April 21, 2015
Re: Appeal of Final Local Determination
Locality Assessing Tax: *****
Taxpayer: *****
Business, Professional and Occupational License (BPOL) Tax
Dear *****:
This final state determination is issued upon the application for correction filed by ***** (the "Taxpayer"), with the Department of Taxation. You appeal a final local determination upholding BPOL tax assessments for the 2012 and 2013 tax years issued by the ***** (the "City").
The local license tax and fee are imposed and administered by local officials. Virginia Code § 58.1-3703.1 A 5 authorizes the Department to issue determinations on taxpayer appeals of certain 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, 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
The Taxpayer, a pass-through entity that provided billing services and claims management, had a definite place of business in the City. Substantially all of its services were subcontracted out to independent third party providers.
The Taxpayer was operated in the City by three managing partners and two employees. The partners received distributions from the Taxpayer in lieu of wages. In April 2011, one partner moved to ***** (State A). In May 2012, the two other partners moved to ***** (State B). The Taxpayer maintained a definite place of business in the City with the two employees.
Under review, the City determined that the Taxpayer had underpaid BPOL tax for the 2012 and 2013 tax years and issued assessments. The Taxpayer appealed to the City, contending that the gross receipts should be sitused outside of the City because the services were directed and controlled by the partners located out-of-state. In the alternative, the Taxpayer asserted that the gross receipts should have been sitused using payroll apportionment, and the distributions to the partners and the payments to the contractors should be considered wages for payroll purposes.
In its final determination, the City concluded that the gross receipts from clients located in Virginia should be sitused to the City. The Taxpayer filed an appeal to the Tax Commissioner, contending that its gross receipts should not be sitused by client location because the services were conducted in localities both within and without Virginia.
ANALYSIS
Definite Place of Business
Virginia Code §§ 58.1-3703.1 A 3 a 4 and 58.1-3703.1 A 3 b clearly requires the gross receipts from services to be attributed to a definite place of business. A "definite place of business" is defined as an office or a location at which occurs a regular and continuous course of dealing for thirty consecutive days or more. See Virginia Code § 58.1-3700.1. Some characteristics that may help determine whether the location is a definite place of business include, but are not limited to, the following on-site activities: (1) a continuous presence; (2) having an office with a phone; (3) the reception of mail; (4) having employees; (5) record keeping; and (6) and advertising or otherwise holding oneself out as engaging in business at the particular location. See Public Document (P.D.) 97-201 (4/25/1997).
The City attributed the gross receipts from any client located in Virginia to the definite place of business in the City and excluded any gross receipts from clients located outside of Virginia. It concluded that any services provided by the Taxpayer to a Virginia-based client were either performed at or directed and controlled from the definite place of business located in the City.
The Taxpayer asserts that the services for its clients were provided from locations both within and without Virginia. The facilities of the third party entities contracted to perform the billing and claims management services would not be considered to be the Taxpayer's definite place of business.
Further, while the Taxpayer indicates that its three owners performed services, or directed and controlled its business from State A and State B, no documentation has been provided that demonstrates that the Taxpayer has established a definite place of business in these states.
In P.D. 14-121 (7/24/2014), the Department addressed the issue of whether an employee's home could be considered to be a definite place of business. A home could still be a definite place of business if it is a location at which occurs a regular and continuous course of dealing for 30 consecutive days or more. Each location must be separately evaluated under the standards set forth above to determine if it is a definite place of business. In P.D. 15-24 (2/19/2015), for example, the Department found that a person's residence was a definite place of business after the individual, among other things, obtained a zoning variance from a locality. In general, however, the determination as to whether a person's home constitutes a definite place of business is a question of fact to be decided by a local taxing authority.
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. 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 definite place of business 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.
Although the Taxpayer held itself out to be a provider of certain billing services, it performed very little of the services for its clients. Instead, the services were subcontracted to third parties. The Taxpayer solicited business from consumers and then hired subcontractors to perform the business activities. Based on this understanding, gross receipts would be sitused to the definite place of business where the solicitation and hiring services either occurred or was directed or controlled.
The documentation provided by the Taxpayer shows the gross receipts attributable to each client and the client's location. It does not show the definite place of business where its services were performed or where they were directed and controlled.
Payroll Apportionment
The Taxpayer also contends that if it is deemed impossible or impractical to determine where the service is performed or from where the service is directed or controlled, its gross receipts should be issued using payroll apportionment. It asserts that if payroll apportionment is utilized, the Taxpayer's distributions to its partners and payments to subcontractors should be considered wages. The City asserts that distributions and subcontractor payments are not wages for payroll apportionment purposes.
Payroll is "the total compensation payable to a company's employees for one pay period or a list of employees to be paid" and "the amount due to each." See Black's Law Dictionary 1166 (8th. Ed. 2004). Therefore, payroll is compensation provided by an employer to an employee. Thus, a distribution from a pass-through entity to its owners is not payroll for payroll apportionment purposes. Under Title 23 of the Virginia Administrative Code (VAC) 10-500-130 B, independent contractors are engaged in a separate business from that of the person who contracts for the independent contractor's services. As such, payments to independent contractors are also not payroll for purposes of payroll apportionment of gross receipts under the BPOL tax.
DETERMINATION
In its appeal, the Taxpayer failed to provide any evidence that it had a definite place of business outside the City. Accordingly, I am remanding the case back to the City with instruction to consider any documentation the Taxpayer may provide to show it had a definite place of business in a jurisdiction other than the City. If the Taxpayer only had a definite place of business in the City, all gross receipts would be sitused to that office. In addition, once the situs of gross receipts has been determined, the Taxpayer may be entitled to a deduction for gross receipts subject to income tax in another state under Va. Code § 58.1-3732 B 2.
The Taxpayer should provide such documentation to the City within 30 days of the date of this determination. If the Taxpayer can show that it had more than on definite place of business, it must provide documentation to situs gross receipts based on where its services were performed or where they were directed or controlled. Only if it is impossible or impractical to situs gross receipts under these methods may payroll apportionment be used. Distributions to the partners and payments to subcontractors, however, may not be used in the computation of payroll apportionment.
Based on its review of all the additional information, the City must make the appropriate adjustments or issue a new final determination for the 2012 and 2013 tax years. If the Taxpayer disagrees with the City's new final determination, it may appeal pursuant to Title 23 VAC 10-500-720.
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5874203997.B