California is big on the space industry, and for good reason. The state is home to CalTech’s Jet Propulsion Lab and NASA’s Ames Research Center, and benefits from the long-term presence of aerospace giants Boeing, Lockheed Martin, and several others. California is also home to SpaceX, founded by Elon Musk, which bills itself as the leader in low-cost space access. Colorado-based United Launch Alliance, a joint venture between Boeing and Lockheed Martin, also has significant operations in the state. Of course, these space activities wouldn’t be possible without the Vandenberg Air Force Base — about three hours north of Los Angeles, Vandenburg is the only facility in California permitted by the Federal Aviation Administration to launch large payloads into orbit.
As one can imagine, launching a satellite isn’t cheap. The fare on one of these “space taxis” can range from $62 million to $400 million, depending on the payload’s tonnage, service contracts, and other factors, some of which are unique to the government. Even accounting for overhead, at these prices anyone running a space taxi business could reap many millions in income over the course of a single year.
For space transport companies that pay income tax to California, their in-state activities presented a real problem. Since space transport was entirely new, there was no guidance in either the state’s tax law or regulations on how to calculate the tax on taxable income. In short, the standard apportionment rules simply didn’t apply. In California, for some businesses, one factor that must be considered is the market that generated the business’s revenue. For space transport, when goods and property are launched into orbit, it’s at best difficult to determine the market that benefited from the service, if not impossible.
SpaceX, Virgin Galactic, and United Launch Alliance approached the Franchise Tax Board for a solution to the apportionment problem, and the space transport companies and the FTB devised a new regulation tailored for the industry, based on mileage and departures. The departure factor is the ratio of all launches in the state under contract (even if some launches occur outside the tax year) and the number of space launches that occurred everywhere. The numerator of the mileage factor is set at 62 miles for each launch. Why 62 miles? That’s the elevation of the Karman line, the internationally recognized demarcation between Earth’s atmosphere and outer space.
Of course, there were some who opposed the new regulation. Legislation was introduced in 2018 to invalidate the regulation by exempting space flight income from tax on grounds that it’s a fledgling industry that should be allowed to grow without excessive government interference. The bill ultimately failed.
Concerning fledgling industries and excessive government interference, I’ve heard that argument before. When the Internet Tax Freedom Act was being debated in the late 1990s, it was argued that internet service providers were a fledgling industry and so should be exempt from state taxes. The argument was successful, and the industry exploded. The problem is that two decades later, the industry is well-established and stable, yet continues to be exempt from state taxes. I’m not saying there’s anything inherently wrong with providing exemptions for new industries. But if the new industry is successful, like ISPs, in fairness, the exemption should be repealed. But that’s in a perfect world; the reality is that when an exemption is granted, it tends to become set in stone. It’s heartening to see that the fledgling space transport industry was willing to come forward and help the state draft a solution to a difficult issue. As for me, I’m squirreling away my coins so I can buy a ticket for a trip on Virgin Galatic’s SpaceShipTwo. Then I’ll have fulfilled my lifelong dream to be a real space cadet.