05-53 | Virginia Tax

Tax Type

BPOL Tax

Description

Nonvessel operating common carrier arranges transportation of cargo

Topic

Basis of Tax

Local Taxes Discussion

Date Issued

04-08-2005

April 8, 2005

Re: Appeal of Assessment: 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 the ***** (the "City") BPOL tax assessments for tax years 1999-2002.

The following determination is based on the facts presented to the Department as summarized below. The Code of Virginia sections 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.policylibrary.tax.virginia.gov.

FACTS

The Taxpayer is a global nonvessel operating common carrier ("NVOCC") that provides for the arrangement of transportation of its customer's cargo with other carriers. The services the Taxpayer provides to its customers are booking of cargo with other carriers, providing necessary support activities associated with managing the transportation service and responding to customer inquiries.

The Taxpayer's headquarters, described as its "operations center," is located in ***** ("State A"). The Taxpayer has sales offices across the United States, including the office in the City. The Taxpayer's office in the City is staffed by a sales manager and three administrative support personnel. The functions of the Taxpayer's office in the City are soliciting sales of outbound container services in Virginia, booking container shipments, taking the initial steps in fulfilling these orders, and providing ongoing service to its customers. The services include handling of routine inquiries on the status of shipments and passing information to the operations center in State A, as well as locations in neighboring states.

The Taxpayer's employees in the City office also serve customers who have booked cargo from one of the Taxpayer's other offices in the United States. The employees in the City deal with local carriers when shipping problems arise, no matter where the cargo was originally booked.

The Taxpayer's operations center in State A is responsible for maintaining relationships with other carriers, negotiating rates and arrangements with the carriers who transport the cargo on the Taxpayer's behalf, maintaining shipping documentation and customer billing, tracking shipments and performing responsibilities associated with the transportation of its customers' cargo.

The Taxpayer had been paying the City an annual business license fee. After an audit of the Taxpayer in 2002, the City assessed the Taxpayer license taxes, based on the Taxpayer's self-reporting of gross sales originating from its office in the City. The Taxpayer disputes the use of the gross sales figure, which happens to be the same as the sales factor on the Taxpayer's Virginia corporate income tax return. The numbers were not derived from the Taxpayer's corporate income tax return, however. The Taxpayer furnished the information directly to the City.

The Taxpayer contends that, because all of its operations in the various locations perform services that are integral to the generation of gross receipts, payroll apportionment is the appropriate methodology to use for purposes of local license tax assessment. The City disagrees, holding that the Taxpayer's gross receipts derived from services can be attributed to the Taxpayer's office in the City, as reported by the Taxpayer. The City also believes the activities performed by the office in State A are support functions and, therefore, are ancillary to the Taxpayer's primary business of arranging the booking and transportation of cargo by other carriers.

ANALYSIS

Taxation of Business Services

The BPOL tax is a tax on the privilege of doing business in a given jurisdiction. The BPOL tax is measured by those gross receipts attributable to business conducted in a given jurisdiction. Under the situs rules for gross receipts derived from the performance of services, the general rule is found in Va. Code § 58.1-3703.1 A 3(a)(4):

- 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. [Emphasis added.]

In those instances in which 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(b). The general rule cited above, must be given first consideration by a taxpayer and a locality in determining the attribution of gross receipts to a given jurisdiction for BPOL tax purposes, however. 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.

The Taxpayer clearly performs services from its definite place of business in the City. The Taxpayer has not presented enough evidence to indicate that the receipts attributed to these services cannot be identified. If the Taxpayer can demonstrate that it is clearly "impossible or impracticable" to determine the gross receipts attributed to its business in the City, the Taxpayer may use a payroll apportionment methodology.

If the City and the Taxpayer were to agree that payroll apportionment is the only methodology appropriate to the special circumstances, most of the employees in the administrative offices in State A would have to be excluded from the calculation. See Public Document (P.D.) 97-308 (11/27/97). It is not clear from the Taxpayer's presentation whether this was taken into consideration.

Use of the Sales Factor

The Taxpayer contends that the City inappropriately used the sales factor the Taxpayer reported on its Virginia corporate income tax return in determining the Taxpayer's gross receipts for BPOL tax assessment purposes. The figures the City used were in fact provided to the City by the Taxpayer.

The Taxpayer is correct, however, in stating the sales factor is not an appropriate measure of a taxpayer's gross receipts for purposes of the BPOL tax. Receipts reported as part of the sales factor for Virginia corporation income tax purposes could include receipts for the cost of performance elsewhere. Receipts attributed to "cost of performance" are not included in a taxpayer's taxable measure for purposes of the BPOL tax. Therefore, use of the sales factor in determining a BPOL tax liability is not generally appropriate. See P.D. 98-177 (10/29/98) and P.D. 03-15 (3/10/03) for further explanation. If the Taxpayer inadvertently supplied the City with the wrong figure, it must correct the error.

I disagree with the City's assertion that the Taxpayer's activities in State A and in other states are ancillary to the Taxpayer's business activities, however. In determining the gross receipts that are to be attributed to the Taxpayer's business activity in the City, the City must provide the Taxpayer with the out-of-state deduction for receipts earned in states where the Taxpayer files an income or an income-like tax, provided the Taxpayer substantiates the deduction as discussed below.

Out-of-State Deduction

The BPOL tax is based on a taxpayer's gross receipts, which are defined as "the whole entire total receipts, without deduction." Va. Code § 58.1-3700.1. There are specific deductions that a taxpayer may take as provided for in the Code of Virginia, however. Included among these is the deduction for "any receipts attributable to business conducted in another state." See Virginia Code § 58.1-3732 B 2. The regulations further provide that the taxpayer must be liable for an income or an incomelike tax in the other state and file a return in that state to take advantage of the deduction. 2000 BPOL Guidelines § 2.6.

To the extent 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, the taxpayer must deduct all of the receipts attributed to its activity in those states to arrive at its Virginia receipts for BPOL tax assessment purposes.

In this case, it is clear that the services, the booking for transportation of cargo, and attendant customer services, are performed at the Taxpayer's definite place of business in the City. While the Taxpayer's employees in the City may provide services in conjunction with contracts whose gross receipts are attributed to other locations, the bulk of the Taxpayer's business in the City is attributed to the booking of cargo and attendant services negotiated by its office in the City. To the extent that the Taxpayer is able to ascertain the gross receipts attributed to servicing contracts negotiated in other states, the City must deduct receipts attributed to this business if the Taxpayer has filed an income or income-like tax return in these states. Va. Code § 58.1-3732 B.

DETERMINATION

It is my determination that if the Taxpayer disputes the "gross sales" figure it provided to the City, it is incumbent upon the Taxpayer to produce a new figure that more accurately reflects the gross receipts attributed to its business activity in the City. Furthermore, in so doing, the Taxpayer must draw a distinction between the gross receipts generated by the activities of its employees in the City, and those receipts attributed to business activity in other states where the Taxpayer is liable for an income or income-like tax and files a return. Therefore, I am directing the Taxpayer to present the City with a more accurate reflection of its gross receipts, one that takes into account the out-of-state deduction as provided for in Va. Code § 58.1-3732 B.

If the Taxpayer proves that it is "impossible or impracticable" to attribute its gross receipts to its business activity in the City using the above methodology, it may use the payroll apportionment methodology. In so doing, it must exclude the headquarters staff that does not directly participate in the businesses' licensed activity.

The Taxpayer must present the City with the necessary evidence outlined above within 60 days of the date of this determination so that the City can adjust its assessment accordingly. Any additional extension of time must be mutually agreed upon by the Taxpayer and the City. If the Taxpayer fails to present further evidence to substantiate its position, the original assessment stands.

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/49608H

Rulings of the Tax Commissioner