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 the denial of refunds of Business, Professional and Occupational License (BPOL) tax by the County of ***** (the “County”) for the 2016 through 2019 tax years and the assessment of additional BPOL tax by the County for the 2020 tax year. 

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

The Taxpayer, a business that collected and distributed data for a specific industry, had a definite place of business in the County. The Taxpayer filed amended BPOL tax returns for the 2016 through 2019 tax years with the County, requesting refunds of BPOL tax previously paid. The amended returns sitused gross receipts using payroll apportionment and claimed the out-of-state deduction for gross receipts attributable to business conducted in other states or countries in which it filed income tax returns. 

The County audited the amended returns and issued three different letters. Each letter was issued after receiving additional information from the Taxpayer. In the last letter, the County determined that the Taxpayer only had one definite place of business and, therefore, no apportionment was required. The County further denied the out-of-state deduction claimed for a number of states and a foreign country on the basis that the Taxpayer either lacked nexus or did not attribute any income to those particular states. 

Subsequently, the Taxpayer filed an appeal with the County, raising the same issues and including an appeal of an assessment issued for tax year 2020. In its final determination, the County again determined that the Taxpayer’s only definite place of business was in the County and, therefore, no apportionment was required. The County further denied the out-of-state deduction claimed for a number of states and a foreign country because the Taxpayer either lacked nexus or did not attribute income to those particular states. The Taxpayer appealed to the Department, contending that it was eligible to apportion its gross receipts using payroll apportionment and that it was entitled to all of the claimed out-of-state deductions.

ANALYSIS

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 Public Document (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 business’s operations must be considered. In P.D. 14-121 (7/24/2014), the Department observed that an employee’s home may constitute a definite place of business if there is a regular and continuous course of dealing for 30 consecutive days or more. Each location must be separately evaluated under the standards set forth above to determine if it is a definite place of business. Ultimately, the determination as to whether a home office is a definite place of business must be made by the locality in which the home office is located. See also P.D. 21-131 (9/28/2021).

In its final determination, the County found that there was no evidence that the employees’ residences qualified as definite places of business because the Taxpayer had not submitted any evidence in support of its position. The Taxpayer asserts that the County never requested any specific evidence to support its position that the residences qualified as definite places of business for the Taxpayer. The Taxpayer has, however, provided numerous state income tax returns that apportion payroll to states other than Virginia. While not determinative, the reporting of positive payroll factors in other states could indicate a business had employees working remotely from their homes in other states during the tax years at issue, which could qualify as definite places of business.

The Taxpayer also claimed that its offices in ***** (State A) and the ***** ( (Country A) qualified as definite places of business. The State A location was characterized by the County as a virtual office that did not qualify as a definite place of business because it was operated pursuant to a service agreement and not a lease for real property. The County also determined that the Country A office did not qualify as a definite place of business because the Taxpayer had not offered any evidence to support such a finding. 

Concerning the State A location, virtual office providers generally provide businesses with a mailing address, telephone services, meeting rooms, and video conferencing. The business does not, however, have to enter a long-term lease or employ its own administrative staff to work in the office space. The fact that the lease is not a traditional lease of office space is insufficient to disqualify the office as a definite place of business if it meets the requirements described above. 

With regard to the Country A facility, a review of the documentation submitted reveals that the Taxpayer previously provided the County with tax returns filed in Country A that apportioned payroll and property there. As with employees’ home offices, this information provides some evidence that the Taxpayer may have had a definite place of business in Country A. In addition, the Taxpayer states that it previously provided the County with a copy of a lease for their office in Country A.

While the provisions of Virginia Code § 58.1-3109 6 empower the local taxing authority to require records and other information necessary to make an accurate assessment of a business’s license taxes, such requests should not be so overly burdensome that it is impossible for a business to comply. Further, having years of experience in reviewing business records, a locality will usually know the type of documentation needed to make an accurate determination. As such, it is incumbent upon a business to provide support, whether by furnishing the requested documents or alternative documentation directly related to the disputed issue, that will enable the locality to make a clear and accurate finding.

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 provide 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 place 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. 

As indicated above, the Taxpayer may have more than one definite place of business. When a taxpayer has more than one definite place of business, gross receipts attributable to services performed at each definite place of business would be sitused there. Only to the extent that services were not performed at a definite place of business would they be sitused to the place from which they were directed or controlled. Finally, payroll apportionment is only to be used as a last resort when it is impossible or impractical to situs gross receipts from services to where the service is performed or, if not performed at a definite place of business, from where they were directed and controlled. 

In this case, the Taxpayer’s services included collecting and distributing data and it is not possible to attribute specific receipts to activities conducted by specific employees because employees work in conjunction with each other from various definite places of business to generate such receipts. This appears to be similar to a case in which the Virginia Supreme Court held that payroll apportionment was appropriate when loans that ultimately generated the taxpayer’s gross receipts may have originated in a local Virginia office, but employees located in other offices were involved in servicing and other activities that contributed to the income producing activity. See Ford Motor Credit Co. v. Chesterfield County, 281 Va. 321 (2011). Based on the description of the services provided, situsing the Taxpayer’s gross receipts based on where the services are performed would be difficult if not impossible.

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 no actual tax liability in a given year, in order to claim the deduction in that state or foreign country.

Service Businesses Generally

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 P.D. 08-86 (6/6/2008). Accordingly, in those instances in which a taxpayer has a definite place of business in Virginia and does business in other states where it is liable for an income or income-like tax, and files a tax return in those states, a deduction is allowed for the receipts derived from customers located in those states. See P.D. 08-86 and P.D. 13-170 (9/13/2013).

Gross Receipts Eligible for the Deduction

While the deduction is measured with reference to gross receipts derived from customers located outside Virginia, the statute limits the availability of the deduction to those businesses liable for an income or other tax based upon income. Thus, while Title 23 VAC 10-500-80 requires a business to file a return in the other state in order to be eligible for the deduction, gross receipts are not automatically attributable to business conducted in another state or foreign country simply because a return was filed in another state. In order to be eligible for the deduction, a business must be required by the laws of another state or foreign country to file an income tax return or other return for a tax based upon income. See P.D. 97-490 (12/19/1997).

For those states that impose an income tax or another type of tax based on income, Public Law (P.L.) 86¬-272, codified at 15 U.S.C. §§ 381-384, prohibits the imposition of a net income tax where the only contacts with a state are a narrowly defined set of activities constituting solicitation of orders for sales of tangible personal property. The scope of P.L. 86-272 is limited to only those activities that constitute solicitation, are ancillary to solicitation or are de minimis in nature. See Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992). Although P.L. 86-272 provides a minimum standard, states differ in their interpretation of activities that are permitted without creating nexus. Under Virginia’s interpretation of P.L. 86-272, an entity will almost always have property or payroll in Virginia before nexus can be established. 

In some cases, a business deriving revenue from customers outside Virginia may not be able to deduct such revenue or gross receipts from taxable gross receipts related to the exercise of the same privilege in Virginia. This would occur when the business is not required by the laws of another state or foreign country to file an income tax return or other return for a tax based upon income. 

The fact that the Taxpayer had no property or payroll in some of the states where it filed income tax returns raises questions as to whether it was liable for income tax in such states. See P.D. 18-170 (10/10/2018). For these states, the Taxpayer must show by clear and cogent evidence that it was required to, and has filed, an income or income-like tax return in order to qualify for the deduction.

In accordance with Title 23 VAC 10-500-80 A 2, a business does not need to actually pay income tax in another state in order to take the deduction so long as it is liable for an income or other tax based upon income and is required to file a return for an income or income-like tax in that state or foreign country. Neither the statute nor the regulation require that any tax due result, in whole or in part, from sales attributed to the other state in the sales factor of the apportionment formula. The fact that the Taxpayer was required by a state’s statute to file an income tax return in another state is sufficient for eligibility to claim an out-of-state deduction for that state. Such a determination is a factual matter for the local taxing authority to decide.

Use of Sales Factor in Determining Gross Receipts

The County also denied the out-of-state deduction for a number of states on the basis that the gross receipts or revenues were not reported as sales on associated state income tax returns. The Department has repeatedly addressed the use of the sales factor as a basis for gross receipts, including P.D. 97-490, P.D. 01-5 (1/04/2001), P. D. 03-15 (3/10/2003), P. D. 04-46 (8/12/2004), P. D. 05-1 (1/08/2005), and P.D. 08-86. In these rulings, the Department found that the sales factor reported on a taxpayer’s Virginia corporate income tax return does not necessarily equate to a taxpayer’s gross receipts as reported to a jurisdiction for purposes of the BPOL tax.

Further, the Department has ruled that the Virginia income tax sales factor is “an unreliable measure of gross receipts for purposes of the BPOL tax.”  See P.D. 05-58 (4/12/2005). Thus, gross receipts attributable to business conducted in another state will almost never equate to apportioned net income or income appearing in sales factors or other like factors for apportioning income. Instead, gross receipts eligible for the deduction are those derived from business conducted in another state or foreign country. See P.D. 97-490.

Payroll Apportionment 

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) and P.D. 22-66 (4/5/2022). 

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:

1.    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;

2.    Determine the receipts that are eligible for deduction; and
3.    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 (2015). With regard to P.D. 12-146 (8/31/2012), the Virginia Supreme Court ruled that the Department’s methodology “falls within the scope of accounting methodologies permitted by [Virginia] Code § 58.1–3732(B)(2).”  Nielsen Company (US), LLC, 289 Va. at 96. Thus, when payroll apportionment is required to situs gross receipts, the out-of-state deduction must be re-determined based on the methodology set forth above unless another method of computing the deduction falls within the scope of accounting methodologies contemplated under the statutory regime for the out-of-state deduction. 

DETERMINATION

Based on the analysis above, I am remanding this case to the County to re-evaluate its findings. First, the County must determine the extent to which the Taxpayer had definite places of business outside the County. Next, the County must situs gross receipts to one or more of the Taxpayer’s definite places of business. Finally, from the remaining pool of taxable gross receipts the County must determine the extent to which the Taxpayer was eligible for the out-of-state deduction and grant such deduction. If the County determines the Taxpayer is eligible to situs gross receipts based on payroll apportionment, the deduction must be determined in accordance with the methodology described herein.

The Taxpayer must work with the County to provide any further relevant information the County may request. Failure of the Taxpayer to provide sufficient documentation to support its position will result in the assessment being upheld. Likewise, the County must thoroughly review and address any and all information the Taxpayer is able to provide. Upon the conclusion of its review, the County must issue a new final determination that fulfills all of the requirements of the BPOL regulations. Once the County has issued its final determination, the Taxpayer may file an appeal with the Department within 90 days pursuant to Title 23 VAC 10-500-720 if it disagrees with any of the County’s conclusions. 

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

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