Document Number
05-1
Tax Type
BPOL Tax
Description
Gross receipts attributed to business in other states
Topic
Allocation and Apportionment
Taxable Transactions
Date Issued
01-18-2005

January 18, 2005




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 1999 and 2000.

The following determination is based on the facts presented to the Department, as summarized below. 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.policylibrary.tax.virginia.gov.

FACTS

The Taxpayer is an Internet service provider headquartered in the County. ***** . During the tax years in question, the Taxpayer maintained offices in two other Virginia localities. Additionally, the Taxpayer maintained offices, including call centers, in other states. These offices served such functions as maintaining the Taxpayer's data networks and creating content for its on-line services.

The major source of the Taxpayer's gross receipts is its service or subscription revenues, although it does generate some revenue from merchandise sales. The question in this case is where the Taxpayer's gross receipts generated from its service or subscription sales should be attributed for purposes of the BPOL tax.



The County audited the Taxpayer and issued an assessment reflecting a substantial increase in the Taxpayer's BPOL tax liability. The Taxpayer disagreed with the County's assessment and filed an application for review with the County for license tax years 1999 and 2000. In its final local determination, the County denied the Taxpayer's application for relief. The Taxpayer appeals the County's final local determination to the Department.

The Taxpayer has presented evidence that sets out the total revenues attributed to business in each state. The service portion of these revenues is based on actual billings sourced geographically by member address. This information was not presented in the Taxpayer's initial application for review to the County. After an extended period of discussion between the Taxpayer and the County that occurred subsequent to the issuance of the final local determination, the County reasserted its original position that all the gross receipts generated from the Taxpayer's service or subscription sales must be allocated to the County. The County would then apportion those receipts among the Taxpayer's three locations in Virginia based on payroll.

The Taxpayer has appealed the final local determination to the Tax Commissioner, incorporating the new facts (reporting receipts generated by sales of services by state) presented earlier to the County. The County has not altered its position subsequent to the Taxpayer's filing of the appeal to the Tax Commissioner. This determination is based upon the new facts presented in the appeal to the Tax Commissioner.

The Taxpayer's Position

The Taxpayer contends that, for purposes of the BPOL tax, it should be allowed to deduct from gross receipts those receipts attributable to other states in which it files an income or income-like tax return as required by law 1. These gross receipts would include gross receipts attributed to both service revenues and merchandise sales. After the out-of-state deductions are taken, the Taxpayer would apply payroll apportionment to determine the percentage of gross receipts allocated to Virginia that should be apportioned to the County.

Clarifying its position, the Taxpayer asserts that the following formula should be used for purposes of calculating the BPOL tax due to the County:

    • Total Revenue (Nationwide on-line service and merchandise sales revenues) Minus gross receipts subject to an income or an income-like tax in other states in which the Taxpayer is required to and does file a return *
      Equals Gross receipts attributed to Virginia for purposes of the BPOL tax Multiplied by (County payroll/Virginia payroll)
      Multiplied by County BPOL tax rate
      Equals BPOL tax due to the County

* These receipts are calculated by the actual billings sent to subscriber addresses in each state and receipts attributed to merchandise sales.

Using this formula, approximately 95.8 percent of the Taxpayer's total revenues in tax year 1999 were generated by the Taxpayer's business in other states that impose an income or an income-like tax where the Taxpayer was required to file a return. In tax year 2000, the percentage of the Taxpayer's out-of-state revenues was 85.9 percent.

The County's Position

The County maintains that, as the place from which the services are directed or controlled, all of the Taxpayer's on-line service revenue should be allocated to the County. In determining the Taxpayer's BPOL tax assessment, the County states that although the Taxpayer's merchandise sales constitute a separate business activity, because of the "overwhelming magnitude of the Taxpayer's subscription revenues as compared to merchandise sales," the County treated these sales as ancillary to the Taxpayer's primary business and did not assess the merchandise sales as a separate business. The County did, however, deduct the gross receipts derived from the Taxpayer's merchandise sales in other states where the Taxpayer was subject to and had filed an income or an income-like tax return.

The County relies on the sales factor as defined in Va. Code § 58.1-416 2 and reported on the Taxpayer's Virginia corporate income tax in determining the allocation of the Taxpayer's gross receipts attributed to its service revenues. The County states:
    • Based on 'cost of performance,' it is clear that at least 50% of all [the Taxpayer's] revenue should be taxable in Virginia for BPOL purposes. More importantly, based on the fact that 100 percent of service fees were allocated to Virginia in the sales apportionment factor on [the Taxpayer's] Virginia State income tax return, we determined that all Service revenue should be taxable in Virginia, without deduction." [Emphasis in original.]

The County apportioned the remainder of all the Taxpayer's receipts among the three Virginia localities where it had a definite place of business. The County's assessment method is:
    • Total Revenue (Nationwide on-line service and merchandise sales revenues) Minus Merchandise Sales subject to out-of-state deduction
      Multiplied by (County payroll/Virginia payroll)
      Multiplied by County BPOL tax rate
      Equals BPOL tax due to the County

In summary, the dispute between the Taxpayer and the County is two questions: (1) In calculating a BPOL tax assessment, at what point should the out-of-state deduction be considered, and how is it computed? and (2) Does the sales factor, as reported for Virginia corporate income tax purposes, control the standard for assessing the BPOL tax or in determining the receipts qualifying for the out-of-state deduction? Ancillary to these questions but relevant to the determination is the issue of payroll apportionment used in determining a taxpayer's local BPOL tax liability.

ANALYSIS

Taxation of Services

In determining the situs of gross receipts, Va. Code §§ 58.1-3703.1 A 3(a)(4) and 58.1-3703.1 A 3(b) state 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; and as a last resort, or (iii) when it is impossible or impracticable to determine where the service is performed or from where the service is directed or controlled, by payroll apportionment between definite places of business.

Definite Place of Business and Out-of-State Deduction

The BPOL tax is based on a taxpayer's gross receipts, which are defined in Va. Code § 58.1-3700.1 as "the whole entire total receipts, without deduction." There are some specific deductions that a taxpayer may take as provided for in the Code of Virginia. Included among these is the deduction for "any receipts attributable to business conducted in another state." See Va. Code § 58.1-3732 B 2. The regulations further provide that the taxpayer must be liable for an income or an income-like tax in the other state and file a return in that state to take advantage of the deduction. 2000 BPOL Guidelines§ 2.6.

The County's position is that because the Taxpayer does not have a definite place of business in other states 3, all receipts must be allocated to Virginia. These receipts are subject to payroll apportionment for purposes of apportioning the receipts among the three Virginia locations without a deduction for gross receipts generated from the Taxpayer's services provided in other states where it is liable for an income or income-like tax.

The County's position that the out-of-state deduction is not available because the Taxpayer does not have a definite place of business in other states is contrary to the Tax Commissioner's ruling in Public Document (P.D.) 01-5 (1/4/01). That case involved the BPOL taxation of receipts generated by services performed in another state where the taxpayer did not have a definite place of business, but was liable for an income or an income-like tax.
    • As the Taxpayer does not have a definite place of business in Pennsylvania, the receipts derived from the Pennsylvania contracts are attributable to your locality under Code of Virginia § 58.1-3703.1(a)(4). However, you must allow a deduction for any receipts included in this measure which are also `attributable to business conducted in another state or foreign country in which the business is liable for an income or other tax based upon income.' Code of Virginia § 58.1-3732 B 2. [Emphasis added.]

In summary, 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 attributed to its activity in those states. The deduction is allowed even if the taxpayer does not have a definite place of business in those states. In the Taxpayer's case, it is entitled to deduct from its gross receipts allocated to Virginia those receipts attributable to business conducted in another state in which the Taxpayer is liable for an income or income-like tax, even if the Taxpayer does not maintain a definite place of business in the state.

In calculating a BPOL tax assessment, at what point should the out-of-state deduction be considered?

In those instances where a taxpayer has a definite place of business in another state, the preferred approach is to assign gross receipts to each office, both out-of-state and in Virginia, following the statutory hierarchy set out above. From the receipts assigned to an office in Virginia, certain deductions are authorized by statute, including a deduction for receipts attributable to states in which the taxpayer is subject to an income-based tax. The deduction is allowed to the extent that the receipts to be deducted were assigned to a Virginia office in the first step.

The County contends that even if it agreed that the deduction for gross receipts attributable to sales of services in other states were permitted, it would be impossible to source receipts to the appropriate states, because the service is mobile. One can access the Internet provider from anywhere in the country. Receipts attributable to billing addresses do not necessarily reflect where the service is performed.

The Taxpayer disagrees, contending the services are billed to the subscriber's billing address and that even though such services may occasionally occur elsewhere, such as when one is traveling and accesses the Taxpayer's Internet service from a site other than his billing address, it is presumed that the subscriber is receiving the vast majority of his service at the billing address. If such services are not directly received at his billing address (e.g., the billing address is a post office box), generally the preponderance of services is delivered within the state of his mailing address. The Taxpayer acknowledges this measurement may not be precise, but asserts that it is the nationally accepted measure for the sourcing of cellular telephone services, which may be considered to be analogous to on-line communications services 4.

Both the Taxpayer and the County initially agreed that all receipts derived from the Taxpayer's Internet service should be allocated to the Taxpayer's offices in Virginia. The difference in their approaches is that the County did not consider the Taxpayer's service revenues subject to the out-of-state deduction before applying payroll apportionment to apportion receipts among the three Virginia localities. The Taxpayer maintains that the out-of-state deductions pursuant to Va. Code § 58.1-3732 B 2 should be allowed before the remaining receipts are apportioned among the three definite places of business in Virginia. Based on the determination outlined above, the County must allow the out-of-state deduction for service revenues subject to an income or income-like tax in another state before applying payroll apportionment to the remaining receipts.

Does the sales factor, as reported for Virginia corporate income tax purposes, control the standard for assessing the BPOL tax or in determining the receipts qualifying for the out-of-state deduction?

The County's reliance on either cost of performance measures or the sales factor reported on the Taxpayer's Virginia corporate income tax return in assessing BPOL tax liability is contrary to established policy. In P.D. 97-490 (12/19/97), the Tax Commissioner made it clear that the deductions for receipts attributable to business done in other states are not to be determined by apportionment factors used in calculating income tax:
    • Gross receipts attributed does not mean apportioned net income or amounts appearing in sales factors or other like factors for apportioning income. It means gross receipts derived from business conducted in another state or foreign country regardless of whether the full amount or a portion of such gross receipts are subject to income tax in another state or foreign country. [Emphasis added.]

This position was reaffirmed in P.D. 03-15 (03/10/03), in which the Tax Commissioner found:
    • Whether a business's gross receipts are attributed to the sale of tangible property or to the cost of services performed, the methodology used in calculating those receipts for purposes of the Virginia corporate income tax is unique to that tax. The sales factor a taxpayer reports on its Virginia corporate income tax return is based upon a measure of taxable receipts that may be different from the measure used in the calculation of a taxpayer's gross receipts for purposes of the BPOL tax.

In other words, the best method of measuring revenues from business done in other states is based on actual receipts from the sale of goods or services generated in those states. Again, in P.D. 97-490, the Tax Commissioner stated: "I concur that it would be proper to measure the gross receipts deduction with reference to the revenue derived from customers located in a state or country other than Virginia." [Emphasis added.] In this case, the Taxpayer has submitted evidence of receipts derived from customers located outside Virginia.

Payroll Apportionment

Having determined the gross receipts that qualify for the out-of-state deduction, the question remains - How are the Taxpayer's remaining gross receipts to be apportioned within Virginia? The Taxpayer has three definite places of business in Virginia that engage in operational activities. The Taxpayer and the County have agreed that the best method of determining apportionment in this case is that of payroll apportionment. I see no reason to suggest that this methodology should be changed. Payroll apportionment between the three definite places of business in Virginia appears to be the most efficient method of apportioning the Virginia receipts for purposes of the BPOL tax.


DETERMINATION

The Taxpayer has furnished figures that set out the total revenues attributed to customers in each state. The service portion of these receipts is based on "actual billings sourced geographically by member address." The County may require proof that the Taxpayer is subject to an income tax or income-like tax on those receipts and, in fact, filed a return in each state in which the Taxpayer is claiming a deduction for business attributable to that state.

It is my determination, therefore, that the Taxpayer must provide the County with any additional state income tax returns the County may require within 45 days of the receipt of this determination. The County must use the information the Taxpayer provides as evidence for gross receipts attributed to business in other states and deduct these receipts from the Taxpayer's taxable base in accordance with the provisions of Va. Code § 58.1-3732 B 2. After those receipts are deducted, payroll apportionment may be used to apportion taxable receipts among the three Virginia localities.

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/42872H
1 Section 58.1-3732 B 2 of the Code of Virginia provides a deduction for receipts "attributable to business conducted in another state or foreign country in which the taxpayer (or its shareholders, partners or members in lieu of the taxpayer) is liable for an income or other tax based upon income." The 2000 BPOL Guidelines § 2.6 notes that a taxpayer needs to file a return in these states, even if there is no actual tax liability in a given year, to claim the deduction.
2 In determining when the sales other than sales of tangible personal property are attributable to the Commonwealth for purposes of the corporation income tax, Va. Code § 58.1-416 provides that if (i) the income-producing activity is performed in the Commonwealth; or (ii) the income-producing activity is performed both in and outside the Commonwealth and a greater proportion of the income-producing activity is performed in the Commonwealth than in any other state, based on costs of performance such sales shall be attributable to the Commonwealth.
3 This is contrary to information provided by the Taxpayer indicating it maintains offices in other states. The extent to which the Taxpayer conducts its primary business from these offices is unclear.
4 This idea is consistent with the principles in both the federal Mobile Telecommunications Sourcing Act (MTSA) and Va. Code 58.1-3812, both of which provide for the sourcing of cellular telephone services to the subscriber's primary address for purposes of local taxation of mobile cellular telephone service. It should be noted, however, that these taxes, while based on usage, are more like the sales tax in that they are levied directly on the consumer.

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46