Tax Type
BPOL Tax
Description
County erred when it relied on the sales factor reported on the Taxpayer's income tax returns to calculate the BPOL tax assessment
Topic
Local Power to Tax
Taxpayers' Remedies
Date Issued
06-06-2008
June 6, 2008
Re: Appeal of Final Local Determination
Locality: *****
Taxpayer: *****
Business, Professional and Occupational License 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 an assessment of Business, Professional and Occupational License (BPOL) taxes issued to the Taxpayer by the ***** (the "County") for tax years 2003 and 2005.
The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3103.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct. That is, 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 summarized below. The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.
FACTS
The Taxpayer, a multinational corporation, maintains offices throughout the world, including one (Office A) in the County. The Taxpayer provides a broad range of technical, professional, and construction services to industrial, commercial and governmental clients, drawing upon the particular expertise of employees situated at its various offices, depending upon the nature of the project. On each project, the Taxpayer segregates gross receipts attributable to services performed by each office.
The County audited the Taxpayer for the tax years at issue and assessed additional BPOL tax. The Taxpayer appealed the assessments to the County in accordance with Va. Code § 58.1-3703.1 A 5. In its final local determination, the County upheld the audit assessment, which was based on the sales factor from the Taxpayer's Virginia corporate income tax returns, allowing for deductions for gross receipts attributed to other localities where the Taxpayer had paid a business license tax. The County also determined that the Taxpayer was not entitled to deductions for business conducted in other states because the services were performed in the County.
Pursuant to Va. Code § 58.1-3732 B 2, the Taxpayer protests the County's BPOL assessments for tax years 2003 and 2005 on the basis that it was denied the deduction for those receipts attributed to business conducted in other states.
ANALYSIS
Sales Factor
The County used the Virginia sales factor from the Taxpayer's Virginia corporate income tax returns as the gross receipts subject to BPOL tax. The use of the sales factor as a basis for gross receipts has been addressed in numerous public documents, including Public Document (P.D.) 97-490 (12/19/97), P.D. 01-5 (01/04/01), P.D. 03-15 (03/10/03), P.D. 04-46 (08/12/04) and P.D. 05-1 (01/08/05). In these public documents, the Department found that the sales factor reported on a taxpayer's Virginia corporate income tax return does not necessarily equate to a taxpayer's gross receipts as reported to a jurisdiction for purposes, of the BPOL tax. That is, the Virginia income tax sales fact-or is "an unreliable measure of gross receipts for purposes of the BPOL tax." See P.D. 05-58 (404/12/05).
Out-of-State Deduction
The BPOL tax is based on a taxpayer's gross receipts, which are defined in Va. Code § 58.1-3700.1 as "the whole entire total receipts, without deduction." There are some specific deductions that a taxpayer may take as provided for in the Code of Virginia. Included among these is the deduction for "[a]ny receipts attributable to business conducted in another state or foreign country in which the taxpayer . . . is liable for an income or other tax based upon income." See Va. Code § 58.1-3732 B 2. The regulations further explain that the taxpayer must be liable for an income or an income-like tax in the other state and file a return in that state to take advantage of the deduction. See 2000 BPOL Guidelines § 2.6.
In this case, the Taxpayer is required to file income tax returns in a number, of states where its customers are located, even though the employees providing the services to these customers may not be located in customer's state. At issue is whether the gross receipts attributable to services performed in Office A resulting from business conducted in other states are eligible for this deduction.
The County asserts that the out-of-state deduction is not available for services performed at Office A on out-of-state projects because such services were actually performed at a definite place of business in the County. In determining the situs of gross receipts, Va. Code §§ 58.1-3703.1 A 3 a 4 and 58.1-3703.1 A 3 b state that receipts from services are to be taxed based on (in order): (i) the definite place of business at which the service is performed, or if not performed at any definite place of business, (ii) the place from which the service is directed or controlled; or (iii) when it is impossible or impracticable to determine where the service is performed or from where the service is directed or controlled, by payroll apportionment between definite places of business.
Office A is the Taxpayer's definite place of business in the County. The scientists, architects and engineers that work out of any of the Taxpayer's offices, including Office A, may be actively engaged in projects in any one of the many states where the Taxpayer conducts business. Under Virginia statute, all gross receipts attributable to services performed at Office A would be sitused to the County.
For purposes of the deduction of business conducted in other states, however, the Department has found that, in the case of business services, the proper measure of the out-of-state deduction is based on gross receipts, or revenues derived from customers located in a state or country other than Virginia. See P.D. 97-490. Accordingly, in those instances in which a taxpayer has a definite place of business in Virginia and does business in other states where it is liable for an income or income-like tax, and files a tax return in those states, a deduction is allowed for the receipts derived from customers located in those states. This deduction is allowed even if a taxpayer does not have a definite place of business in those states or services are directed or controlled in those states.
In this case, the Taxpayer has provided evidence of actual accounting of revenues derived from customers located in other states properly sitused to the Office A and income tax returns filed in the states where such customers were located. For example, one contract in which Taxpayer provided multiple construction-related services to a customer located in ***** (State A), the Taxpayer drew on the expertise of employees located in 14 different localities in 9 different states, including Office A. The Taxpayer was able to show that 17% of total gross receipts earned under the contract were attributed to services performed by Office A. The Taxpayer was subject to State A income tax and filed State A income tax returns. Such evidence would indicate that the Taxpayer properly computed its out-of-state deduction on its original returns.
DETERMINATION
For the reasons set forth above, the County erred when it relied on the sales factor reported on the Taxpayer's income tax returns to calculate the BPOL tax assessment. Furthermore, the Taxpayer is entitled to the deduction provided under Va. Code § 58.1-3732 B 2 for receipts attributable to business conducted in another state. Accordingly, I am remanding this matter to the County with instructions to recalculate the Taxpayer's BPOL taxes for tax years 2003 and 2005 in accordance with this determination.
If you have any questions regarding this determination, you may the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-1868481323H
Rulings of the Tax Commissioner