California: Regulators seek feedback for possible taxation of space transportation activities

Last March, the California Franchise Tax Board authorized its staff to hold interested party meetings to discuss the regulation of apportionment and allocation of income derived from space transportation activities. This includes the transportation of people or cargo into and from space.

Industry initiated the effort with a document titled Request to Proceed to Interested Parties Meeting for a Proposed Regulation under California Code of Regulations, Title 18, Section 25137, Relating to the Apportionment of Income Arising from Space Transportation Activities. Acknowledging that the current tax code does not address space transportation, the authors explained that “in the near future,” the private companies that now launch satellites into orbit and transport supplies to and from the International Space Station anticipate transporting people to and from space as well.

The Uniform Division of Income for Tax Purposes Act does not contain procedures for determining the apportionment factors arising from space transportation activities, hence the request.

The first interested parties meeting convened on July 9, 2015. The agenda included the following:

1. How should space transportation activities be defined in a regulation?
   
   a. At what point do we consider aircraft or space vehicles as traveling into space?
2. How should unsuccessful missions be treated?
3. What apportionment factors should we use to apportion and allocate income from space transportation activities? How many apportionment factors should we consider, and how should they be weighted, such as:
   
   a. Launch factor?
   
   b. Recovery factor?
   
   c. Mileage factor?
   
   d. Others?
4. Should a regulatory effort address the potential for "nowhere income," and if so, how should it be addressed?
5. What issues could we encounter with combining space transportation activities with a taxpayer's other trade or business activities?
6. Should a regulatory effort distinguish between transporting cargo and people?

The tax board has announced its second interested persons meeting, which is set for April 13. At this session, the board will provide draft regulatory language and solicit feedback from taxpayers and practitioners. Discussion topics include, but are not limited to:

1. The scope of the possible regulation
2. Input on proposed regulatory language defining specified terms, input on the proposed apportionment factors based on a mileage factor and a launch factor
3. What issues, if any, might be encountered with combining space transportation activities with other trade or business activities

As currently written, the draft language contains definitions, such as what constitutes a “space exploration activity,” instruction on how to calculate the sales factor of space transportation companies, and record keeping rules.

The draft language also defines the elements that make up the sales factor, such as mileage and departure factors, and mileage ratios. Illustrating the application of the regulations, including how to apportion income, is an example featuring a space transportation company that has revenue from non-space transportation activities, and that has entered into three separate, revenue-producing launch contracts, which will occur both within and outside of California.

As it currently stands, the regulations would be effective for taxable years beginning on or after Jan. 1, 2016.