April 5, 2022
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 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) by ***** (the “County”) for the 2013 through 2016 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, a provider of professional and information technology services primarily for the United States government, filed for a refund of BPOL taxes paid to the County for the 2013 through 2016 tax years. The refund was based on changing the situsing of gross receipts to the County by using payroll apportionment and claiming the out-of-state deduction. The County denied the refund, and the Taxpayer filed an appeal with the County. In its final determination, the County concluded that the Taxpayer’s original method of situsing gross receipts was in accordance with the general statutory methods and that the Taxpayer had not provided sufficient information to substantiate the out-of-state deduction. The Taxpayer appealed to the Department, contending that its cost tracking system did not accurately situs gross receipts and that it was not otherwise possible or practical to situs gross receipts using the general methods. The Taxpayer also contends that the out-of-state deduction should be computed using the method applicable to payroll apportionment.
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 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.
The Department has recently ruled on this issue in another locality with regard to the Taxpayer. See Public Document (P.D.) 21-111 (8/24/2021). In that case, the Department determined that payroll apportionment was the appropriate situsing methodology to use under the circumstances and remanded the case to the locality so the Taxpayer and the locality could work together to resolve the out-of-state deduction issue in light of the Department’s determination regarding the situs issue. This current appeal raises the same issues, and the Taxpayer’s business operations in the County do not appear to be such that a different result would be warranted. Under these circumstances, once the Department made the determination that payroll apportionment was the appropriate methodology, the statute required that “the gross receipts . . . be apportioned between the definite places of business on the basis of payroll.” [Emphasis supplied]. See Virginia Code § 58.1-3703.1 A 3 b. A consistent application of the statute requires that gross receipts be sitused to any of the Taxpayer’s other definite places of business on the basis of payroll, including any definite places of business in the County.
In its final determination, the County used an example to demonstrate how payroll apportionment could materially distort the situs of revenue and create an unfair representation of business operations in this case. The County explained that a project manager of the Taxpayer could be directing and controlling large projects performed by subcontractors with significant revenue impact. The County reasoned that if payroll apportionment were used, only a small percentage of revenue would be sitused to the location where the project manager worked because his or her pay would be small in proportion to the total payroll.
However, distortion is not the standard on which a determination as to whether the situs of gross receipts must be determined by payroll apportionment is made. Instead, payroll apportionment is a method of last resort to be used only when a business has more than one definite place of business and it is impractical or impossible to determine to which definite place of business gross receipts should be attributed under the general rule. See P.D. 04-26 (6/2/2004). As the Virginia Supreme Court observed in Ford Motor Credit Co. v. Chesterfield County, 281 Va. 321, 337, 707 S.E.2d 311, 319 (2011):
we then must decide whether the circuit court erred in holding that it was “neither impractical nor impossible” to attribute the gross receipts to the performance of services at a specific, definite place of business, and that payroll apportionment was not required.
The direct labor method described in P.D. 18-168 (9/26/2018) may sometimes prove useful in arriving at a fair proportion, but as the Department cautioned in P.D. 21-111, the direct labor method is only applicable to the extent it accurately reflects the assignment of revenue. The more difficult that assignment is, the more likely payroll apportionment will be necessary. Ultimately, the determination whether payroll apportionment should be used depends on an analysis of all of the relevant facts and circumstances.
In P.D. 21-111, several specific issues were identified with regard to situsing gross receipts based on the location of project managers. First, subcontractor costs were inconsistently assigned. In some instances, gross receipts were allocated to the location of the project manager but other times to other locations such as the location of the purchaser. Second, the extent of direction and control was not always discernable from the language of the contract or captured in a report. Third, in the case of fixed price contracts, receipts were assigned to the location of the project manager even though the services may not have been the definite place of business where they were performed or directed and controlled. Based on these circumstances, the Department reasoned that payroll apportionment was an appropriate situsing methodology because of the difficulty in applying the general rule to such a complex business operation.
The Department also takes issue with the County’s example of distortion. A large project may have hundreds, if not thousands, of individuals contributing to its completion. While work on the contracts is performed by numerous individuals and subcontractors at multiple locations throughout the United States and even around the world, the County’s example assumes that the location of project managers should be considered the locations where services are directed and controlled. First, the county presupposes the project managers all work at a definite place of business. Second, the County also makes the assumption that the Taxpayer’s other employees assigned to a contract do not work from a definite place of business. Such assumptions, however, should not be made, given that these issues require a full analysis of the facts and circumstances in any given case. In addition, these issues may require an even closer examination in the day and age of advanced teleworking technology and remote workforces. In fact, situsing the entire gross receipts derived from the activities of such a large workforce to the location of a specific project manager could itself create an unfair or distorted representation of business operations.
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 of the Virginia Administrative Code (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:
- “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.
- “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.
- “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 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:
- 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;
- Determine the receipts that are eligible for deduction; and
- Multiply the receipts eligible for the deduction by the same payroll factor used to determine the situs of gross receipts.
The Department’s methodology was upheld in Nielsen Company (US), LLC v. County Board of Arlington County, 289 Va. 79, 767 S.E.2d 1 (2015). In this case, the County denied the out-of-state deduction, but because the County declined to grant the Taxpayer’s request to use payroll apportionment, the issue was not examined under the three-step methodology outlined above.
DETERMINATION
Under the facts and circumstances presented, the Department finds that the Taxpayer was eligible to use payroll apportionment to apportion gross receipts. In light of that conclusion, the case is being returned to the County to determine to what extent, if at all, the Taxpayer was eligible to claim the out-of-state deduction under the process used when payroll apportionment is used to situs gross receipts.
Accordingly, the Taxpayer and the County are instructed to work together to resolve the out-of-state deduction issue. The Taxpayer must respond to any further information requests from the County in a timely fashion. Once the County has had an opportunity to re-examine the out-of-state deduction issue, the County is instructed to issue a final determination as to that issue to the Taxpayer in writing, thoroughly analyzing the facts and circumstances in light of the applicable laws and policies. If the Taxpayer wishes to dispute that final determination, it may appeal to the Department within 90 days as provided under Virginia Code § 58.1-3703.1.
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/4031.M