Tax Type
BPOL Tax
Description
Situsing gross receipts to a definite place of business; out-of-state deductions
Topic
Appropriateness of Audit Methodology
Out of State Tax Credits
Date Issued
09-13-2013
September 13, 2013
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business, Professional and Occupational License Tax
Dear *****:
This final state determination is issued upon the application for correction filed on behalf of your client, ***** (the "Taxpayer"), with the Department of Taxation. The Taxpayer appeals an assessment of Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by the ***** (the "City") for the 2007 and 2008 tax years.
The BPOL tax is imposed and administered by local officials. Virginia Code § 58.13703.1 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, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.
FACTS
For the tax years at issue, the Taxpayer, a provider of computer-based services with multiple locations in the City and throughout the world, apportioned its gross receipts based on payroll. The Taxpayer calculated its gross receipts by subtracting from its total worldwide 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, 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 City's assessment, asserting the audit computations did not follow the policies and procedures set forth in Public Document (P.D.) 11-13 (1/21/2011). In response, the City issued a final determination and a revised audit report concluding that the revised findings were supported by P.D. 11-13.
The Taxpayer filed an appeal with the Department. In its appeal, the Taxpayer now claims it was able to situs gross receipts to the definite place of business where the work was performed. In addition, the Taxpayer contends it would be eligible for an out-of-state deduction for gross receipts attributable to contracts for which the customer was located outside of Virginia and the Taxpayer filed an income-like tax return.
ANALYSIS
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 Iicensure at a definite place of business within [the] jurisdiction." See Va. Code § 58.1-3703.1 A 3 a.
In determining the situs of gross receipts, Va. Code §§ 58.1-3703.1 A 3 a 4 and 58.1-3703.1 A 3 b state that receipts from services are to be taxed based on (in order): (i) the definite place of business at which the service is performed, or if not performed at any definite place of business, (ii) the place from which the service is directed or controlled; or as a last resort (iii) when it is impossible or impractical to determine where the service is performed or from where the service is directed or controlled, by payroll apportionment between definite places of business.
The Taxpayer maintains that is impractical to situs gross receipts using the statutory method. For purposes of its appeal, however, the Taxpayer was able to trace labor charges made by each of its employees located in the City. It then determined the total labor cost charged to these contracts by its employees nationwide. Utilizing these two calculations, a fraction was then developed with the numerator being the direct labor charges at the City's definite place of business and the denominator being total direct labor charges. This fraction was multiplied against total receipts from the contracts that the employee working at the city's definite place of business worked on to determine gross receipts attributable to the City.
Virginia Code § 58.1-3703.1 A4 b clearly states that payroll apportionment is only to be used as a last resort when it is impossible or impractical to situs gross receipts from services to where the service is performed or directed and controlled. The Taxpayer has provided a methodology of directly situsing its gross receipts.
In its response to the Taxpayer's appeal, the City acknowledges that the Taxpayer's direct labor method appears to situs gross receipts in accordance with the statutory method. However, the City states it has not had the opportunity to examine the documentation. Further, the City believes this methodology is both possible and practical.
Out-of-State Deduction
Virginia Code § 58.1-3732 B 2 provides a deduction from gross receipts otherwise taxable for any receipts "attributable to business conducted in another state or foreign country in which the taxpayer . . . is liable for an income or other tax based upon income." Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-500-80 A 2, a taxpayer must file an income or income-like tax return in a state or foreign country even if there is not actual tax liability in a given year, in order to claim the deduction in that state or foreign country.
In its calculations of the out-of-state deduction that it submitted with this appeal, the Taxpayer deducted gross receipts attributable to contracts in which the customer was located in states other than Virginia in which it filed an income tax return. The Taxpayer asserts example B 1 in Title 23 VAC 10-500-80 directly addresses its circumstances. In that example, a merchant is permitted to deduct all gross receipts from the sale of goods to a North Carolina resident because the merchant filed a North Carolina income tax return.
The City disagrees with the Taxpayer's calculation of the out-of-state deduction, citing Ford Motor Credit v. Chesterfield County, 281 Va. 321, 707 S.E.2d 311 (2011). It contends the out-of-state deduction is limited to those receipts actually reported on the out-of-state tax return and the statute does not provide for the deduction to be applied to gross receipts attributed to an out-of-state customer location. It also argues that the example in Title 23 VAC 10-500-80 is inapplicable because it addresses a retailer rather than a service provider.
In addition, the City contends that Va. Code § 58.1-3732 B 2 allows the out-of-state deduction for gross receipts that would "otherwise be taxable." Thus, the deduction would be limited to those gross receipts sitused to a definite place of business at the locality for which the deduction is claimed. According to the City, these gross receipts must be attributable to business conducted in another state or foreign country.
In P.D. 97-490 (12/19/1997), the Department addressed the complexity of identifying specific gross receipts actually subject to tax in another state or country. Because of the differences between income tax apportionment principles and situsing gross receipts, gross receipts attributable to another state or foreign country cannot be directly attributed to apportioned income or other financial information reported on an income tax return filed in another state or country. Accordingly, the Department concluded the gross receipts resulting from revenue derived from customers located in a state or country other than Virginia, in which a return for an income or income like tax was filed, is the proper measure for the out-of-state deduction.
While the Taxpayer is a service provider and the merchant in the example is a retailer, the Department has found that, in the case of business services, the proper measure of the out-of-state deduction is based on gross receipts, or revenues derived from customers located in a state or country other than Virginia. See P.D. 08-86 (6/6/2008). Accordingly, in those instances in which 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, a deduction is allowed for the receipts derived from customers located in those states. This deduction is allowed even if a taxpayer does not have a definite place of business in those states or services are directed or controlled in those states. See P.D. 08-86.
DETERMINATION
Based on the evidence provided, it appears the Taxpayer has shown that it is possible to situs its gross receipts using the under the general rule. However, the City has not been afforded the opportunity to examine this evidence in detail. In addition, the Taxpayer may be eligible for an out-of-state deduction for gross receipts derived from customers located in states in which the Taxpayer filed a return for an income or income-like tax.
Accordingly, I am remanding this case back to the City to evaluate the Taxpayer's method of situsing gross receipts to a definite place of business and grant an out-of-state deduction in accordance with this determination. Further, if the City accepts the Taxpayer's direct labor method for situsing gross receipts, the Taxpayer is instructed to work with the City to determine how it would be practical to situs gross receipts in the same manner for subsequent tax years.
If you have any questions regarding this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5323880886.B
Rulings of the Tax Commissioner