Document Number
04-80
Tax Type
BPOL Tax
Description
Defense related contract services for the federal government
Topic
Appropriateness of Audit Methodology
Basis of Tax
Exemptions
Local Taxes Discussion
Date Issued
08-25-2004

August 25, 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 year 1998 made by the Commissioner of the Revenue of the ***** (the "County"). I apologize for the delay in the Department's response.

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, 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 as summarized below. 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 a multistate information technology consulting services firm that performs defense related contract services for the federal government. Four of its subsidiaries have definite places of business in the County. The Taxpayer states that it performs its services under thousands of contracts. Furthermore, any given contract may be executed in one state, the services performed in conjunction with a contract may be performed in several different states, and portions of a given contract may be directed or controlled from different states. Some of the Taxpayer's federal contracts are so highly classified that the Taxpayer does not always have direct knowledge of the actual location where the services are performed.

For state income tax purposes, the Taxpayer sources its revenue to the various states using the apportionment methods prescribed by each state with which it has nexus. For BPOL tax purposes, however, the Taxpayer maintains that because of the nature of its business and the accounting method it uses, it is "impossible and impractical for [the Taxpayer] to allocate its receipts by location" and therefore under the apportionment rules (Va. Code § 58.1- 3703.1(A)(3)(a)(4)(b)), payroll apportionment should be used in determining the Taxpayer's BPOL tax liability in the County. The Taxpayer further contends that under the requirements of the Commerce Clause, such apportionment should be based on national payroll figures, rather that state payroll figures.

In its audit of the Taxpayer, the County relied upon the gross receipts reported in the sales factor on the Taxpayer's Virginia corporate income tax return. The sales factor included receipts from subsidiaries that did not conduct business in the County. The County deducted only those gross receipts reported to other Virginia taxing jurisdictions in determining the Taxpayer's BPOL tax liability.1

At issue in this appeal is the difference in methodologies used by the Taxpayer and the County in deriving the Taxpayer's gross receipts attributable to its definite place of business in the County. The Taxpayer also contests the inclusion of subsidiaries that do not have a definite place of business in the County in the County's BPOL tax assessment. The Taxpayer maintains that only the four subsidiaries that have a definite place of business in the County should be included in the tax base.
ANALYSIS

BPOL Taxation of Business Services

The BPOL tax is a local option tax that may be imposed by jurisdictions on "businesses, trades, professions, occupations and callings and upon the persons, firms and corporations engaged therein within the county, city or town." See Va. Code § 58.1-3703. [Emphasis added.] In other words, it is business' situs and business activity within a given jurisdiction that give rise to local BPOL tax liability.

Under the situs rules governing the BPOL tax liability of services, the general rule states, "The 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." Va. Code § 58.1-3703.1(A)(a)(4).

Payroll Apportionment

In those instances where a taxpayer has more than one definite place of business and it is impractical or impossible to determine to which definite place of business gross receipts should be attributed, gross receipts of the business must be apportioned between the definite places of businesses on the basis of payroll. See Va. Code § 58.1-3703.1(A)(3)(a)(4)(b). The general rule cited above, however, is the first consideration to be used in determining the attribution of gross receipts to a given jurisdiction for BPOL tax purposes. In other words, the payroll apportionment method is to be used only when it is impossible or impracticable to determine (in order): (i) the definite place of business at which the services are performed or, (ii) the definite place of business from which the services are directed or controlled. See Public Document (P.D.) 03-5 (2/5/2003).

In this case, the Taxpayer contends that it is unable to account for the receipts directly attributable to its performance of services in the County. Additionally, the Taxpayer is unable to identify those services that are directed or controlled from its offices in the County because the nature of the Taxpayer's contracts result in many points of control. These points of control are located both within and outside of the Commonwealth. Furthermore, the services provided under a given contract may transcend state borders. For these reasons, the Taxpayer maintains that payroll apportionment is the appropriate method to be utilized in determining its BPOL tax liability.

Given the Taxpayer's multistate activities and the fact that its accounting procedures are contract driven, rather than service driven, I must agree with the Taxpayer that the most appropriate method of assessing the Taxpayer for BPOL purposes is through the use of payroll apportionment.

Moreover, in reviewing the methodology the County utilized in assessing the Taxpayer, I would note that the bases of the sales factor as reported on the Virginia corporate income tax return and the Taxpayer's gross receipts as reported for BPOL tax purposes are unrelated. As explained in more detail in P.D. 03-15 (3/10/03), 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.

Situs

The Taxpayer has multiple subsidiaries, but only four of its subsidiaries have a definite place of business in the County. Virginia Code § 58.1-3703.1(A)(3)(a)(4)(b) states that gross receipts "shall not be apportioned to a definite place of business unless some activities under the applicable general rule occurred at, or were controlled from, such definite place of business." It is only the business activity of the Taxpayer's four subsidiaries with a definite place of business in the County that may be considered under the payroll apportionment scheme. Payroll and gross receipts of the Taxpayer's other subsidiaries may not be included in the County's assessment for BPOL tax purposes. See Va. Code § 58.1-3703.1(A)(3)(b).

Interstate Payroll Apportionment

While Virginia Code § 58.1-3703.1(A)(3)(b) makes provision for use of a payroll apportionment methodology in those cases where it is impossible or impractical to determine the situs of a taxpayer's gross receipts using the general rule, it does not specify the methodology to be used. In its discussion, the Taxpayer offers two alternative methodologies in determining payroll apportionment: (1) intrastate payroll apportionment and (2) interstate payroll apportionment. The proposed formulas are:
    • 1. Virginia income tax single sales factor numerator for sales attributed to the four subsidiaries with physical presence in the County * County gross payroll / Virginia gross payroll for the four subsidiaries.
    • 2. The components of the Virginia income tax sales factor denominators for the four subsidiaries * the County payroll for the four subsidiaries / national payroll for the four subsidiaries.

While I agree with the Taxpayer's general argument that interstate rather than intrastate apportionment is the appropriate approach to take in assessing this Taxpayer for BPOL tax purposes, I find that the Taxpayer's proposals do not comply with the Department's ruling in P.D. 03-15 (03/10/2003). For this reason, neither of the two proposed methodologies that rely on the Taxpayer's sales factor as reported on its corporate income tax returns is appropriate.

Nonetheless, the interstate complexity of the Taxpayer's business and its inability to source its business activities to individual definite places of business, both within and outside the Commonwealth, necessitates the use of some form of payroll apportionment in determining the BPOL tax due. The fact that many of the Taxpayer's employees work on contracts that involve performing services in jurisdictions outside Virginia dictates that apportionment in this case should be based on interstate payroll to avoid violation of the Commerce Clause. This issue was thoroughly discussed in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). In Complete Auto, the Court offered a four-pronged test in evaluating the validity of a local tax under the Commerce Clause. The tax must be (1) applied to an activity with a substantial nexus with the taxing authority, (2) fairly apportioned, (3) nondiscriminatory to interstate commerce, and (4) fairly related to the services provided by the state or locality. Id. at 279.


A pure national payroll apportionment methodology based on gross receipts is the appropriate approach to utilize in cases such as this. The formula is as follows:
    • National gross receipts for the four subsidiaries * the County payroll for the four subsidiaries / national payroll for the four subsidiaries.

This method of apportionment is based purely on gross receipts and captures only the relationship between the County's payroll and the percentage of gross receipts apportioned to the County. This method of apportionment may not completely capture those gross receipts subject to an income or income-like tax in other states for which the Taxpayer is entitled to a deduction as provided for in Va. Code § 58.1-3732(B)(2). In such cases, the burden of proof is upon the Taxpayer to demonstrate that the method of apportionment assigns less than the full value of the receipts in other states to which it is entitled a deduction. If the Taxpayer can demonstrate a difference between the two, it is entitled to deduct the difference from its taxable gross receipts in the County.

The Taxpayer has definite places of business in multiple locations in a number of states. Using the national apportionment methodology discussed above, the Taxpayer's County payroll for its four subsidiaries with a definite place of business in the County divided by the Taxpayer's national payroll for the same becomes the basis of the payroll apportionment factor. The Taxpayer's national gross receipts, rather than the sales factor would serve as the other factor in the calculation. This approach conforms to the principles of the BPOL tax, which is a tax based on gross receipts.
DETERMINATION

In summary, responding directly to the Taxpayer's major points raised on appeal, it is my determination that:
    • 1. The County erred in the methodology used to determine the Taxpayer's BPOL tax liability.
      2. Given the Taxpayer's unique circumstance, payroll apportionment is the correct method to be utilized in determining the Taxpayer's BPOL liability.
      3. To avoid violating the Commerce Clause, in the case of this particular taxpayer, use of interstate apportionment is necessary.
      • 4. Such payroll apportionment must be based upon national gross receipts, not the Virginia income tax sales factor denominators.
        5. Only the gross receipts of the four subsidiaries that have definite places of business in the County can be included in the tax base.

I am returning this appeal to the County with the directive to utilize the payroll methodology described above in calculating the Taxpayer's BPOL tax assessment for tax year 1998. If the Taxpayer has paid in full the County's original assessment, any overpayment is to be refunded to the Taxpayer with interest as prescribed in Va. Code § 58.1-3981.

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/43200H

1For intrastate apportionment, Va. Code § 58.1-3703.1(A)(3)(b) stipulates: "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."

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46