Document Number
03-5
Tax Type
BPOL Tax
Description
Gross Receipts, provider of IT and engineering services
Topic
Appropriateness of Audit Methodology
Basis of Tax
Date Issued
02-03-2003


February 3, 2003



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 of assessment filed by you on behalf of *********** (the "Taxpayer") with the Department of Taxation. You appeal a final local determination upholding an audit assessment of BPOL taxes made by the Commissioner of the Revenue of ************ (the "County") for license tax years 1998 and 1999. I apologize for the delay in the Department's response.

The local license tax and fee are imposed and administered by local officials. Va. Code § 58.1-3703.1(A)(5) authorizes the Department to issue determinations on taxpayer appeals of certain BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct. In other words, 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 as summarized below. This determination addresses the question of whether the apportionment methodology utilized by the County in determining its assessment of the Taxpayer's BPOL tax liability was the appropriate methodology to use in this case.

Copies of the Code of Virginia, regulations and public documents cited are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.
FACTS
    • The Taxpayer is a provider of information technology and engineering services. In addition to its office in the County, it has business offices elsewhere in Virginia and in other states. Its headquarters are in ***** ("County A").

At issue in this appeal is the difference in methodologies used by the Taxpayer and the County in deriving the Taxpayer's gross receipts attributable to its definite place of business in the County.

During the years in question, for state income tax purposes, the Taxpayer apportioned its total revenues among the states with which it had nexus on the basis of percentage of payroll. The Taxpayer states that approximately one-third of its payroll is apportioned to Virginia. This figure is partially attributed to the location of the Taxpayer's headquarters and associated ancillary nonservice functions conducted at the headquarters' site. These services include human resources, payroll, treasury, tax, legal, accounting, marketing, corporate communications, travel, etc. The Taxpayer has specified that 49.1 percent and 52.7 percent of its Virginia payroll was attributed to officer and indirect (not related to provision of services) compensation in 1997 and 1998, respectively.

The Taxpayer states that during the years in question this method of apportionment was accepted by the states in which it had situs. However, the Taxpayer contends that this method of payroll apportionment was not appropriate for local BPOL tax purposes, because of the large percentage of Virginia payroll attributed to headquarters' staff and functions that are unrelated to the Taxpayer's direct business purpose. For purposes of reporting receipts for BPOL tax purposes, the Taxpayer used a manual process to identify "the specific revenues earned for services performed in each Virginia locality." This process allowed the Taxpayer to identify specific revenues generated by specific projects in a given jurisdiction.

The Taxpayer's method of sourcing actual revenues generated by its business attributed to its location in the County resulted in a lesser figure than did the County's method of apportioning the Taxpayer's gross receipts among those Virginia jurisdictions in which the Taxpayer has situs. The County contends that the gross receipts reported on the Taxpayer's Virginia corporate income tax return should be the basis for apportioning the Taxpayer's gross receipts among those Virginia jurisdictions in which the Taxpayer has situs.

The Taxpayer asks that the Tax Commissioner find that the methodology it used in sourcing gross receipts to the County be accepted as the preferred method. In the event the Taxpayer's methodology is not accepted, the Taxpayer proposes apportioning gross receipts on the basis of payroll after factoring out the payroll associated with its headquarters' functions.
ANALYSIS

Situs

The BPOL tax is a tax on the privilege of doing business in a given jurisdiction. It is not a sales tax, nor is it an income tax. Furthermore, it is a tax to be measured by only those gross receipts attributable to business conducted in a given jurisdiction.

Under the situs rules governing the BPOL tax liability of services, the general rule states that: "[t]he gross receipts from the performance of services shall be attributed to the definite place of business at which the services are performed or, if not performed at any definite place of business, then to the definite place of business from which the services are directed or controlled." Va. Code § 58.1-3703.1(A)(a)(4). [Emphasis added.]

The statute does make a provision in those instances where the taxpayer 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. In these instances, gross receipts of the business must be apportioned between the definite places of businesses on the basis of payroll. However, the general rule (gross receipts are attributed to the definite place of business at which the services are performed) is the first consideration in determining the attribution of gross receipts to a given jurisdiction for BPOL tax purposes. In other words, the payroll apportionment method is to be used only when it is impossible or impracticable to determine (in order): (i) the definite place of business at which the services are performed or, (ii) the definite place of business from which the services are directed or controlled.

In this case, the Taxpayer contends that it is able to account for the receipts directly attributable to its performance of services in the County. Therefore, the Taxpayer maintains that these and only these receipts constitute the Taxpayer's taxable measure in the County for purposes of the BPOL tax.

The County informed the Taxpayer that "One hundred percent of the gross . receipts reported to the state of Virginia on your income tax return are subject to taxation in the Virginia jurisdictions in which [the Taxpayer] has a tax situs." The County subtracted the gross receipts reported to other Virginia jurisdictions from the gross receipts reported on the Taxpayer's state income tax return and attributed the remainder to the County for purposes of the BPOL tax. This is not an acceptable methodology. Only those receipts attributable to the definite place of business in a jurisdiction are subject to that locality's BPOL tax. Under Va. Code § 58.1-3703.1(A)(3)(b)
    • Gross receipts attributable to a definite place of business in another jurisdiction shall not be attributed to this jurisdiction solely because the other jurisdiction does not impose a tax on the gross receipts attributable to the definite place of business in such other jurisdiction.

It is not clear whether the "other" local jurisdictions the County used in determining the "remainder" which it claimed to be subject to the County tax was an all inclusive list of Virginia localities in which the Taxpayer had a definite place of business. However, this does not matter because the only receipts subject to the County's BPOL tax are those receipts attributed to the Taxpayer's definite place of business in the County. There is no throw-back rule concerning the apportionment of gross receipts among Virginia jurisdictions. In this case, the Taxpayer was able to provide the County with the relevant information pertaining to gross receipts attributable to its definite place of business in the County.

The County cites Short Brothers (USA) v. Arlington, 424 Va. 520 (1992), in asserting that the Court held that "the use of a company's income tax returns to determine taxable gross receipts is a valid method for local business license tax purposes." The County takes the Court's ruling out of context. The fact pattern in Short Brothers was far different from that in the present case. In Short Brothers the taxpayer had only one definite place of business in the state - in the County:
    • Short chose Arlington County as its place of business and conducted all its revenue-generating operations from that office for the period in question. The County was the base of operations for all of Short's leasing activities. Short's salesmen all were based in, and contacted their existing customers from, Arlington County. Short approved all lease transactions, kept its documents, and received payments on its transactions at its Arlington County offices. Short generated its advertising from the County and told potential customers to contact the Arlington office. Short Brothers (USA) v. Arlington 424 Va. 520 (1992).

In the present case, the Taxpayer's headquarters and attendant activities occur in County A. The Taxpayer apportions its income among multiple states and is assessed a BPOL tax in several Virginia localities. The Taxpayer's gross receipts attributed to its business in the County have been identified and should be the basis for the County's assessment of the Taxpayer's BPOL tax.

In Short Brothers, the Taxpayer argued that: (i) the County could not tax revenues generated from sales and leases of property that occurred outside of the Commonwealth; and (ii) in so doing, the County was violating the "fairly apportioned" requirement of Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).1

The Court disagreed with the Taxpayer on both issues, holding that: "[t]he use of that amount to calculate various types of tax liability does not automatically convert a levy from one type of tax to another... [and] Short never presented any evidence to the County or at trial reflecting the apportionment of its gross receipts or reflecting that it would be, or could be, subject to taxation in other jurisdictions for those transactions."

Neither of these questions is germane to the present case. The question at hand is the appropriate methodology to be applied in determining the Taxpayer's gross receipts attributable to the County for purposes of BPOL tax assessments. Neither the question of destination sales of property nor the issue of interstate apportionment is at issue here. In the present instance, the Taxpayer has made a detailed presentation of its use of apportionment for income tax purposes, while demonstrating the amount of gross receipts attributed to its business in the County could be discretely identified.
DETERMINATION

The first rule in determining the situs of a business service and its gross receipts for BPOL tax purposes is the place where the services are performed. The Taxpayer has demonstrated the ability to identify its gross receipts generated by services performed in the County. For this reason, I will not address the Taxpayer's secondary proposal of payroll apportionment. This is a methodology to be utilized only when the definite place of business at which the services are performed, or the definite place of business from which the services are directed or controlled cannot be determined.

Accordingly, I am returning this matter to the County with the instruction to recalculate its BPOL tax assessment for license years 1998 and 1999 on the basis of the gross receipts attributed to the Taxpayer's services performed in the County.

If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
                • Sincerely,


                    • Kenneth W. Thorson
                  Tax Commissioner

AR/40794H
1 In Complete Auto Transit The Court determined that state taxation of businesses engaged in interstate commerce complies with the requirements of the Due Process Clause and the Commerce Clause if: (1) the tax is applied to an activity that has a substantial nexus with the taxing jurisdiction; (2) the tax is fairly apportioned; (3) the tax does not discriminate against interstate commerce; and (4) the tax is fairly related to the services provided by the taxing jurisdiction. Id. at 279.

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46