D.C. court backs BAE Systems tax exemption

By Nathan Bass | Dec 5, 2012

WASHINGTON, D.C. (Legal Newsline) - The D.C. Court of Appeals has rejected the arguments of the D.C. Office of Tax and Revenue and affirmed the administrative decision granting a tax exemption to a high-tech company.

In 2001 and 2002, BAE Systems Enterprise Systems Inc. claimed an exemption from corporate franchise taxes under the "New E-Conomy Transformation Act."

"To qualify, a company must have two or more employees and must derive at least 51% of its gross revenues from specified high-technology activities, including services involving the Internet or advanced computer software.

The company also must "maintain an office, headquarters, or base of operations in the District of Columbia," according to the opinion.

After BAE claimed the exemptions on its 2001 and 2002 tax returns, the Office of Tax and Revenue ("OTR") issued a notice of tax deficiency of $532,764 to BAE, asserting BAE was not exempt.

OTR and BAE then had their dispute heard before the Office of Administrative Hearings ("OAH") which found BAE exempt.

OTR then submitted a petition for review of the administrative office's decision to the D.C. Court of Appeals.

Judge Roy D. McLeese wrote for the Court, "During 2001 and 2002, under contracts with terms ranging from one to seven years, BAE provided services to the federal government at three separate government facilities located in the District of Columbia."

"It is undisputed that providing those services qualified as high-technology activity."

"It is also undisputed that during 2001 and 2002 approximately 180 BAE employees were working in the District of Columbia while providing those services."

"Finally, it is undisputed that the places where BAE provided services to the federal government fell geographically within a designated "High Technology Development Zone."

"The parties do contest," McLeese clarified, "whether BAE maintained an office or base of operations in the District of Columbia."

"BAE employees assigned to the government facilities ... typically reported to the same location on a daily basis for the duration of each contract. The government assigned specific work areas in its facilities for BAE employees."

"Within those designated areas, BAE selected desk and office workspaces for its own employees, and there were signs identifying BAE employees outside of their cubicles or offices ... and BAE records reflected the addresses of the government facilities as its employees' official places of work."

OTR argued that BAE did not "maintain" an office or base of operations because they did not exercise "predominant dominion, control, or autonomy" over their "office or base of operations."

To this argument, the Court asserted, "OTR has cited no precedent for interpreting 'maintain' to impose a requirement of 'predominant dominion, control, or autonomy ... to the contrary, OTR's proposed definition of 'maintain' conflicts with prior tax decisions in this jurisdiction."

"We are therefore unpersuaded by OTR's arguments as to the natural understanding of the word 'maintain' in the phrase 'maintain an office ... or base of operations.'"

The Court then looked at statutory construction issues, the legislative history, and other OTR arguments before concluding, "In sum, when all of the relevant considerations are taken into account, OTR's interpretation of the franchise-tax exemption cannot reasonably be sustained."

"To be eligible for an exemption from the franchise tax, a high-technology company need not exercise "predominant authority, dominion, or control" over an office or base of operations."

"Rather, it suffices if the company has a sufficient number of employees performing qualifying high-technology work at a fixed location in a high-technology zone for a sufficiently extended period of time."

OAH therefore correctly determined that BAE was eligible for the franchise-tax exemption."

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