December 22, 2017
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
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 request a refund of Business, Professional and Occupational License (BPOL) taxes paid by the Taxpayer to the ***** (the “County”) for the 2010 through 2013 tax years.
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 online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.
FACTS
The Taxpayer, a provider of laboratory testing and services, has several facilities located in the County. Specimens are collected either at doctors' offices or at Taxpayer centers and sent to a laboratory within the County. A small percentage of specimens are tested in the County, but the remaining specimens are sent to Taxpayer laboratories located outside of Virginia for testing.
The Taxpayer filed amended BPOL tax returns requesting a refund for the 2010 through 2013 tax years. The returns apportioned gross receipts according to payroll and claimed the deduction for receipts attributable to business conducted in another state (the “out-of-state deduction”).
The County audited the tax year at issue and requested additional documentation. The Taxpayer did not provide the requested documentation on the basis that it would reveal confidential information about Taxpayer patients. Accordingly, the County issued a final determination denying the Taxpayer's request for a refund.
The Taxpayer appeals the County's final determination, contending it qualified for the out-of-state deduction because it only requires that its County employees participate in transactions with employees located outside of Virginia. The Taxpayer also contends that the documentation it provided to the County was sufficient to support its deduction.
ANALYSIS
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.” Title 23 VAC 10-500-80 A 2 further explains that a taxpayer must be liable for an income or an income-like tax in the other state and file a return in that state to take advantage of the deduction.
The statutory language allowing the deduction is best analyzed as consisting of three requirements:
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“any receipts” includes receipts that have already been assigned to the definite place of business for BPOL taxation purposes. A business cannot deduct receipts that have already been excluded by the situsing rules.
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“attributable to business conducted in another state or foreign country” conveys that some portion of the receipts assigned to the definite place of business must be attributable to business activity in another state. To ascertain if such gross receipts exist, a business must analyze whether employees from the Virginia definite place of business earn, or participate in earning receipts attributable to customers in other states.
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“in which the taxpayer (or its shareholders, partners or members in lieu of the taxpayer) is liable for an income or other tax based upon income” denoting that a business must be liable for income tax to the state in which occurred the business activity considered in the second requirement.
When gross receipts are apportioned by using the general payroll apportionment formula, the amount of the out-of-state deduction would be determined by multiplying the total out-of-state gross receipts by the same payroll factor used to determine the situs of gross receipts. See Public Document (P.D.) 10-229 (9/29/2010). Subsequently, the Department established a three-step process for computing the out-of-state deduction when payroll apportionment is used to situs gross receipts. These steps are as follows:
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Determine if employees from the definite place of business earn, or participate in earning receipts attributable to customers in other states where a taxpayer filed an income tax return;
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Determine the receipts that are eligible for deduction; and
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Multiply the receipts eligible for the deduction by the same payroll factor used to determine the situs of gross receipts.
The Taxpayer contends the deduction is available for any gross receipts attributable to business conducted in another state or foreign country. The Department has previously addressed the Taxpayer's appeal in another locality on essentially the same facts. See P.D. 17-159 (9/8/2017).
Documentation Request
Virginia Code § 58.1-3109 6 grants local assessing officers the authority to require records and other information necessary to make an accurate assessment of a taxpayer's tangible personal property. In addition, pursuant to Virginia Code § 58.1-3983.1 B 3, a local assessing officer may require the submission of additional information or documentation in order to make a proper and equitable determination of an application for correction.
The Taxpayer's response to the County was to object to the request, stating it would violate its patients' right to privacy under the Health Insurance Portability and Accountability Act of 1996 (HIPPA). The County indicates that the documentation was required to show the connection between the Taxpayer's County and out-of-state labs.
DETERMINATION
In light of P.D. 17-159, the Taxpayer was not entitled to claim the deduction as provided under Virginia Code § 58.1-3732 B 2 for the 2010 through 2013 tax years. Further, because the deduction is not permitted in this case, there is no need to address the documentation issue. As such, the County properly denied the Taxpayer's amended returns claiming the out-of-state deduction.
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/1038.B