Tax Type
BPOL Tax
Description
Provider of information technology services
Topic
Computation of Tax
Local Power to Tax
Returns/Payments/Records
Date Issued
08-31-2004
August 31, 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 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 1998,1999, 2000 and 2001. I apologize for the delay in the Department's response.
You also ask that the Tax Commissioner review a refund request made by you to the ***** (the "Town"). The Town has not issued a final local determination of the Taxpayer's BPOL assessment. Therefore, the Tax Commissioner cannot consider the Taxpayer's request for a review of the request for a refund of BPOL taxes paid to the Town.1
This state determination will only address the Taxpayer's appeal of the audit assessment made by the County for tax years 1998, 1999, 2000 and 2001.
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 provider of information technology services that specializes in meeting requirements for government budget software, education technology infrastructure, systems management and document management. It services clients from many sectors, but primarily defense agencies and public school systems. It is headquartered in the Town and maintains five customer service centers - four in other states and one in the County. Its office in the County primarily supports federal sector clients. The Taxpayer's employees in this office include experts in network engineering and management, software engineering and configuration management, and web-based software solutions. The Taxpayer maintains a network-engineering laboratory on premises for testing and evaluating new and emerging client requirements.
The Taxpayer's other regional offices serve different clients and concentrate on technological support systems for these clients. The office in the County has been described by the Taxpayer as "merely a satellite office created for the convenience of [its] federal clients."
The Taxpayer's primary research and development facilities are located in the Town. Some of its employees work at both locations in the Town and the County. The Taxpayer states that unlike the regional centers in other states, which have their own independent "cost centers," it has not established a cost center for its offices in the County, nor would it be possible to do so. The County has made its BPOL assessments based on payroll apportionment.
During the audit process, the Taxpayer reported to the County that it had reported all of its gross receipts to the Town for tax years 1998, 1999 and 2000.
ANALYSIS
Gross Receipts
The BPOL tax is a local license tax imposed on the privilege of doing business. It is based on an entity's gross receipts. For BPOL tax purposes, "gross receipts" are defined as "the whole, entire, total receipts, without deduction." See Virginia Code § 58.1-3700.1.
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. The fact that the Taxpayer has a definite place of business in the County is not in dispute. It promotes its County office in its literature as posted on the Internet.
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." Virginia Code § 58.13703.1(A)(3)(a). This general rule is applied to professional, 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. Virginia Code § 58.1-3703.1(A)(3)(a)(4).
The Taxpayer performs different types of customer service at each of its four out-of-state regional customer services offices. While its headquarters is located in the Town, the Taxpayer has significant personnel working from its office in the County performing significant services for various governmental entities from its County offices. Indeed, the Taxpayer states that the County office was established for the "convenience of the [Taxpayer's] federal customers who are located in the ***** and the *****". The Taxpayer defines the mission of the County's office on its web site as:
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- [The Taxpayer] is dedicated to supporting federal sector clients including the *****. Staffing includes experts in all phases of network engineering and management, software engineering and configuration management, and web-based software solutions.
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- [The Taxpayer] maintains an extensive network-engineering laboratory for testing, evaluating, and anticipating new and emerging client requirements. Current work includes planning for video-on-demand, ATM networks, and Windows 2000 migrations. Leading this work is a large cadre of technical specialists with certifications from Microsoft, Cisco, and others.
In this case, the Taxpayer is clearly performing services from its location in the County.
Apportionment
Virginia Code § 58.1-3703.1(A)(3)(b) states that if the licensee 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 gross receipts of the business shall be apportioned between the definite places of businesses on the basis of payroll.
The Taxpayer has a definite place of business in the County, but was unable to provide the County with a clear accounting of gross receipts directly attributable to the County. In tax years 1998, 1999, and 2000, the Taxpayer reported its entire Virginia gross receipts to the Town. In this case, because the Taxpayer has more than one definite place of business and it cannot attribute gross receipts under the general rule, apportionment by payroll is appropriate.
Deductions and Special Limitations on Gross Receipts
Even though the general definition states that gross receipts mean "the whole, entire, total receipts, without deduction," Va. Code § 58.1-3732 provides certain deductions and exclusions from gross receipts. The deductions include:
Ø Any amount paid for computer hardware and software that are sold to a United States federal or state government entity provided that such property was purchased within two years of the sale to the entity by the original purchaser. The original purchaser must have been contractually obligated at the time of purchase to resell such property to a state or federal government entity.2 [Emphasis added.]
For purposes of apportionment, deductions and exclusions must be calculated before the apportionment method can be determined. This would include the method of using Virginia payroll. If, as in this case, the Taxpayer filed an income tax or "income tax like" return in other states, the income attributed to those returns must be deducted from the Taxpayer's gross receipts before intrastate apportionment occurs.
Likewise, if the Taxpayer has executed a contract with a federal or state government requiring it to purchase computer software and hardware for use in research and development for such agency and then resell the equipment to the agency within two years at original cost, the receipts from the sale to the agency are to be deducted from the Taxpayer's gross receipts in the year in which the resale occurs. Again, these receipts are to be deducted from the Taxpayer's total gross receipts before apportionment occurs.
In simple terms, gross receipts subject to apportionment are as follows:
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- Gross receipts - (deductions, exclusions and exemptions) = gross receipts subject to apportionment.
Tax Rates for Certain Federal Contracts
Virginia Code § 58.1-3706(D)(1) limits the tax rate applicable to certain federal contracts:
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- Any person, firm, or corporation designated as the principal or prime contractor receiving identifiable federal appropriations for research and development services as defined in § 31.205-18 (a) of the Federal Acquisition Regulation in the areas of (i) computer and electronic systems, (ii) computer software, (iii) applied sciences, (iv) economic and social sciences, and (v) electronic and physical sciences shall be subject to a license tax rate not to exceed three cents per $100 of such federal funds received in payment of such contracts upon documentation provided by such person, firm or corporation to the local commissioner of revenue or finance officer confirming the applicability of this subsection.
The Taxpayer has demonstrated the ability to segregate the monies it receives from federal agencies for the provision of such services. Therefore, the apportionment formula described above applies to this case. The gross receipts attributable to a locality based on payroll apportionment as described above are to be taxed at the following rates:
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- ($ amount of % of qualifying gross receipts) x rate (.03 per $100) = $XXX
) = $YYY-
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- TAX DUE = $ZZZ
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DETERMINATION
It is my determination that the methodology outlined above for use in determining gross receipts taxable by any jurisdiction within the Commonwealth is that which should be followed by the County. The Taxpayer must provide the County with evidence that: (1) it filed tax returns in other states where it does business, and (2) it resold computer hardware and software acquired in conjunction with its federal and state contracts back to the entities within the prescribed time period. Finally, the Taxpayer must furnish the County with documentation substantiating any qualified funding received from the federal government for its research and development activity. Such evidence must be provided for each tax year in dispute.
The Taxpayer's request for refund from the Town is not under consideration in this determination. To the extent that it erroneously attributed all of its gross receipts to the Town for BPOL tax purposes in 1998, 1999, and 2000, it should work with the Town and the County to resolve this error.
If you have questions regarding this determination, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/38754H
1 [Any] person assessed with a local license tax as a result of an audit may apply within ninety days of the determination by the assessing official upon an application for correction pursuant to subdivision 5 a, to the Tax Commissioner for a correction of such ssessment. Virginia Code § 58.1-3703.1(A)(5)(c) in effect until July 1, 2002.
2This deduction shall not occur until the time of resale and shall apply to only the original cost of the property and not to its resale price, and the deduction shall not apply to any of the tangible personal property which was the subject of the original resale contract if it is not resold to a state or federal government entity in accordance with the original contract obligation. Virginia Code §58.1-3732.
Rulings of the Tax Commissioner