the income-producing activity occurred in Virginia than in any other state. Because most of CEB’s employees worked in Virginia and its servers were located in Virginia, CEB allocated almost all its sales to Virginia. CEB filed a lawsuit in state court arguing that Virginia’s apportionment formula violated the Due Process Clause of the Fourteenth Amendment and the Commerce Clause of the Constitution because it resulted in CEB paying multiple state taxes on the same income. CEB sought relief through the Uniform Division of Income for Tax Purposes Act’s relief provision. Under that provision, if a taxpayer could show that applying a state’s standard apportionment formula would produce unfair results such as multiple taxation attributable to the state, the taxpayer could petition for an alternate apportionment formula. The circuit court upheld Virginia’s apportionment formula. CEB appealed.