August 10, 2021
Re: Appeal of Assessment: Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
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 appeal the denial of refunds of Business, Professional and Occupational License (BPOL) tax paid by the Taxpayer to ***** (the “County”) for the 2011 through 2014 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, 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
The Taxpayer was a defense contractor performing work pursuant to contacts with the United States government. Work was performed by the Taxpayer’s employees at customer sites or at offices located in the County and two other Virginia localities. The Taxpayer filed its BPOL tax returns for the 2011 through 2014 tax.
The Taxpayer submitted a refund request for the 2011 through 2014 tax years based on multiple issues. The County granted a partial refund, but concluded that administrative staff should be included in the Taxpayer’s payroll apportionment of gross receipts and that gross receipts derived from certain research and development activities were not subject to payroll apportionment.
The Taxpayer filed an appeal with the County, asserting that administrative employees should be excluded from the payroll apportionment calculation and that gross receipts derived from the research and development activities should be apportioned by payroll. In its final local determination, the County denied the Taxpayer’s refund request on the basis that the total payroll must be included in the payroll apportionment calculation, and that the gross receipts derived from research and development should be apportioned by the general rule. The Taxpayer appeals to the Department, contending that the payroll of its administrative staff should not be included in the payroll apportionment calculation and that gross receipts derived from research and development should be subject to payroll apportionment.
ANALYSIS
Payroll Apportionment
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 Virginia Code § 58.1-3703.1 A 3 a. In determining the situs of gross receipts, Virginia 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.
In this case, the Taxpayer and the County agreed that payroll apportionment was proper with the exception of gross receipts derived from research and development, as discussed below. The Taxpayer contends that administrative staff should not be included in the payroll calculation because they did not directly participate in activities that generated the gross receipts. The County asserts that all payroll must be included in the payroll calculation.
In Public Document (P.D.) 97-308 (7/22/1997) and P.D. 05-118 (7/19/2005), the Department determined that only those employees who directly participate in a businesses’ licensed activity may be included in the payroll used for apportionment purposes. In Nielsen Co. (US) LLC v. County Board of Arlington County, 289 Va. 79, 767 S.E. 2d 1 (2015), however, the Supreme Court of Virginia held that for purposes of payroll apportionment:
. . . the business’s total gross receipts among all of its definite places of business contributing to the licensed business must be apportioned between those definite places of business on the basis of each respective definite place of business’s percentage of the company’s total payroll. Thus, under this methodology, the pool of taxable gross receipts for the definite place of business with the licensing jurisdiction will be equal to that particular definite place of business’s percentage of the company’s total payroll. [Emphasis Added.]
In accordance with the Supreme Court of Virginia’s decision, a taxpayer’s total payroll must be used to situs gross receipts based on payroll apportionment.
Research and Development Gross Receipts
Virginia Code § 58.1 3706 D 1 provides a separate BPOL classification for:
Any person, firm, or corporation designated as the principal or prime contractor receiving identifiable federal appropriations for research and development services as defined in § 31.205 18 (a) of the Federal Acquisition Regulation in the areas of (i) computer and electronic systems, (ii) computer software, (iii) applied sciences, (iv) economic and social sciences, and (v) electronic and physical sciences...
Businesses eligible for this classification are subject to a BPOL tax rate not to exceed $.03 per $100 on federal funds received for eligible contracts.
The Taxpayer asserts that it was able to separate gross receipts attributable to federal research and development from its other company receipts, but it was unable to separate payroll attributed to research and development from the total company payroll. As such it contends that gross receipts derived from its research and development services should have been subject to the BPOL tax rate pursuant to Virginia Code § 58.1 3706 D 1 and apportioned by payroll.
The County concedes that gross receipts derived from research and development pursuant to Virginia Code § 58.1 3706 D 1 qualify for the reduced BPOL rate. It contends, however, that the Taxpayer’s federal research and development contracts specify requirements such as the location where services are to be performed, the employee type and qualifications required to perform needed services, the resources required for the project, funding details, and specific funding details. As such, it asserts that the Taxpayer’s gross receipts derived from research and development can be sitused using the general rule or the direct labor method.
In effect, the County is allowing the Taxpayer to use payroll apportionment for some receipts and not others. In the Department’s opinion, when taxpayers’ business operations are complex enough to require payroll apportionment, localities and taxpayers lose the ability to segregate gross receipts for different situsing treatment. Allowing localities or taxpayers to treat some receipts as apportionable but not others could generate significant complexity to the situs analysis, defeating the policy purpose for even having payroll apportionment, namely to reduce the administrative burden of situsing gross receipts. Taxpayers and localities, for example, could begin picking and choosing which contracts to try to either include in, or exclude from, payroll apportionment, as is favorable to them, potentially complicating the analysis substantially and increasing the risk of disputes.
In P.D. 04-90 (8/31/2004), the Department determined that when a taxpayer sitused gross receipts using payroll apportionment and was able to segregate which receipts were attributable to research and development activities covered under Virginia Code § 58.1-3706 D 1, then the tax on that portion of receipts should be computed by multiplying such receipts by the payroll factor then the special rate. In this case, the Taxpayer was able to unbundle its research and development receipts from total receipts.
DETERMINATION
In accordance with Nielsen, I find that payroll included in the payroll calculation when payroll apportionment is utilized for the purpose of situsing gross receipts is not limited to those employees who directly participate in the income generating activity. As such, the payroll of the Taxpayer’s administrative staff must be included in the payroll calculation for the 2011 through 2014 tax years.
Further, in accordance with the methodology in P.D. 04-90, the County must apply the Taxpayer’s payroll percentage to the receipts subject to the special rate under Virginia Code § 58.1 3706 D 1. As such, I am remanding this case back to the locality to adjust the Taxpayer’s BPOL tax liability for the 2011 through 2014 tax years in accordance with this determination and issue refunds if warranted.
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/3672.B