05-168 | Virginia Tax

Tax Type

BPOL Tax

Description

Definite place of business

Topic

Local Power to Tax

Local Taxes Discussion

Date Issued

12-12-2005

December 12, 2005

Re: Appeal of Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
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 request an abatement of Business, Professional and Occupational License ("BPOL") taxes assessed by the Commissioner of the Revenue of the ***** (the "City") for license tax years 2001, 2002, and 2003.

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 Virginia Subchapter S corporation, is a wholly owned subsidiary of ***** (the "Parent"). The Taxpayer and the Parent are engaged in the business of providing college level instruction and degrees through correspondence courses. The Parent offers 14 associate degrees and various technical training courses, and the Taxpayer offers a single baccalaureate degree.

The Taxpayer maintains an office in the City that was staffed by one employee of the Parent during the tax years at issue. The Taxpayer has no employees or payroll. The actual educational and administrative services are provided from the Parent's offices in ***** ("State A"). The Parent has a third location in State A where it maintains a warehouse for its educational material, and conducts mass mailings for both institutions. The Parent also maintains a physical presence in three other states and files an income tax return in each of those states.

The Parent has 45 employees, including three full-time and two part-time faculty members. This faculty is responsible for teaching all courses offered by both the Taxpayer and the Parent. Students may enroll in courses on-line through either the Parent's or the Taxpayer's website, both of which are maintained by the Parent's offices in State A. The Taxpayer's literature contains both the Parent and the Taxpayer's name on letterheads and other material.

While most student payments for courses offered by the Taxpayer are received by the Parent's offices in State A, an employee of the Parent does receive payments at the office in the City maintained in the Taxpayer's name. Payments are deposited in the Parent's bank account, which is maintained in State A. All of the Taxpayer's operating expenses are paid from the Parent's operating bank account in State A.

For purposes of reporting its BPOL taxes due to the City, the Taxpayer based its gross receipts on those revenues attributed to payments and fees received from students in the Taxpayer's baccalaureate program who were residents of Virginia. The City declined to accept this methodology. In calculating the Taxpayer's BPOL tax assessment, the City used the gross receipts reported by the Taxpayer on an income statement for all locations prepared for the City. These gross receipts consisted of those payments and fees received from all students enrolled in the Taxpayer's baccalaureate program plus "other income." The City refused to allow any deduction for gross receipts attributable to business conducted in other states, maintaining that the only employee of the Taxpayer is located in the City, and therefore all of the Taxpayer's gross receipts must be attributed to its only definite place of business in the City. The Taxpayer disagrees, stating that all persons associated with both programs, including the office in the City, are employees of the Parent.

ANALYSIS

Gross Receipts and Definite Place of Business

The BPOL tax is a local license tax imposed on the privilege of doing business. It is based on an entity's gross receipts. For BPOL tax purposes, "gross receipts" are defined as "the whole, entire, total receipts, without deduction." See Virginia Code § 58.1-3700.1.

Virginia 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 fact that the Taxpayer has a definite place of business in the City is not in dispute. The Taxpayer's Internet website directs "correspondence, assignments, exams and questions" be mailed to the Taxpayer's address in the City. Questions and exams also may be sent by facsimile to the Taxpayer's office in the City.

In actual practice, however, all such correspondence is routed to the Parent's offices in State A, either by courier, or when appropriate, by e-mail. All telephone calls made to the toll free number advertised on the Taxpayer's website are routed to the Parent's offices in State A. Both the Parent's and the Taxpayer's websites are maintained in State A and both link to and reference one another. All literature and diplomas are generated and mailed from the Parent's offices in State A.

In summary, although the Taxpayer does maintain a definite place of business in the City, the Taxpayer's business is directed and controlled from the Parent's offices in State A and almost all of the Taxpayer's actual business activity occurs at its locations in State A.

Situs

The general rule for establishing situs for the BPOL tax is that whenever the tax 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 [the] jurisdiction." See Va. Code § 58.1-3703.1 A 3 a. This general rule is applied to professional, business and personal services as follows:

- 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 a definite place of business, then from 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, while the Taxpayer maintains a definite place of business in the City, the actual services the Taxpayer provides are performed, directed and controlled from the Parent's offices in State A. For BPOL tax purposes, those gross receipts must be sitused to the Taxpayer's office in State A where the actual services are performed, directed and controlled.

Virginia Code § 58.1-3703 provides for localities to impose, by local ordinance, a license fee or a license tax on "businesses, trades, professions, occupations and callings and upon the persons, firms and corporations engaged therein within" the locality. In this case, the Taxpayer's gross receipts must be sitused to State A; therefore, the City may only impose a license fee on the Taxpayer.

DETERMINATION

The Taxpayer's services are not only directed and controlled from State A, they are also performed in State A. The provisions of Virginia Code § 58.1-3703.1 A 3 a 4 prohibit the City from imposing the BPOL tax on all of the Taxpayer's gross receipts, the methodology used by the City. Likewise, I know of no provision in the statute that would authorize the imposition of the BPOL tax based on receipts derived from fees assessed to students residing in Virginia, the methodology proposed by the Taxpayer.

Because the Taxpayer has a definite place of business in the City and the Taxpayer's gross receipts are attributed to its business activity in State A, the City may impose a license fee on the Taxpayer. I am remanding this matter to the City with the instruction to correct the Taxpayer's assessment to reflect the imposition of a license fee.

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

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/54321H

Rulings of the Tax Commissioner