Tax Relevance of Tech News: Part 1 — Apollo 11 50th Anniversary

With the 50th anniversary of the moon landing July 20, this tech news/tax relevance series starts with this major triumph as well as developments of today calling for renewed and expanded space exploration, travel, and research. Work on these plans and the new activities they will enable raise new tax issues beyond what had to be addressed in the past. Perhaps the 50th anniversary of the moon landing is a time not only for renewed interest in space exploration, but also for a focused effort among governments, practitioners, and industry experts to address these tax issues in a collaborative manner with workable tax system outcomes.

I. The Apollo 11 Moon Landing

“I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to Earth.”

— President John F. Kennedy¹

The U.S. space program began over 60 years ago because of numerous factors, including space as the logical next step in aeronautical research, military needs tied to missile and rocket capabilities, the Cold War and desires to advance space exploration ahead of the Soviet Union (the space race), and advances in science and communications technology.² Initial launches involved unmanned rockets, which continued even after the first crewed flight.

The first American in space was Alan B. Shepard Jr. aboard Freedom 7, part of the Mercury program. This Mercury-Redstone 3 launched May 5, 1961, and its suborbital flight lasted just under 16 minutes.³ The excitement of this success presented an opportunity for President Kennedy to seek funds for continued space exploration in a speech before Congress about three weeks later. Shepard’s flight also led to more crewed flights involving increasing distance, duration, and capabilities.

The Mercury program led to the Gemini program, with continued testing of scientific theories, mechanics, and human endurance. The Apollo program had a tragic start with a fire in the Apollo 1 command module January 27, 1967, in which astronauts Virgil Grissom, Edward White, and Roger Chaffee lost their lives. The program ended with Apollo 17 in December 1972, with six moon landings altogether for Apollos 11 to 17 (the Apollo 13 landing was aborted in April 1970).⁴

The first moon landing involved three astronauts aboard Apollo 11, which launched on July 16, 1969, from the Kennedy Space Center in Florida. The launched vehicle split for the moon landing and recovery. The Lunar Module (the Eagle) with Neil A. Armstrong and Edwin E. “Buzz” Aldrin Jr. aboard, landed at the Sea of Tranquility July 20 (4:17 p.m. EDT). These astronauts walked (and jumped) on the moon, planted an American flag, spoke with President Nixon, conducted experiments, gathered moon rocks, took photographs, and relayed information back to Earth. Meanwhile, Michael Collins orbited the moon in the Command and Service Module (the Columbia) and prepared to reconnect with the Eagle. The three astronauts returned to Earth, splashing down in the Pacific Ocean about 900 miles from Hawaii and 13 miles from the USS Hornet recovery ship July 24, 1969 (12:50 p.m. EDT).⁵

Apollo 11 and its crew spent a little over eight days on the mission, with just under 24 hours on the moon. This milestone event was viewed on television by about 650 million people,⁶ representing 18 percent of the world’s population (the U.S. population was 203 million in 1969).

As with past milestone anniversaries of the Apollo 11 moon landing, the 50th anniversary celebration includes special events at NASA, on the USS Hornet, in the Smithsonian’s National Air and Space Museum, and elsewhere. New books and videos have been released, people involved with Apollo 11 have been interviewed by the news media, and there are even augmented reality apps about the Apollo 11 mission. The anniversary is likely to revitalize interest in space exploration and travel among many people in the United States. The next section summarizes public and private space activities taking place today and planned for the near future.

II. Public and Private Space Exploration Efforts Today

While NASA has been synonymous with space travel through the end of the Apollo program and the start and continuation of the International Space Station (ISS), today many might first think of billionaires Elon Musk and Jeff Bezos regarding new explorations and activities in space.

SpaceX was founded by Musk in 2002. The company, with more than 6,000 employees, builds and launches rockets, satellites, and spacecraft. In 2012 SpaceX achieved a first by launching a vehicle to deliver cargo to and from the ISS. The company states that it serves “to revolutionize space technology, with the ultimate goal of enabling people to live on other planets.”

Bezos, founder of Amazon.com, started Blue Origin in 2000. The company launches satellites and other vehicles for companies, universities, and governments conducting research in space. The company’s mission states that it is “committed to building a road to space so our children can build the future.” The company seeks to help preserve Earth by accessing “unlimited resources and energy” of space and enabling millions of people to live and work in space. A technology focus of Blue Origin is development and use of reusable equipment.

Virgin Galactic was founded in 2004 by yet one more aeronautics-focused billionaire, Richard Branson. The company’s mission is to develop and operate “a new generation of space vehicles to open space for everyone.” The company focuses on reusable equipment and research, and seeks “to change the world for good.” 

Not all commercial space launch and exploration companies were founded by famous billionaires. For example, United Launch Alliance has a vision to “harness the potential of space for humanity.” It provides launch services for public and private customers and has almost 2,500 employees. Other launch and exploration companies also exist.

Private space exploration has not replaced public efforts but instead supplements these capabilities for tremendous advances in this area. Like some of the private efforts aiming for personal space travel without traditional astronaut training, NASA announced in June 2019 its “NASA Interim Directive (NID) on Use of International Space Station (ISS) for Commercial and Marketing Activities,” starting in 2020.⁷ This new effort includes the possibility of “private astronauts” making trips to the ISS. The directive provides the following as its purpose:⁸

Low-Earth orbit is where the ISS is located. As described by NASA, LEO “is considered the area in Earth orbit near enough to Earth for convenient transportation, communication, observation, and resupply.” It anticipates that “many proposed future platforms” will be in LEO.⁹

The June 2019 NASA press release also noted that the organization is working to land “the first woman and next man on the moon by 2024” and that private industry “also will play an essential role in establishing a sustainable presence” there.¹⁰

NASA’s recent release and directive highlight that one of the ways to qualify a project is for it to “support the development of a sustainable low-Earth orbit economy.” No doubt, increased commercial activity in LEO will continue to raise tax questions of nexus, sourcing, and apportionment of income generated there, mostly in the multistate tax area. Some of these topics have been addressed in the past, but increased activity and new business are likely to bring renewed interest and need for guidance in this area (discussed in Section IV).

The June 2019 NASA announcement likely stems from promotion for renewed space exploration by both the Obama and Trump administrations. President Trump’s Space Policy Directive-1 of December 11, 2017, amends President Obama’s Presidential Policy Directive-4 (National Space Policy) of June 28, 2010. The original and amended paragraphs of these directives show the significance both presidents placed on advancing space exploration and travel.

The 2010 directive includes among a few specified guidelines for “civil space” that NASA shall: “Set far-reaching exploration milestones. By 2024, begin crewed missions beyond the Moon, including sending humans to an asteroid. By the mid-2030s, send humans to orbit Mars and return them safely to Earth.”¹¹

Trump’s 2017 amendment replaces that statement with the following:

At the signing of the 2017 amendment, Vice President Pence, who serves as chair of the National Space Council, noted that NASA would not only once again send astronauts to the moon but also focus on a mission to Mars. Reasons offered for reinvigorated exploration included enhancing national security, promoting innovation, job creation, and ensuring “that the rules and values of space exploration are written with American leadership and American values.”¹³

Finally, Trump’s fiscal 2020 budget includes funding for space exploration and commercial activity. He called for a 1.4 percent increase in the NASA budget, which included “$363 million to support commercial development of a large lunar lander that can initially carry cargo and later astronauts to the surface of the moon.” The budget also provided for $600 million for a trip to Europa, a moon of Jupiter, to launch in 2023.¹⁴

III. To the Moon and Beyond Economics

Efforts to land a human on the moon and return him safely were costly. NASA estimates that funding of just the Apollo program’s unmanned and 12 manned missions was about $20.4 billion.¹⁵ And significant costs also went into the preceding programs, including Mercury and Gemini. Kennedy and others focused on the significance of this spending to the U.S. budget and economy.

In a speech delivered September 12, 1962, at Rice University in Houston, Kennedy made several observations about the cost and sacrifice of getting to the moon, as well as the benefits. He noted there was “new knowledge to be gained” and that the effort to get to the moon “will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win.” Benefits of the work to get to the moon highlighted by Kennedy that day included¹⁶:

• satellites already orbiting Earth advance knowledge on launch capabilities, help ships pursue safer routes, and warn of hurricanes;

• advancements in science from new knowledge and tools of observation and mapping, including computers; and

• formation of new companies and “tens of thousands of new jobs” and more highly skilled personnel.

In a May 1963 memo requested by Kennedy, Vice President Lyndon Johnson, also head of the National Aeronautics and Space Council, noted several benefits of the space program, including¹⁷:

• the multiplier effect of the space program’s research and development that “will augment our economic strength, our peaceful posture, and our standard of living”;

• new knowledge about the solar system;

• improvements in making steel and ceramics;

• improved communications and navigation systems;

• increased number of highly trained engineers and scientists;

• improved education system including by “setting goals that will encourage young people”;

• “an expansion of the base for peaceful cooperation among nations”; and

• “military competence.”

In his 1962 speech, Kennedy also reminded the audience of the significant costs involved in getting to the moon:

As with any spending program, the source of funds is typically questioned, as government funds are never enough to fund all possible projects to benefit the economy, society, and environment. The president of the National Urban League noted that the cost to get two men to the moon was more than three times what it would cost to boost poor people from poverty for a year.¹⁹

Similar questions continue with current efforts for federal space exploration. Should the money be used instead to help reduce or eliminate poverty, help workers who may be displaced by robotics, cure cancer and other diseases, reduce reliance on fossil fuels, or address climate change? Unlike the 1960s, commercial space activities are a significant and growing enterprise today. This expands the finance questions to include whether new taxes should be imposed on these activities to help fund NASA activities as well as federal projects otherwise displaced by continued and increased funding for NASA’s activities. Tax and funding considerations of expanded space activities are discussed next.

IV. Tax Considerations of Today’s Space Exploration and Travel

A. Federal Tax Rules

Aside from resolving tax issues that may arise, a more significant issue for Congress is how to fund additional space exploration and research, given existing annual budget deficits. In addition to typical tax changes to generate revenue for general purposes, consideration can be given to new excise taxes on space activities, including launches, days in space, and passenger ticket sales. Fees might also be considered for licensing technology from NASA, maintaining debris in space, or failing to meet specific fuel efficiency or greenhouse gas emission targets. States might also consider some of these fees and taxes (discussed later).

Federal taxation of space activities has been addressed since the Tax Reform Act of 1986 added subsection (d) to IRC section 863 to address sourcing rules for space and some ocean activities. Generally, any income derived from space is sourced to the United States if it is derived by a U.S. person. If it is derived by a non-U.S. person, the income is sourced outside the United States. Space activity includes “any activity conducted in space.”²⁰

Regulations define “space” as “any area not within the jurisdiction (as recognized by the United States) of a foreign country, possession of the United states, or the United States, and not in international water.” A non-exhaustive list of space activities is also provided such as performance and provision of services in space, sales and leasing of property in space, and licensing of technology or intangibles for use in space. Guidance is also provided on the taxation of property produced and sold in space, with a 50/50 method specified. Examples address ownership of satellites, telecommunications services, sale of images and data gathered (produced) in space, and sale of a right to operate from a specified position in space such as a satellite slot.²¹

Expansion of space activities beyond satellites to also include commercial research platforms, travel, and even living in space, is likely to generate federal tax questions beyond what section 863 was designed for. Additional federal tax considerations include:

• Whether special tax incentives are appropriate and if they are, what they should cover and who they should be available to. Should the incentives tie to training, R&D, manufacturing, sharing knowledge gained with the public, or achievement of specified federal goals?

• Are new taxes warranted to help address negative externalities of space launch and travel such as environmental damage and expansion of space debris?

• Are new depreciation categories, lives, and methods needed for space exploration, research, and travel equipment?

• Where wages of employees hired and working for commercial space stations co-owned by U.S. and non-U.S. companies should be taxed.

These federal tax issues are similar to state and multistate tax issues that would need to be addressed. Also, existing state rules on apportionment and sourcing for space and non-space activities likely need updating for increased levels of commercial space activities — to be sure they make sense, such as when people are living in space or regularly traveling to locations in space. A summary of these issues as well as some existing guidance and suggestions for moving forward follows.

B. State Authority to Tax

U.S. constitutional provisions, notably the due process clause of the 14th Amendment and the commerce clause, set limits on a state’s authority to tax activity not totally within its borders. The nexus that must exist for the state to have taxing authority requires sufficient connection between the taxpayer and the state to ensure fairness to the taxpayer and avoidance of harm to interstate commerce.²²

With outer space, the issue is not only which states may tax income and transactions with some connection to a state, but how much can be taxed if a portion of the activity is not even on Earth or some appropriate distance above Earth. Cases on the big picture perspective of taxing authority may shed some light.

Per the U.S. Supreme Court:

Space activity that can be associated with one or more states includes launch and reentry of the space vehicle, manufacture and sale of space vehicles, design of technology and intellectual property, and sales of property such as data and digital images gathered in space. Yet if space activity advances as the companies of billionaires Bezos, Branson, and Musk hope, some of these activities will originate in space or take place solely in space. Even NASA’s 2019 directive calls for commercial and marketing activities and creating “a commercial economy in LEO.” Issues will then arise about the domicile of the company or individual or any connection to one or more states. Throwback rules will also be under scrutiny if space does not include a taxing jurisdiction. Issues of jurisdiction to tax might easily expand beyond the earthly challenges faced over past decades regarding nexus and authority to tax.

Congressional efforts to update P.L. 86-272, enacted in September 1959, date back to at least 2000 with S. 2401, the New Economy Tax Simplification Act of the 106th Congress. Bills have been introduced in each subsequent Congress, including H.R. 3063, the Business Activity Tax Simplification Act of 2019 in the 116th Congress. Given the slow pace of efforts to update P.L. 86-272, sponsors should also consider how commercial space activity should factor into this modernization effort. Analysis and debate on the activities and jurisdiction issues well before there is widespread commercial space activity should lessen the likelihood of years of litigation, confusion, and added costs to taxpayers and the states.

C. Apportionment and Sourcing

Once a state establishes jurisdiction to tax, challenges arise in the space context of determining how much income can be taxed by the state. A state following the Uniform Division of Income for Tax Purposes Act needs to consider how space equipment affects the property factor, how wages paid to employees in space affects the payroll factor, and how sales from space to Earth and between space platforms affects the sales factor. Many states today use only the sales factor and do not use the UDITPA sourcing rule but might instead use market sourcing. Such rules are not uniform among states using market sourcing. In the context of space, identifying the market and the relevance of whether that market imposes tax must be considered.

A sampling of existing statutes, regulations, and cases illustrates the rules needed and challenges that exist when rules are not specific or vary among jurisdictions. In the 1984 case Communications Satellite Corp. v. Franchise Tax Board,²⁴ the trial court decision was reversed on appeal to hold for the state. Comsat owned and operated communications satellites orbiting Earth, tracking stations (not in California), and seven stations for transmitting and receiving signals from satellites with one of the stations in California. The satellites were launched from Florida. The satellites were located over a fixed point on the equator and never passed over California. Comsat had an office in Los Angeles.

In computing the numerator of the property factor, Comsat did not include any satellite property. The Franchise Tax Board “enhanced Comsat’s numerator by adding to it (i.e., adding to the value of its California property) a fraction of the value of Comsat’s interest in the satellites in the particular year.” The rationale was that the satellites had no value without the signal stations on Earth. The court agreed:

The FTB also enhanced Comsat’s numerator for the sales factors to consider a portion of income associated with the California activity. For example, the court noted:

Some states have specifically addressed satellites or “outer-jurisdictional property” in defining the property factor. For example, Arkansas law provides that publishers exclude outer-jurisdictional property (including an “orbiting satellite”) from the denominator of the property factor.²⁵ In contrast, New Jersey law provides that for the communications industry, satellites are included in the property factor denominator with the numerator including “a portion of such property based upon the ratio of ground stations serviced in New Jersey to the number of all such ground stations.”²⁶

In 2017, to address sourcing for the numerator of the sales factor for commercial launch-related income to guide SpaceX, headquartered in California, and other “space transportation” companies²⁷, the FTB issued a regulation with an alternative formula because of the special circumstances of this industry. According to the FTB’s “Initial Statement of Reasons” for adopting the regulation, it worked with taxpayers in the industry.²⁸ This project began in 2015 with a meeting of interested parties to solicit input on “the apportionment and allocation of income derived from Space Transportation Activities, including the transportation of people or cargo into and from Space.” Questions posed included when a vehicle should be treated as traveling into space, treatment of unsuccessful missions, treatment of “nowhere income,” and application of launch and mileage factors in the calculation.²⁹

Under Cal. Code Regs. 25137-15, Apportionment and Allocation of Space Transportation Companies, effective for tax years beginning on or after January 1, 2016, the sales factor is modified with the numerator based 80 percent on a mileage factor and 20 percent on a departure factor. The mileage ratio numerator is 62 miles for launches from California and zero for launches outside the state.³⁰ The denominator is the total mileage of all launch vehicles. If the total mileage is not available because of confidentiality imposed by the government, the denominator mileage for such contracts is presumed to be 310 miles.

The departure numerator is the number of launches in the state, and the denominator is the number of launches everywhere. The ratios are computed for each contract to derive the overall percentage to apply to total gross receipts. The regulation includes an example and a reminder of the need for the taxpayer to maintain all necessary books and records to compute the factors.

The California effort to determine in-state gross receipts for a space transportation company was a single-state effort. While these companies might encourage other states to adopt a similar approach, differences in state apportionment and sourcing rules, as well as the authority of the state tax agency to draft guidance, are likely to result in varying rules, if any, for these companies. Broader discussion of the potentially significant “nowhere” income generated from launch and space activities is also needed. A multistate project informed by industry and tax experts should prove useful, particularly as space activities increase in number and value.

D. Incentives

All states have a variety of incentives to encourage specified activities. The emergence of commercial space activity (beyond the long-standing satellite industry) may encourage some states to offer new incentives to attract this business. For example, for 2001 through 2003, Oklahoma had a credit for “qualified space transportation vehicle providers,” defined as a commercial corporation or limited liability company organized in the state “engaged in designing, developing, producing, or operating commercial space transportation vehicles in this state” and with capitalization of at least $10 million. “Space transportation vehicle” meant a vehicle for orbital or suborbital spacecraft built in Oklahoma and owned by a “qualified space transportation vehicle provider, for the purpose of operating in, or transporting a payload to, from, or within, outer space, or in suborbital trajectory, and includes any component of such vehicle or spacecraft not specifically designed or adapted for a payload.” Providers applied in advance with the Oklahoma Tax Commission for this credit that was equal to 5 percent of eligible capital costs (up to $30 million) with a four-year carryover if needed.³¹

States seeking to attract new commercial space activity might consider tax incentives for building spacecraft and launch and recovery sites and for job training. Such incentives often exist as credits, as Oklahoma provided years ago. They might also be income exclusions or sales tax exemptions. For example, A.B. 1878, introduced in the California Legislature in 2018, proposed an exclusion from gross income for certain space transportation companies. The FTB’s analysis of A.B. 1878 said the purpose of the bill “is to provide tax incentives to ensure that California’s space industry continues to thrive and remain the worldwide space industry leader.”³²

Existing research tax credits or similar R&D incentives of states are likely to help with space exploration activities. Incentives tied to opportunity or enterprise zones might also help encourage some research, manufacturing, and launch activity in parts of the state.

E. Excise Taxes

Federal and state excise taxes exist today on gasoline and other fuels. To help generate tax revenues, if needed, similar taxes could be considered on any special rocket fuels. Similar to the use of gasoline excise taxes for building and maintaining roads, the taxes could be used for basic research and protecting launch sites and surrounding areas, or similar needs and externalities related to space launch and exploration. States might also consider an excise tax on fares paid for space travel. Such a tax can help state revenues and address some of the externalities of space launch. While excise taxes are regressive, given the high cost of purchasing a ticket for space travel, such a tax would not face that concern.

F. Addressing Negative Externalities

Space travel is not without its adverse effects on the Earth and outer space environments. Launches require thousands of gallons of fuel, some of which produce greenhouse gas emissions such as carbon.³³

Additional concerns include the number of satellites in Earth orbit³⁴ and debris left in space. NASA has an office to study the effects of debris — the Orbital Debris Program Office at the Johnson Space Center in Texas. It measures and develops mitigation techniques “to protect users of the orbital environment.”

A long-standing issue partly tied to externalities is the taxation of cable versus satellite television. Cable providers and their customers are often subject to state and local fees, sales taxes, or utility taxes that satellite providers and their customers might not be subject to. Reasons for the differences include the manner of transmission and what state and local resources are used. Consideration must also be given to the costs of both forms of transmission, the purpose of the various taxes imposed, and whether any special taxes are even needed.³⁵

While addressing negative externalities of space is a federal role rather than a state one, states must also identify ones that affect their state such as any land damage, pollution, and effect on any greenhouse gas emission targets that exist at the state level. Fees and taxes can address these costs and encourage the development of new ways to operate, so as to reduce such fees and taxes.

V. Moving Forward

While the United States has not had men land on the moon since 1972, space research and exploration has continued since the first moon landing on July 20, 1969. Commercial activity has increased with the growing need for satellites for communications and collection of data. And today several companies explore a different future in space involving private citizens with in-space economic activity.

Federal and state tax issues and opportunities exist, including state efforts to attract what might be a good economic development activity for a state to create high-quality R&D and manufacturing jobs. While years ago some states did form commissions to study development of space exploration and partnerships with NASA, taxation was not a focus and the studies generally did not persist.³⁶ As suggested in this article, a study group of state governments, practitioners, academics, and industry experts would be a good way to better understand and draft appropriate state tax rules that would work for space activities.

The next articles in this series on tax considerations in 2019 tech news will explore bitcoin, payment cards, mobility, and long-standing software taxation issues. Commonalities will be exposed and addressed among these topics, including security and energy use. The tech news addressed in this series of articles includes a host of tax issues as well as opportunities, especially for improved tax compliance and administration.