Tax Type
BPOL Tax
Description
Worldwide payroll apportionment; Gross receipts
Topic
Accounting Periods and Methods
Allocation and Apportionment
Computation of Tax
Date Issued
06-02-2004
June 2, 2004
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 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 ***** (the "County") for tax years 1998, 1999 and 2000.
The local license tax and fee are imposed and administered by local officials. Virginia 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. Copies of the Code of Virginia sections, regulations and public documents cited are available on-line 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 multinational company engaged in computer information retrieval services. Its worldwide headquarters are in ******* ("State A"), and it maintains its computer mainframes in ***** ("State B") and ***** ("Country C"). For income tax purposes, the Taxpayer apportions its domestic income among 22 states. It also has offices in 32 foreign countries. These offices are directed or controlled by an affiliate in the ***** ("Country D").
Approximately 40 percent of the Taxpayer's gross receipts as reported on its federal income tax return are attributed to foreign sales. All of the Taxpayer's domestic sales and marketing activities are directed and controlled from its worldwide headquarters in State A.
The Taxpayer's promotional brochure offers the following description of its services:
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Subscribers to the Taxpayer's information retrieval services, who are located in the United States, are offered training and some technical support services in 6 locations throughout the United States, including the Taxpayer's location in the County. Most technical support services are offered either on-line, or through the Taxpayer's customer support group located in State A. Foreign subscribers are similarly serviced by locations in 16 other countries. Ninety-eight percent of the Taxpayer's actual domestic sales of the services are generated in its worldwide headquarters in State A. The Taxpayer's foreign sales and marketing divisions are controlled by its offices in Country D. Domestic payrolls are controlled from its location in State A and foreign payrolls are controlled from its office in Country D. The actual provision of the service, data information retrieval services, occurs in State B or in Country C via an Internet or extranet connection, depending upon the service desired.
The Taxpayer has more than 950 employees worldwide. Sixteen of the Taxpayer's employees are located at the Taxpayer's office in the County. These employees consist of a regional vice president for sales and eight sales related employees, five members of its technical support force, two training specialists and an administrative assistant.
The Taxpayer's gross receipts are based on charges for database usage. When a client subscribes to one of the Taxpayer's information retrieval services, it may pay an annual flat fee based on estimated usage, or agree to be charged for actual database usage time, depending upon the nature of the contract. In those cases where a client is charged a flat fee, the Taxpayer allocates the fee to various jurisdictions for tax purposes based on the location of the client's usage. In other words, if a client paid a ***** annual flat fee, and actually used ***** of database time in 5 different states, the Taxpayer would apportion 90.9 percent ***** of the usage time amongst all of the states for tax reporting purposes. Under this scenario, if the client's usage time in Virginia were actually ***** the Taxpayer would report ***** in gross receipts to Virginia for income tax purposes. The amount of the total usage everywhere that is apportioned to the different jurisdictions in cases of the flat fee reflects the ratio of the client's usage time in each state to the total usage multiplied by the percent difference in the client's gross flat fee and the client's gross actual time used.
The cost of the technical services the Taxpayer provides its customers either through the Internet, its customer support center in State A or technical support service personnel located in its regional offices, including that in the County, is built into the Taxpayer's contracts with its individual clients. The training seminars the Taxpayer conducts constitute a separate source of receipts. Customers are separately billed for participation in these seminars.
The primary function of the Taxpayer's employees in the County is the "execution of a sales strategy determined by the upper level management" located in State A. While all domestic sales are directed and controlled by the headquarters' office in State A, a vice president of sales, who is tasked with developing and implementing sales strategies within the designated geographic area, is based in the County. This person reports to the senior executive vice president of sales, who is based in State A. In other words, sales of the Taxpayer's services to businesses within a defined region are made from the Taxpayer's County office under the ultimate direction from the Taxpayer's office in State A. Secondary activities performed in the Taxpayer's office in the County are those of providing technical support to servicing existing contracts and conducting training seminars, which are offered for a separate fee.
The County has assessed the Taxpayer for BPOL tax based on worldwide payroll allocation. The Taxpayer contends that worldwide payroll apportionment is not an appropriate measure of the actual business services it provides in the County. Rather, it argues that because its information retrieval services are directed and controlled outside Virginia (in State B), all related activity is directed and controlled from its location in State A. The Taxpayer concedes tax is due on the gross receipts generated through its training services performed in the County.
As an alternative, the Taxpayer suggests that an appropriate measure of its gross receipts for the purposes of the BPOL tax could be those gross receipts attributed to computer usage of its services by customers operating in the County, plus those receipts attributable to the training services performed at its location in the County.
The Taxpayer requests the Department to reverse the County's assessments for tax years 1998, 1999 and 2000.
ANALYSIS
Statutory Authority
For purposes of the BPOL tax, "business" implies a regular and continuous course of dealing, rather than an irregular or isolated transaction. A rebuttable presumption that a person is engaged in a business may be found in (i) advertising or otherwise holding oneself out for business or (ii) the filing of tax returns, schedules and documents only required of those engaged in a trade or business. "Definite place of business" means an office or a location at which occurs a regular and continuing course of dealing for thirty days or more. See Va. Code § 58.1-3700.1.
The Taxpayer has a definite place of business in the County from which develops sales strategies and solicits sales. From the County location, the Taxpayer also offers technical assistance to existing clients and database training seminars to its clients.
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 Va. Code § 58.13703.1(A)(3)(a). This general rule is applied to business and personal services as follows:
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- The 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 a definite place of business, then from the definite place of business from which the services are directed or controlled. Va. Code § 58.1-3703.1(A)(3)(a)(4).
In this instance, the actual services (computer information retrieval services) were performed in either State B or Country D, and the activities of the Taxpayer's office in the County were controlled and directed from State A. Because these services were directed or controlled from a place of business outside Virginia, the gross receipts generated from these services are not attributable to the Taxpayer's office in the County.
The provision of technical support services to customers in the County and neighboring jurisdictions is generated from a definite place of business in the County. The technical support services it offers out of its various regional offices, including that in the County, are built into the usage charges assessed the Taxpayer's clients and are considered ancillary to the provision of the actual database services. The majority of technical support services offered by the Taxpayer are offered on-line or through direct consulting with the customer support unit located in State A.
The Taxpayer has separately identified the income generated by its training programs. Charges for these programs are separate from its subscription fees and represent revenues specific to the licensable business activity in the Taxpayer's office in the County.
Apportionment
If a Taxpayer subject to the BPOL tax has more than one definite place of business in different jurisdictions and "it is impractical or impossible to determine to which definite place of business gross receipts should be attributed under the general rule, the gross receipts of the business shall be apportioned between the definite places of businesses on the basis of payroll." Va. Code § 58.1-3703.1(A)(3)(b).
The County has used worldwide payroll apportionment in determining the Taxpayer's BPOL tax assessment. Payroll apportionment, however, is a method of last resort to be used only when 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 under the general rule.
The services that the Taxpayer offers through its office in the County that are not integral to its overall business of the provision of computer information retrieval services would be the separate training seminars it offers to customers. These seminars are offered for a separate fee that is not included in the base that the Taxpayer charges its clients for the usage of its information retrieval services and the accompanying technical support, whether the support is provided on-line or through personal contacts with company employees. These training seminars are subject to the local BPOL tax.
In regard to the technical support services, it is clear that a portion of the Taxpayer's revenue is derived indirectly from providing technical support services from its office in the County. To determine the receipts from this activity attributable to the County, a calculation is required that would apply worldwide payroll apportionment of technical support personnel (including supervisory personnel, but not the entire payroll of the Taxpayer) to the gross receipts attributable to the rendition of technical support services. Because the technical support services are included in the base price for Internet search time and not separately billed (like the training services are), I find that it is incumbent upon the Taxpayer to "unbundle" the technical support gross receipts using a methodology such as an allocation based upon the relative cost of doing business for these two activities, "search" on the one hand and "technical support" on the other, against the total gross receipts for the search contracts in which the technical support services are bundled. The burden is upon the Taxpayer to make this allocation. If the Taxpayer is unwilling or is unable to meet the requirements of the second calculation, i.e., unbundle its gross receipts, the County may appropriately use worldwide payroll apportionment to the entire gross receipts from the search contracts.
DETERMINATION
In this case, the basis for the Taxpayer's BPOL tax liability to the County is: (1) the receipts attributed to the separate fee billed for the training seminars and (2) the receipts derived indirectly from providing technical support services from the office in the County. Accordingly, the County should recalculate the Taxpayer's BPOL tax owed for tax years 1998, 1999 and 2000 based on the findings of this determination. If the Taxpayer is unwilling or is unable to meet the requirements of the calculation relating to technical support services, i.e., unbundle technical support receipts using the methodology outlined above, the County may use worldwide payroll apportionment to the entire gross receipts from the search contracts. In other words, the current assessment would stand.
If you have any questions regarding this determination, you may contact ************ in the Department's Office of Policy and Administration, Appeals and Rulings, at *************.
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- Sincerely,
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- Kenneth W. Thorson
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- Tax Commissioner
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- Kenneth W. Thorson
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AR/39454H
Rulings of the Tax Commissioner