Rulings of the Tax Commissioner

October 19, 2023

Re: Appeal of Final Local Determination
      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 assessments of the Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by the City of ***** (the “City”) for the 2018 through 2021 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 on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. 

FACTS

During the tax years at issue, the Taxpayer operated retail stores throughout the country, including three stores located in the City. The Taxpayer reported its gross retail sales at these locations to the City as its BPOL tax base. 

The Taxpayer was a wholly-owned subsidiary of *****, Inc. (the “Parent”). The Parent also owned *****, Inc. (the “Affiliate”), which was responsible for the Parent’s online sales. The Taxpayer and the Affiliate were separate legal entities. 

The Affiliate’s retail-to-customer (RTC) sales were facilitated by the Taxpayer’s employees at its retail locations using the local stores’ computers. Such sales were made using the Affiliate’s online billing system, rather than the Taxpayer’s point of sale system, and were fulfilled and warranted by the Affiliate. The RTC sales were initially recorded in the Affiliate’s ledgers, but were periodically reclassified as sales attributable to the Taxpayer’s retail stores, based on sales entered on local stores’ computers, for management and income tax reporting purposes.

The City audited the Taxpayer and determined that the Taxpayer should have included the RTC sales that occurred at the Taxpayer’s locations in the City as gross receipts subject to BPOL tax. As a result, assessments were issued. The Taxpayer appealed to the City. During the course of the appeal, the City requested additional information so that it could create a BPOL account for the Affiliate. When this information was not provided, the City issued a final determination, concluding that gross receipts from the RTC sales were taxable because they resulted from sales made at a definite place of business in the City and, in the absence of a BPOL account for the Affiliate, such sales were correctly considered taxable gross receipts of the Taxpayer.

The Taxpayer filed an appeal with the Department, contending that it properly reported all retail sales from its locations within the City, and that the RTC sales legally belonged to the Affiliate and could not be attributed to the Taxpayer. In addition, the Taxpayer requested that the penalty assessed by the City be abated because there was no negligence on its part.

ANALYSIS

BPOL Tax

The BPOL tax is imposed on businesses and professionals for the privilege of doing business in a locality. The tax is based on gross receipts which are defined as “the whole, entire, total receipts, of money or other consideration received by the taxpayer...”  Title 23 of the Virginia Administrative Code (VAC) 10-500-10. When a taxpayer holds a separate certificate of incorporation and has its own federal employer identification number, it is considered a separate entity for local business tax purposes. See Public Document (P.D.) 17-191 (11/21/2017) and P.D. 20-3 (1/7/2020). In this case, the Taxpayer and the Affiliate were two separate legal entities such that each would be required to obtain a BPOL license and pay BPOL tax if they had gross receipts attributable to sales which were sitused to a definite place of business within the City. See P.D. 20-3. 

Definite Place of Business

Virginia Code § 58.1-3700.1 defines a “definite place of business” as “an office or a location at which occurs a regular and continuous course of dealing for thirty consecutive days or more.”  A definite place of business can include a location leased or otherwise obtained from another entity on a temporary or seasonal basis. 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) advertising or otherwise holding oneself out as engaging in business at the particular location. See P.D. 97-201 (4/25/1997), P.D. 01-215 (12/12/2001), and P.D. 10-277 (12/21/2010). Although these activities are indicative of a definite place of business, all facts and circumstances concerning the nature of a taxpayer’s operations must be considered. 

For example, in 1978-79 Op. Va. Att’y Gen 279, the Attorney General determined that a continuous and regular course of dealing at a location would seem to constitute a definite place of business in such location when employees are “more or less” permanently assigned to such a location. In addition, the Department has previously ruled on a similar issue. In P.D. 01-215, the Department found that a computer consultant whose work was performed at client locations on a regular and continuous basis in several localities could establish a definite place of business at such locations without all of the characteristics enumerated in P.D. 97-201. Likewise, in P.D. 11-161 (9/20/2011), the Department found that a business could establish a definite place of business at a physical location that it neither owned nor rented.

With regard to online retail sales, the Department ruled in P.D. 99-137 (6/10/1999) that a mere presence on the Internet, in and of itself, is not considered to be a definite place of business for local license tax purposes. The Department has also addressed the issue regarding a catalog retailer that fulfilled orders sold over the Internet from a warehouse in Virginia. Contrary to the Taxpayer’s argument that internet sales are not generally subject to the license tax, the catalog retailer in that case was correctly filing BPOL tax returns that included internet sales fulfilled from a definite place of business in a Virginia locality. See P.D. 05-118 (7/19/2005).

In this case, the retail stores located within the City, although owned by the Taxpayer, may also have been definite places of business of the Affiliate. The Affiliate’s customers were able to place RTC orders over the internet through dedicated physical systems facilitated by the Taxpayer’s employees. Customers could also pick up online orders from the Taxpayer’s locations or return online purchases to the stores. Thus, the Affiliate held the Taxpayer’s locations out as places where its customers could transact online business on a continuous basis. Under these circumstances, it appears likely that the Taxpayer’s retail stores located in the City were also definite places of business of the Affiliate. 

Situs

In determining the situs of gross receipts, Virginia Code § 58.1-3703.1 A 3 a 2 and § 58.1-3703.1 A 3 b provide that the gross receipts of a retailer are to be taxed based on where the sales solicitation activities occur, or if sales solicitation activities do not occur at any definite place of business, then the place from which the sales solicitation activities are directed or controlled. As a last resort when it is impossible or impractical to determine where the sales solicitation activities are performed or from where the activities are directed or controlled, by payroll apportionment between definite places of business. 

Sales solicitation is the act or acts directly related to selling particular items or goods to a particular person. Sales solicitation, however, does not include non-solicitation activities prior or subsequent to sales solicitation activities. See Title 23 VAC 10-500-10. Taking customer orders is considered a sales solicitation activity. See P.D. 97-317 (7/30/1997), P.D. 98-42 (3/6/1998), and P.D. 18-164 (9/26/2018). If the Taxpayer’s retail stores were definite places of business of the Affiliate, then gross receipts from RTC sales likely would be sitused to such places of business because the sales solicitation activities were occurring there, at least to some extent.

The Taxpayer points out that the transfer of title for the RTC sales occurred not at the local stores, but at the location of the customer where the goods were delivered. Where title transfers occur, however, is not relevant to situsing retail sales for BPOL tax purposes. As discussed above, the relevant inquiry is where sales solicitation activity took place. If the solicitation activity (i.e. order placement) for an RTC sale occurred in one of the Taxpayer’s stores, that sale could be sitused to the locality in which the store is located.

In addition, the Taxpayer argues that for purposes of Virginia’s sales and use tax, the RTC sales were reported as sales of the Affiliate and were subject to use tax based on the location of the customer. Local taxes, however, have their own characteristics, separate and distinct from the retail sales and use tax. The Department has highlighted such distinctions numerous times in public documents. See, e.g., P.D. 09-93 (6/11/2009), P.D. 09-139 (9/21/2009), P.D. 11-44 (3/23/2011), P.D. 12-220 (12/21/2012), P.D. 13-25 (3/5/2013), P.D. 15-19 (2/11/2015), and P.D. 21-4 (2/2/2021). As such, it is possible that a taxpayer’s business activities may not be treated the same for Virginia’s sales and use tax purposes and local taxing statutes. 

DETERMINATION

Under the provisions of Virginia Code § 58.1-3109 6, the local commissioner of the revenue is empowered with the authority to require records and other information necessary to make an accurate assessment of a person’s license taxes. Further, pursuant to the City’s License Code, it is unlawful for any person to engage in business for which a license is required without first obtaining a license. As such, it is incumbent upon a taxpayer to prove to the satisfaction of the local taxing authority that it properly sitused and reported gross receipts on its tax returns. In this case, the Affiliate has failed to present clear and cogent evidence to the City that it was not subject to BPOL tax in the City because either it did not have a definite place of business in the City, or that sales solicitation activity did not occur in the City. 

Based on the facts presented, the Taxpayer’s stores were definite places of business of the Affiliate and the RTC sales were sitused to the City based on the sales solicitation activities that occurred at those stores. Absent evidence that it was not subject to BPOL tax, the Affiliate is hereby directed to apply for a BPOL license with the City and file returns for each of the tax years at issue within 30 days of the date of this letter or by another deadline mutually agreeable to both the Affiliate and the City. 

If the Affiliate complies with the above directives, the assessments at issue must be adjusted to remove the Affiliate’s gross receipts that were previously added to the Taxpayer’s gross receipts. If the Affiliate fails to register and file the requested returns, the assessments will be considered to be correct. Further, because their imposition is a matter determined at the local level, penalties are not eligible for review by the Department. See P.D. 22-29 (2/15/2022).

If you have any questions regarding this determination, you may contact *****, in the Office of Tax Policy, Appeals and Rulings, at (804) *****.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/4482.X