Tax Type
BPOL Tax
Local Taxes
Description
Out-of-State Corporation
Topic
Local Power to Tax
Date Issued
11-17-1994
[Opinion - Virginia Attorney General: 1994 at 106]
SYLLABUS: TAXATION: LICENSE TAXES.
Hampton may impose business license tax on gross receipts of out-of-state corporation derived from sales in interstate commerce, for privilege of doing business in state, if tax meets four-part test applying nexus, apportionment, nondiscrimination and related services. Burden is on corporation to establish risk of double or multiple taxation of its gross receipts, in violation of U.S. Constitution's Due Process and Commerce Clauses.
REQUEST BY:
The Honorable Ross A. Mugler Commissioner of the Revenue for the City of Hampton
OPINION BY:
Richard Cullen, Attorney General
OPINION:
You ask what portion of the gross receipts of a particular corporation with administrative offices in your city, whose primary business is the sale of merchandise through mail order catalogs, is subject to the city's local business license tax.
I. Facts
You state that the taxpayer is a Delaware corporation (the "Company") with offices in Hampton and in the State of New York. In addition, the Company has a distribution facility in Newport News, Virginia. Newport News does not impose a local license tax on that facility. You do not state whether the Company pays a local business license tax in any other jurisdiction outside Virginia.
The business of the Company is mail order merchandising; its customers typically call a toll-free number to place an order. Calls are answered by customer service representatives who may be located in Virginia or elsewhere. Merchandise orders are transmitted by computer to a data facility in Illinois for credit approval. Approved orders are then transmitted to Hampton to be filled. All of the Company's customer service and accounting functions are located in Hampton. The majority of employees are located in Hampton, with the remainder working at the Company's headquarters in New York. The Company contends that the business license tax payable to Hampton should be based only on gross receipts generated by sales to Virginia customers.
II. Applicable Constitutional and Statutory Provisions
The Commerce Clause of the Constitution of the United States grants to Congress the authority to regulate commerce with foreign nations and among the several states. U.S. CONST. art. I, § 8, cl. 3.
Section 58.1-3703 of the Code of Virginia provides that a locality may assess a license tax on the gross receipts of any person, firm or corporation that is operating a licensable business within the locality. § 58.1-3706(A)(2) establishes a limit on the rate of tax that may be collected for retail sales. § 58.1-3708(A) provides that the situs for local taxation of a licensable business is the locality in which the firm has a definite place of business or maintains an office.
III. Commissioner Must Apply Four-Part Test to Determine Whether to Tax Business's Gross Receipts from Sales in Interstate Commerce
The fact that the Company does business in interstate commerce raises the question whether any local gross receipts tax may violate the Commerce Clause of the United States Constitution by placing an undue burden on interstate commerce.
In a 1977 case, the Supreme Court of the United States addressed the constitutionality of state sales taxes assessed for the privilege of doing business within the state. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). In that case, the Court overruled earlier decisions and adopted a four-part test to determine whether a local tax unduly burdens interstate commerce. Id. at 277-78. The test applies to gross receipts taxes as well as to sales taxes. Under the test, a tax applied to activity in interstate commerce will be constitutional if the tax (1) is applied to an activity having a substantial nexus with the taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services provided by the state. Id. at 279.
IV. Four-Part Test Applies to Local Business License Taxes on Gross Receipts from Interstate Sales
In a 1992 decision, the Supreme Court of Virginia applied the Complete Auto four-part test to a local business license tax and upheld the constitutionality of the tax, even though it was imposed on gross receipts from sales made in interstate commerce. Short Brothers, Inc. v. Arlington County, 244 Va. 520, 423 S.E.2d 172 (1992). In Short Brothers, a Massachusetts corporation, with its headquarters in Arlington County, Virginia, and sales throughout the United States, challenged Arlington's imposition of its business license tax on the corporation. Id. at 522, 423 S.E.2d at 173. Short Brothers had reported zero gross receipts, because it had no sales to Virginia purchasers. Id. After an audit, however, Arlington County had assessed business license taxes on all the corporation's gross receipts. Id. The corporation, in Short Brothers, challenged the constitutionality of the assessment because it was imposed on receipts from sales of products delivered outside Virginia. Id. at 522, 423 S.E.2d at 173-74.
The first contention in Short Brothers was that the license tax was effectively a tax on property, and that only the states to which the products sold were actually delivered had the authority to tax the revenue generated by those deliveries. Id. at 523, 423 S.E.2d at 174. The Virginia Supreme Court dismissed this contention, noting that a tax imposed on revenue is not necessarily a tax on property. Id. The Court found instead that the Arlington County tax was a tax on the business activity of the corporation, as measured by gross receipts, and not a tax on the products sold. Id.
The second contention in Short Brothers was that Arlington County could not constitutionally use income from property sold or leased in another state as the basis for its license tax, even if services related to the sale or lease were performed in the county. Id. at 524, 423 S.E.2d at 174. The Court found the argument inconsistent with the decision in Complete Auto, which rejected the proposition that a tax on local services incidental to an interstate sale unconstitutionally interferes with interstate commerce. Id. Under Complete Auto, the key to the constitutionality of a state or local tax is now whether a business is availing itself of the public services of a state or locality, and whether the tax assessed is fairly related to those services. Id. at 524, 423 S.E.2d at 174-75. The fairness of the assessment will depend, in part, on the extent of the taxpayer's operations in the taxing jurisdiction.
A related challenge made by the taxpayer in Short Brothers was that the Arlington County tax was unconstitutional because it was not fairly apportioned, and thus did not meet the second part of the Complete Auto test. 244 Va. at 525, 423 S.E.2d at 175. The Virginia Supreme Court ruled that if a tax is based on revenue attributed solely to the taxing jurisdiction and the taxpayer is not subject to the same type of tax based on the same revenue elsewhere, there is no risk of double or multiple taxation and therefore no need to apportion. Id. Arlington assessed the tax on Short Brothers based on financial information in tax returns and other documents. Id. In none of those documents was income allocated to another jurisdiction. Id. No evidence was presented that the income would or could be subjected to tax in another jurisdiction. Id. The Court found that the burden was on the taxpayer to show a risk of double or multiple taxation, and that Short Brothers had not met that burden. Id.
As the Court also noted in Short Brothers, in order for a tax to be constitutional, there must be a nexus between the taxing authority and the taxing entity. Id. The nexus must be substantial. Id. Mere contact with a state through common carriers or mails is insufficient. Id. at 526, 423 S.E.2d at 175-76 (citing Quill Corp. v. North Dakota, 112 S. Ct. 1904, 1910, 119 L. Ed. 2d 91, 113 (U.S. 1992)). Therefore, the state of destination of a mail or telephone order sale, without some additional connection to the taxpayer, does not have the authority to impose a tax on gross receipts generated from such a transaction.
The Court found in Short Brothers that there was no evidence of a place of business in another state, and thus no basis on which to require apportionment. 244 Va. at 526, 423 S.E.2d at 176. All revenue-generating operations were based in Arlington, as were all sales and accounting functions and other business aspects of the operation. Id. The Arlington-based activities were an integral part of the sales and leases, and added value to the transactions. Id. The same analysis may be applied to the Company.
I assume, for purposes of this opinion, that the business license tax in Hampton, like the tax in Arlington County, is imposed for the privilege of doing business in the city. Accordingly, I am of the opinion that the City of Hampton may impose its business license tax on the Company's gross receipts that are derived from sales in interstate commerce if that tax meets the four-part test set forth in Complete Auto ; that is, (1) the Company's activity must have a substantial nexus with Hampton, (2) if the Company is subject to tax in other jurisdictions on the same sales, the tax must be fairly apportioned, (3) Hampton's tax must not discriminate against interstate commerce, and (4) the tax must be fairly related to governmental services Hampton provides to the Company. The burden is on the Company to establish any risk of double or multiple taxation. The Company must present evidence to show that it will or may be subject to the same type of tax on the same revenues in another jurisdiction. It is not enough, however, to show that sales occur in other jurisdictions. The Company must show that the tax assessed is subject to the risk of multiple gross receipts taxes in violation of the Due Process and Commerce Clauses of the U.S. Constitution.1
1 A 1987 opinion of the Attorney General addresses a similar question and concludes that "gross receipts generated from sales in Virginia are taxable." 1987-1988 Op. Va. Att'y Gen. 512, 513. To the extent that opinion implies that gross receipts generated by a mail order business on sales to customers in other states are not taxable, it is overruled.
Attorney General's Opinion