Tax Type
BPOL Tax
Description
Deduction claimed under Va. Code § 58.1-3732 B 2, must provide evidence of entitlement
Topic
Computation of Income
Computation of Tax
Local Power to Tax
Local Taxes Discussion
Records/Returns/Payments
Date Issued
09-29-2010
September 29, 2010
Re: Request for Reconsideration of Final State Determination
Locality Assessing Tax: *****
Taxpayer: *****
Business, Professional and Occupational License Tax
Dear *****:
You request a reconsideration of Public Document (P.D.) 09-56 (05/04/2009), upholding an assessment of Business, Professional and Occupational License (BPOL) taxes issued to ***** (the "Taxpayer") by the Commissioner of the Revenue of the ***** (the "County") for tax years 2001 through 2005.
The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections 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
In P.D. 09-56, the Department ruled concerning the appropriate methodology to be used in calculating the deduction from gross receipts under Va. Code § 58.1-3732 B 2 for gross receipts attributable to business conducted in another state or foreign country (the "'Deduction") when gross receipts are sitused to a definite place of business within a Virginia locality using payroll apportionment. The facts of P.D. 09-56 are incorporated by reference. The Taxpayer requests reconsideration of the Department's determination based on: (1) the Department's established policy, (2) accepted apportionment theory, (3) constitutional limits on taxation, (4) legislative history, and (5) the County's method overstates of receipts subject to its BPOL tax.
ANALYSIS
Gross Receipts Subject to Tax
Under the general rule for establishing situs for the BPOL tax measured by gross receipts, Va. Code § 58.1-3703.1 A 3 a states, "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 a local jurisdiction. (Emphasis added).
Virginia Code § 58.1-3732 B provides certain deductions "from gross receipts or gross purchases that would otherwise be taxable." (Emphasis added). Virginia Code § 58.1-3732 B 2 provides a deduction for taxable receipts "attributable to business conducted in another state of foreign country in which the taxpayer is liable for income or other tax based on income."
The Taxpayer argues that the County's position ignores the plain wording of the statute, asserting that the legislature clearly, intended to permit the out-of-state deduction from gross receipts in all circumstances. According to the Taxpayer, the only conditions required by statute for this deduction are proof that the Taxpayer filed an income tax return in another state and it had receipts attributable to customers in those other states.
Statutory construction, however, clearly establishes that the taxable measure of gross receipts must first be determined before any deduction is granted. In other words, receipts must first be assigned or sitused to a definite place of business. Then, from those assigned receipts, a taxpayer may take a deduction under Va. Code § 58.1-3732 B 2, provided that it can identify receipts attributable to business conducted in another state in which it filed an income tax return and income tax was paid. Within this statutory construction, it is self-evident that a taxpayer cannot deduct an item from a taxable base amount if the particular item has already been excluded from such base amount in an earlier step.
By reason of their character as legislative grants, statutes relating to deductions allowable in computing income and credits allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., et al. v. Virginia Department of Taxation, Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983). In this case, the Taxpayer files income tax returns in multiple states, but the issue becomes how to identify receipts attributable to business conducted in other states from the: gross receipts apportioned to the Virginia definite place of business.
By deducting receipts attributable to other states first, then applying the payroll apportionment formula to allocate receipts to the local definite place of business, the Taxpayer is mathematically applying the same apportionment factor to both the deduction for receipts attributable to other states and to the allocation of receipts to the local definite place of business. If T = total receipts, O = receipts attributable to other states, and P = the payroll apportionment factor for the local definite place of business, then: (T - O) x P = (T x P) - (O x P).
The Taxpayer's approach assumes that (i) the local definite place of business earned receipts that are attributable to other states, and (ii) that it is impossible or impractical to determine those receipts by one or more of the specific situs rules set out in Va. Code § 58.1-3703.1. While one business may have numerous offices, all of which sell to customers in many states, another business may sell only to customers close to each of its offices. In the latter case offices near Virginia's borders are likely to have sales to customers in other states, while offices in central Virginia probably would not.
The County argues that the Taxpayer must show specifically which receipts are attributable to other states. This would be true if the Taxpayer had specifically allocated receipts to a definite place of business under the situs rules. But when it is impossible or impractical for a business to specifically allocate receipts for situs purposes it will similarly be impossible or impractical to identify specific receipts for purposes of the deduction. Requiring specific identification of receipts for the deduction when payroll apportionment has been used for situs purposes would effectively deny the deduction granted by the General Assembly.
A business that has used apportionment for situs purposes must demonstrate that such receipts exist, even if they cannot be specifically identified or easily quantified. For example, if employees from the Virginia definite place of business travel to customer locations in other states it is clear that some receipts earned by the local definite place of business (or that were attributed to it by payroll apportionment) may qualify for the deduction. Telephone calls or Internet contacts between employees in a Virginia definite place of business and customers in other states may also be sufficient to qualify for the deduction.
The link between the BPOL deduction and income tax ends with the filing of an income tax return with the other state. It is not necessary for a business to demonstrate that income earned by the Virginia definite place of business or any of its transactions is included in the taxable income shown on the return filed with any other state, or caused the corporation to be subject to tax in any other state.
The Department can identify only one situation in which a deduction might be allowable without regard to whether a definite place of business participated in interstate activities. Such a situation would occur when a business receives gross receipts from activities in states in which it has no definite place of business and no payroll, but it filed and paid income tax in such states. In this situation the Virginia definite place of business will qualify for the deduction to the extent that payroll apportionment attributes such receipts to the Virginia definite place of business. When the only receipts from other states are from states in which there is no definite place of business (and income tax was paid) then those receipts could be deducted before apportionment.
Such circumstances have been addressed by the Department in P.D. 04-90 (8/31/2004) and P.D. 05-1 (1/18/2005). In P.D. 05-118 (7/19/2005), the taxpayer had stores in several states, including Virginia. The stores filed separate BPOL tax returns and their taxation was not in issue. The dispute arose in connection with receipts of the taxpayer's national warehouse and call center that was also located in the Virginia locality. Because the disputed gross receipts arose from a single location that was treated as a separate line of business, the allowance of the deduction is consistent with P.D. 04-90 and P.D. 05-1.
However, when any receipts are from other states in which a definite place of business and payroll exist, then the formula merely assigns gross receipts to definite places of business where the employees are presumed to have earned it. The formula, by itself, cannot be used to prove that any of the employees based in one definite place of business earned receipts from customers located in other states.
Therefore, before a Virginia definite place of business can claim the deduction there must be some evidence that employees in that definite place of business earn, or participate in earning, receipts attributable to customers in other states where the business filed an income tax return. Employee travel to such states is one obvious way to demonstrate that, but certainly is not the only evidence. The nature of the business activities conducted at a Virginia definite place of business must be analyzed to determine if any of those activities involve transactions with customers in other states.
Constitutional Limits
The Taxpayer contends P.D. 09-146 sets forth one rule for determining taxable receipts for a business having its offices in Virginia and an entirely different rule for businesses with offices in other states. It argues that, in P.D. 04-90 and P.D. 05-1, the Department allowed businesses with offices only in Virginia to deduct out-of-state receipts before payroll apportionment is used to determine situs. Because the Taxpayer has offices located both within and without Virginia, it must apportion first and then specifically identify items for deduction. The Taxpayer argues such a regimen would violate the Due Process and Commerce clauses of the United States Constitution.
As discussed above, the different methods are not justified by the fact that definite places of business were only in Virginia, but on the fact that the receipts to be deducted were from states in which there was no definite place of business or payroll. After considering these two cases in light of the Taxpayer's assertion, the Department concludes that this is too fine a distinction to draw, and too confusing to apply. Henceforth the Department will follow the statutory methodology in all cases. Thus, in P.D. 04-90 and P.D. 05-1 gross receipts should have been sitused via payroll apportionment. Then, the identifiable gross receipts from customers in states in which the taxpayers had no definite place of business and no payroll, but filed and paid state income taxes should have been attributed to each definite place of business in a like manner, i.e., payroll apportionment. Thus the methodology used by the Department, though incorrect, resulted in the correct amount of tax.
Established Policy
The Taxpayer asserts that the Department's position in P.D. 09-146 is contrary to well established policy. That policy should apply uniformly whether businesses have offices outside of Virginia. Further, the Taxpayer argues that P.D. 05-118 (7/19/2005) reaches exactly the opposite conclusion from P.D. 09-146.
P.D. 05-118 addresses whether certain personnel should be included in the payroll factor when a taxpayer that has out-of state definite places of business uses payroll apportionment. This determination's facts indicate that the taxpayer claimed the out-of-state deduction prior to apportioning by payroll. In dicta, this determination states that the taxpayer was entitled to claim the deduction, but does not specify when the deduction should be claimed. As such, to the extent that P.D. 05-118 could be interpreted to allow an out-of-state deduction prior to payroll apportionment for the purpose of determining situs, P.D. 09-56 and P.D. 09-146 supersede P.D. 05-118.
In P.D. 09-56, the Department states that after using the payroll apportionment formula to assign receipts to the definite place of business in the locality, the taxpayer may be entitled to a deduction for gross receipts attributable to business conducted in another state or foreign country if it can demonstrate that the general payroll apportionment formula assigns less than the full value of the receipts in other states or foreign countries. In this case the issue is what evidence is necessary to qualify for the deduction. The County argues that the Taxpayer must specifically identify receipts eligible for the deduction, but when payroll apportionment has been used to assign receipts to the definite place of business in the County it will be impossible for the Taxpayer to do so. Therefore, the Taxpayer must be allowed to use payroll apportionment to calculate the deduction once the Taxpayer has demonstrated that eligible receipts exist even though they cannot be specifically identified.
Income Tax Returns
The Taxpayer contends that the Department failed to address which of the Taxpayer's income or income-like tax returns would qualify for the deduction under Va. Code § 58.1-3732 B 2. Our review of the Taxpayer's original appeal and corresponding documentation reveals no disagreement with the County as to which states the Taxpayer earned gross receipts that could qualify for the out-of-state deduction. The Taxpayer has offered no evidence in its reconsideration that the County denied a deduction for a specific state. Further, as this is a factual matter, such an assertion should be easily rectified between a taxpayer and a local taxing authority.
CONCLUSION
Situsing gross receipts under the statutory method is preferred in all cases. But, by its own admission with concurrence from the County, the Taxpayer has not been able to use the statutory method. Because payroll apportionment must be used to determine situs, the Taxpayer may claim a deduction under Va. Code § 58.1-3732 B 2 provided it can show some evidence that employees from the definite place of business in the County earn, or participate in earning, receipts attributable to customers in other states where the Taxpayer filed an income tax return. The amount of any deduction would be determined by multiplying the total out-of-state tax receipts by the same payroll factor used to determine situs of gross receipts.
In accordance with this determination, I am remanding this case to the County in order to adjust the assessments for the 2001 through 2005 tax years to allow for the out-of-state deduction pending additional evidence the Taxpayer may provide to show that it is entitled to such deduction. The Taxpayer should provide such evidence to the County within 30 days of the date of this determination.
This reconsideration represents the Tax Commissioner's final determination on the Taxpayer's appeal. Any further relief must be pursued pursuant to Va. Code § 58.13703.1 A 7.
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- Sincerely,
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Craig M. Burns
Acting Tax Commissioner
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AR/1-3561323729.B
Rulings of the Tax Commissioner