Document Number
11-13
Tax Type
BPOL Tax
Description
Taxpayer not permitted deduction for gross receipts attributable to business conducted in other states
Topic
Local Power to Tax
Out of State Tax Credits
Records/Returns/Payments
Date Issued
01-21-2011


January 21, 2011




Re: Appeal of Final Local Determination
Locality: *****
Taxpayer: *****
Business, Professional arm 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 "City") for tax years 2002 through 2006.

The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, i.e., 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 is a provider of computer-based services with multiple locations in the City and throughout the world. You represent that it was impossible or impractical to determine the situs of its gross receipts under the general situs rules; therefore, the Taxpayer apportioned its gross receipts based on payroll.

For BPOL tax purposes, the Taxpayer calculated its gross receipts by subtracting from its total world wide gross receipts those gross receipts generated from each state in which it filed an income tax return and multiplied the net total by the percentage of its Virginia payroll to total payroll. The City audited the Taxpayer for the tax years at issue, disallowed the subtraction for the gross receipts attributed to states in which the Taxpayer filed income tax returns, and assessed additional BPOL tax.

The Taxpayer appealed the assessments to the City, contending it was not permitted a deduction for gross receipts attributable to business conducted in other states. In its final local determination the City upheld the audit assessment, concluding that the deduction afforded by Va. Code § 58.1-3732 B 2 is not applicable to the Taxpayer because the Taxpayer was not otherwise taxable by the City.

The Taxpayer appeals the City's final determination to the Tax Commissioner, claiming it has been denied the deduction for gross receipts attributable to its business conducted in other states or foreign countries.

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 exercises 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 or foreign country in which the taxpayer is liable for income or other tax based on income."

The Taxpayer argues that the City'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.

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 for such receipts. 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 equals 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 § 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 City 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.'s 04-90 and 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 haves 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.

Throwback Rule

The Taxpayer contends that a locality may not tax gross receipts attributed to a definite place of business in another jurisdiction if the gross receipts are not taxed by that jurisdiction. The BPOL tax 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. In other words, it is a business' situs and its activity within a given jurisdiction that gives rise to its local BPOL tax liability. Therefore, a locality may not tax gross receipts attributable to a definite place of business in another locality if that locality does not tax those receipts.

The "throwback" of gross receipts is not germane to the present case. The question at hand is at what point the deductions afforded by Va. Code § 58.1-3732 B 2 can be taken. In the instant case the gross receipts are being sitused by payroll apportionment. The City is not taxing gross receipts attributable to definite places of business in other jurisdictions.

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.

Both P.D. 09-56 and PD 09-146 state 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 of 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 City 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 City 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.

CONCLUSION


Situsing gross receipts under the statutory method is preferred in all cases. But, by its own admission with concurrence from the City, 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 City 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 City in order to adjust the assessments for the 2002 through 2006 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 with in 30 days of the date of this determination.

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


                • Linda D. Foster
                  Deputy Tax Commissioner



AR/1-4444114652.B

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46