Document Number
04-46
Tax Type
BPOL Tax
Description
Calculation of gross receipts paid to all states where business is conducted
Topic
Local Power to Tax
Date Issued
08-12-2004


August 12, 2004




Re: Appeal of Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Business, Professional and Occupational License (BPOL) Tax

Dear *****:

This final state determination is issued upon the application for correction filed by you on behalf of ***** (the "Taxpayer") with the Department of Taxation. You appeal a final local determination upholding a BPOL tax assessment for tax years 1998, 1999, 2000 and 2001 made by the Commissioner of the Revenue for the ***** (the "County").

The local license tax and fee are imposed and administered by local officials. Virginia Code § 58.1-3703.1(A)(5) authorizes the Department to issue determinations on taxpayer appeals of certain BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct. In other words, the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department as summarized below. Copies of the Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.
FACTS

The Taxpayer is an out-of-state corporation that provides engineering, logistics and information technology services primarily to defense agencies, but also to other federal and state governmental agencies as well as to a few commercial entities. The Taxpayer also sells precision manufactured products. For purposes of the BPOL tax, the Taxpayer has agreed to the County's use of the business services rate of $0.36 per $100 for all of its revenues, because its sales of tangible goods were ancillary to the Taxpayer's provision of services.

The Taxpayer has two locations in Virginia other than that in the County. The business conducted by these entities is unrelated to the Taxpayer's business in the County. The Taxpayer's business unit in the County is discretely defined for internal accounting and auditing purposes as the ***** systems division (the "Taxpayer's unit"). Like its business in the County, the Taxpayer's offices in the two other Virginia jurisdictions where the Taxpayer has a definite place of business and its offices in other states operate as separate entities with their own discrete titles and functions. All of the Taxpayer's business is based on winning bids on various contracts. The Taxpayer's businesses in Virginia have different "specialties and skill sets" and do not compete against one another in the bidding on a given contract or in the performance of services called for in the various contracts.

The Taxpayer states that on those occasions when the skills of one unit are required to support the primary activity of another unit when fulfilling a contract, individual employees of one unit may be called upon to lend appropriate technical support. While none of the Taxpayer's employees who work in the units in the other Virginia jurisdictions perform services in the County, employees of units located in other states occasionally do perform services in the County. The Taxpayer has included in its gross receipts services performed in the County that were directed or controlled by units located in other states.

The Taxpayer's unit in the County also performs services in several other states. The Taxpayer deducted the gross receipts attributed to its services performed in other states from the total gross receipts attributed to its business in the County.

The Taxpayer describes its business in the County as a "stand alone business operation," although a part of the corporate entity "maintains records of employees and service work performed by service/contract from its County location." The Taxpayer's unit in the County did provide services to clients located in another Virginia jurisdiction where the Taxpayer does not have a definite place of business. In this case, the gross receipts were sourced back to the County. The Taxpayer also has been able to identify the gross receipts from services performed in the County that are directed and controlled by units located in other states. Thus, for purposes of the BPOL tax, similar to the case addressed in Public Document (P.D.) 03-05 (03/02/03), the Taxpayer has been able to identify its gross receipts derived from services performed in the County both with respect to those receipts directly related to services performed by its unit in the County and to those services performed in the County that are directed and controlled by other units. It should be noted that 87 percent of the Taxpayer's gross receipts attributed to the County are from services performed by employees working for the Taxpayer's unit in the County.

All gross receipts from services performed in Virginia jurisdictions where the Taxpayer does not have a definite place of business have been sourced to the unit from which such services are directed or controlled. All gross receipts attributed to services performed in other states, but directed and controlled by the Taxpayer's unit in the County, have been deducted from the total gross receipts attributed to the County for purposes of the BPOL tax.

Using its method of calculating gross receipts, in BPOL tax year 2001, The BPOL tax imposed in 2001 is based on receipts generated in tax year 2000. the Taxpayer attributed ***** of its total gross receipts to the County. Of these receipts, ***** was attributed to services performed in the County or services performed elsewhere in Virginia, but directed and controlled by the Taxpayer's unit in the County. This amount also includes ***** attributed to services performed in the County but directed and controlled by the Taxpayer's units located in other states. The remaining ***** was attributed to services performed in other states but directed and controlled by the Taxpayer's unit in the County.

The County has based its assessment on the Virginia sales factor as reported on the Taxpayer's Virginia corporation income tax return. In its audit of the Taxpayer, the County found a significant discrepancy between the gross receipts reported to the County for BPOL tax assessment purposes and those receipts reported as "sales" on the Taxpayer's Virginia corporation income tax return. The County has stated that it allows exemptions for "those gross receipts reported to other Virginia jurisdictions for taxation, as evidenced by the business license tax filings in those jurisdictions." The County has not commented on the status of the Taxpayer's gross receipts attributed to business activity in other states. The County's methodology as applied in BPOL tax year 2001 took the Virginia sales factor of ********** subtracted gross receipts apportioned to the Taxpayer's units in the two other Virginia jurisdictions ***** and used the remaining ***** as the basis of its BPOL tax assessment issued to the Taxpayer. The difference between the Taxpayer's methodology for computing gross receipts taxable by the County and the methodology used by the County is *****.

The Taxpayer maintains that only gross receipts generated by services performed within the County should be subject to the County's BPOL taxes. The Taxpayer also questions how sales of goods and services originating outside of Virginia but provided to Virginia-based customers that are not located in the County can be subject to the County's BPOL tax.
ANALYSIS

Definite Place of Business

For purposes of the BPOL tax, Va. Code § 58.1-3700.1 defines a "definite place of business as "an office or a location at which occurs a regular and continuous course of dealing for thirty consecutive days or more." The Taxpayer maintains a definite place of business within the Commonwealth of Virginia in the County and in two other Virginia jurisdictions. The actual businesses conducted out of these offices are separate lines of business that can be, and have been, segregated for accounting purposes.

Situs

The BPOL tax is a tax on the privilege of doing business in a given jurisdiction. It is not a sales tax, nor is it an income tax. Furthermore, it is a tax to be measured by only those gross receipts attributable to business conducted in a given jurisdiction. Under the uniform ordinance provisions found in Va. Code § 58.1-3703.1, the general rule for situs of gross receipts provides that:
  • Whenever the tax imposed by this ordinance is measured by gross receipts, the gross receipts included in the taxable measure shall be only those gross receipts attributed to the exercise of a privilege subject to licensure at a definite place of business within this jurisdiction. In the case of activities conducted outside of a definite place of business, such as during a visit to a customer location, the gross receipts shall be attributed to the definite place of business from which such activities are initiated, directed, or controlled. Virginia Code § 58.1-3703.1(A)(3)(a).

The County subtracted the gross receipts reported to other Virginia jurisdictions from the Virginia sales factor figure reported on the Taxpayer's Virginia corporation income tax return and attributed the remainder of the sales figure to the County for purposes of the BPOL tax. This is not an acceptable methodology. Only those receipts attributable to the definite place of business in a jurisdiction are subject to that locality's BPOL tax. Virginia Code § 58.1-3703.1(A)(3)(b) provides that:
  • Gross receipts attributable to a definite place of business in another jurisdiction shall not be attributed to this jurisdiction solely because the other jurisdiction does not impose a tax on the gross receipts attributable to the definite place of business in such other jurisdiction.

If, however, a professional service provider performs services at a location away from its home office for 30 consecutive days or more, and essentially maintains an office with a telephone, etc., then that taxpayer may be subject to the BPOL tax in that locality. In this case, the Taxpayer has stated that it has occasionally had employees working on projects in other Virginia jurisdictions where it does not have a "definite place of business." In these instances, the Taxpayer has operated on the assumption that the "definite place of business" for individual employees working on projects in other Virginia jurisdictions is that jurisdiction from which the Taxpayer's "services are directed or controlled," or the County. The Taxpayer has reported its gross receipts associated with such services accordingly.

BPOL Taxation of Business Services

Virginia Code § 58.1-3703 authorizes localities to impose the BPOL on "businesses, trades, professions, occupations and callings and upon the persons, firms and corporations engaged therein within the county, city or town . . . ." [Emphasis added.] In other words, it is a business' situs and its activity within a given jurisdiction that give rise to its local BPOL tax liability. Furthermore, in the calculation of a person's BPOL tax liability, "the gross receipts included in the taxable measure shall be only those gross receipts attributed to the exercise of a privilege subject to licensure at a definite place of business within this jurisdiction." Virginia Code § 58.1-3703.1(A)(3)(a).

There is no dispute that the Taxpayer is a business service. As such, its gross receipts from the performance of services "shall be attributed to the definite place of business at which the services are performed or, if not performed at any definite place of business, then to the definite place of business from which the services are directed or controlled." Virginia Code § 58.1-3703.1(A)(3)(a)(4). In this case, the Taxpayer contends that it has been able to identify those gross receipts that are directly attributed to its business in the County. It is only these receipts that are subject to the County's BPOL tax.

Out-of-State Business

Virginia Code § 58.1-3732(B) provides a deduction from gross receipts that would otherwise be taxable for "[a]ny receipts attributable to business conducted in another state or foreign country in which the taxpayer (or its shareholders, partners or members in lieu of the taxpayer) is liable for an income or other tax based upon income." Section 2.6 of the 2000 BPOL Guidelines further clarifies this deduction by specifying what constitutes taxpayer liability for purposes of Va. Code § 58.1-3732(B).
  • A Virginia taxpayer is liable for an income or other tax based upon income if the taxpayer files a return for an income or income-like tax in that state or foreign country. The Virginia taxpayer, however, need not actually pay any tax to take the deduction.

In P.D. 97-490 (12/19/97), the Tax Commissioner discussed how to measure the receipts eligible for a deduction under Va. Code § 58.1-3732(B).
  • Clearly, there is a difference between gross receipts attributable to another state or foreign country and adjusted income or other financial information reported on an income tax return filed in another state or country. Gross receipts attributed does not mean apportioned net income or amounts appearing in sales factors or other like factors for apportioning income. It means gross receipts derived from business conducted in another state or foreign country regardless of whether the full amount or a portion of such gross receipts are subject to income tax in another state or foreign country. [Emphasis in original.]

Sales Factor in the Virginia Income Tax Return and the BPOL Tax

For sales other than sales of tangible personal property, the sales factor as reported on the Virginia corporate income tax return reflects all the income producing activity that is performed in Virginia. When such activity associated with a sale is performed both within the state and outside the state, if the preponderance of the activity occurs within the state, the total sale is attributed to Virginia and is included in a taxpayer's sales factor. Therefore, in any given case, sales activity originating outside of the Commonwealth could be supported by activity within the Commonwealth to such an extent that it would be included in the Virginia sales factor for corporate income tax purposes. In other words, receipts reported as part of the sales factor for Virginia corporation income tax purposes could include receipts for the cost of performance elsewhere. See Title 23 of the Virginia Administrative Code 10-120-230 and P.D. 98-177 (10/29/98.) for further explanation. Such receipts are not included in a taxpayer's taxable measure for purposes of the BPOL tax.

Whether a business's gross receipts are attributed to the sale of tangible property or to the cost of services performed, the methodology used in calculating those receipts for purposes of the Virginia corporate income tax is unique to that tax. The sales factor a taxpayer reports on its Virginia corporate income tax return is based upon a measure of taxable receipts that may be different from the measure used in the calculation of a taxpayer's gross receipts for purposes of the BPOL tax and, therefore, is inappropriate.
DETERMINATION

The Taxpayer's corporate structure enables it to isolate those receipts attributed to the services performed by its business unit that is located in the County and by other business units located in other states, but performing services in the County. These receipts should be the basis of the County's assessment of the Taxpayer's BPOL tax liability. The Taxpayer has furnished the County with statements reflecting the actual gross receipts generated by its business in the County. In so doing, the Taxpayer has included receipts generated in other Virginia jurisdictions attributed to business services that it directs and controls. The Taxpayer has also included any gross receipts related to the sales of its precision machinery and tools in its gross receipts attributed to its unit in the County. Because these sales are ancillary to its provision of services, and indeed, constitute a very small portion of the gross receipts of the Taxpayer's business in the County, it has included these receipts in its reporting of "business services revenue."

The Taxpayer has properly deducted gross receipts attributed to business services provided by its County unit in other states. The outstanding question regarding this deduction is whether the Taxpayer filed an income tax or an income-like tax in those states. It is incumbent upon the Taxpayer to provide the County with proof of the fact that it filed such returns. Whether the Taxpayer paid a tax is not relevant; the filing of the return is.2000 BPOL Guidelines § 2.6.

The ability of the Taxpayer to isolate those gross receipts attributed to its business in the County makes it unnecessary to pursue any apportionment methodology in determining what receipts should be the basis of the BPOL tax. It is my determination that the correct taxable base for purposes of the County's BPOL tax assessment of the Taxpayer is: (1) the gross receipts attributed to the services the Taxpayer provides in the County, plus (2) the receipts generated by services performed elsewhere in Virginia in which the Taxpayer has no definite place of business and are directed and controlled by the Taxpayer's unit in the County, less (3) the receipts attributed to the business services it performs in other states in which it has filed an income or income-like tax return. I would also note that in reviewing its methodology for calculating its gross receipts, the Taxpayer has revised its calculation of gross receipts attributed to the County upward by *****. Therefore, I am directing the Taxpayer to submit its latest calculations based on the formula detailed above to the County. The County, using these gross receipts figures, shall recalculate the Taxpayer's BPOL assessment for the years in question.

If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
                  • Sincerely,


              • Kenneth W. Thorson
                  • Tax Commissioner



AR/43377H

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46