June 9, 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 “City”) for the 2011 through 2013 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 section, 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 information technology services with a definite place of business in the City and locations outside of Virginia, filed a refund request with the City for the tax years at issue asserting that it did not properly situs its gross receipts in order to claim the correct out-of-state deduction.
The City agreed with the Taxpayer's methodology for situsing gross receipts, but denied the deduction. The City requested that the Taxpayer show a breakdown of receipts for the situs it was claiming a deduction. The Taxpayer appealed the City's refund denial, asserting that it was only required to situs its gross receipts to out-of-state locations in states in which it filed an income tax return or return based on income. In response, the City issued a final determination denying the refund because the Taxpayer had not provided the requested documentation. The Taxpayer filed an appeal with the Department, contending it was not required to demonstrate that the gross receipts it attributed to the out-of-state locations were actually reported on those states' income tax returns.
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.” 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. 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 Public Document (P.D.) 08-86 (6/6/2008) and P.D. 13-170 (9/13/2013).
In its calculations of the out-of-state deduction 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 City, citing Ford Motor Credit v. Chesterfield County, 281 Va. 321, 707 S.E.2d 311 (2011), denied the refunds on the basis that the Taxpayer had not provided sufficient documentation to show that the gross receipts sitused outside of Virginia were in fact reported on its out-of-state returns. When the Taxpayer did not provide the requested evidence, the City denied the refund requests.
By reason of their character as legislative grants, statutes relating to deductions allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See City of Lynchburg v. English Constr. Co., 277 Va. 574, 675 S.E.2d 197 (2009) and DKM Richmond Associates, L.P. v. City of Richmond, 249 Va. 401, 457 S.E.2d 76 (1995). Because the Taxpayer files income tax returns in multiple states, 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.
The Taxpayer argues that it is only required to provide evidence of receipts derived from customers located in another state and file an income tax return in that state. In Ford Motor Credit, the Virginia Supreme Court, citing P.D. 07-142 (9/5/2007), held that “a taxpayer may deduct gross receipts attributable to business conducted in another state only if the taxpayer demonstrates that it ‘actually reports those receipts . . . on its out-of-state returns’.”
In its final determination, the City appears to accept the fact that the Taxpayer is eligible for an out-of-state deduction and only disputes the documentation needed to compute the deduction. The City asserts gross receipts must equal the taxable income reported on an out-of-state return. The Department has determined that, although federal tax information and audited financial statements can be helpful in determining gross receipts, they usually provide insufficient detail when a taxpayer has multiple locations or operates in multiple localities and states. In P.D. 97-490 (12/19/1997), the Department stated:
Gross receipts attributed does not mean apportioned net income or amounts appearing in sales factors or other like factors for apportioning income. It means gross receipts derived from business conducted in another state or foreign country regardless of whether the full amount or a portion of such gross receipts are subject to income tax in another state or foreign country .... [B]ecause the income tax policies of other states and countries are so diverse[,] ... a common basis for the deduction can only be arrived at by using gross receipts. [Emphasis added.]
Accordingly, the gross receipts reported on another state's income tax return by the Taxpayer will almost never equal the amount of gross receipts sitused to a definite place of business for BPOL tax purposes. All of the gross receipts of any business, however, would be included in the income tax or income like tax return of any state where gross income or federal taxable income is the starting point for calculating that state's liability. For such states, gross receipts sitused to a definite place of business in a Virginia locality would be reported on the out-of-state returns.
In Nielsen Company (US), LLC v. County Board of Arlington County, 289 Va. 79, 767 S.E. 2d 1 (2015) the Virginia Supreme Court addressed the deduction when gross receipts are sitused using the “general rule”. The Court stated that the taxable pool of gross receipts include those that “accrue outside of the licensed definite place of business, both within and beyond the licensing jurisdiction, which can be attributed to activities that are initiated, directed, or controlled by the licensed definite place of business” and the allowable out-of-state deduction backs out “all receipts that accrued from business in non-Virginia jurisdictions in which the taxpayer is subject to an income-based tax liability.” See Nielsen 289 Va. at 91 and 92. Thus, according to the Court, gross receipts eligible for the out-of-state deduction are not limited to an amount equal to income reported on the out-of-state income tax return or return measured by income.
DETERMINATION
Because the City has determined the Taxpayer was eligible for the out-of-state deduction, this appeal only addresses whether the Taxpayer's gross receipts were reported on income tax returns filed in other states. As indicated above, the Taxpayer need only show that gross receipts are included in gross income or federal taxable income reported on another state's return to show it actually reports those receipts such state's return.
Accordingly, I am remanding this case back to the City to review the Taxpayer's income tax returns filed in other states for the 2011 through 2013 tax years. If the returns include gross receipts in accordance with this determination, the City must permit a deduction for gross receipts attributable to business conducted in another state or foreign country and issue the applicable refunds.
If additional information is required, the Taxpayer should work with the City to provide satisfactory documentation to determine the accuracy of the deduction. See Va. Code § 58.1-3109 6.
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/784.B