Tax Type
BPOL Tax
Description
Gross receipts, Sales made in other states
Topic
Computation of Income
Property Subject to Tax
Date Issued
07-19-2005
July 19, 2005
Re: Application for Correction of Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Business, Professional and Occupational License 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 the methodology used by the Commissioner of the Revenue of the ***** (the "City") in assessing the Business, Professional and Occupational License ("BPOL") taxes for tax years 2000, 2001, 2002 and 2003.
The following determination is based on the facts presented to the Department summarized below. Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov.
FACTS
The Taxpayer is a catalog retailer that sells its merchandise through catalogs, via the Internet, and in outlet stores. The outlet stores are located in several states, including two in Virginia, one of which is in the City. The Taxpayer's national distribution warehouse is also located in the City. The Taxpayer's gross receipts from the retail store sales are not in dispute. For accounting purposes, they are segregated from the activity of the catalog sales, and the two Virginia stores file their own BPOL tax returns.
The Taxpayer has call centers through which it facilitates the execution of catalog sales throughout the country. The centers are located in the City and two other states. It is the situs of the gross receipts attributed to sales made to the Taxpayer's customers from the call center in the City that are at issue.
In computing its gross receipts subject to the City's BPOL tax, the Taxpayer began by deducting from its total gross receipts amounts "directly traceable . . . to states other than Virginia." The Taxpayer then apportioned the remaining gross receipts on the basis of payroll in the three states where its call centers are located. Using this methodology, the Taxpayer filed amended BPOL tax returns with the City for tax years 2000 through 2004.
The City disallowed the Taxpayer's deduction for gross receipts attributable to other states, noting the Taxpayer had not provided the City with sufficient documentation to permit the deduction. The City then assessed the Taxpayer on the basis of payroll apportionment, excluding the payroll of the Taxpayer's creative and marketing departments. In denying the inclusion of the payroll of these departments, the City concluded that the business activity of these departments did not constitute solicitation as defined in the 2000 BPOL Guidelines § 1: Effective July 1, 2001, the BPOL Guidelines were accorded the weight of regulation under Va. Code § 58.1-205.
"Sales solicitation does not include nonsolicitation activities prior or subsequent to sales solicitation activities."
The Taxpayer appeals the assessment, asserting that the creative and marketing departments should be included in any payroll apportionment scheme, and that the City's methodology fails to take into consideration the out-of-state deduction provided in Va. Code § 58.1-3732 B 2.
ANALYSIS
The BPOL tax is based upon the gross receipts attributed to a licensable business activity conducted within a given jurisdiction, with certain exclusions and deductions provided by law. Virginia Code § 58.1-3703.1 A 3 a (2) provides:
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- The gross receipts of a retailer or wholesaler shall be attributed to the definite place of business at which sales solicitation activities occur, or if sales solicitation activities do not occur at any definite place of business, then the definite place of business from which sales solicitation activities are directed or controlled.
In the case of multistate businesses, a taxpayer's accounting practices may make the attribution of gross receipts to a single definite place of business or to a point of control difficult. In such cases, the statute provides for the use of payroll apportionment.
Payroll Apportionment
When a taxpayer has more than one definite place of business and it is impractical or impossible to determine to which definite place of business the receipts should be attributed under the general rule, a taxpayer may apportion the gross receipts among the definite places of business by payroll. See Va. Code § 58.1-3703.1 A 3 b. In this case, the Taxpayer asserted that it would be difficult to reflect accurately the actual receipts generated by each of its three definite places of business, and used the methodology described above. The City does not challenge the Taxpayer's use of payroll apportionment; rather, the City objects to the Taxpayer's calculation.
In determining payroll to be used for apportionment purposes, the Taxpayer can include only those employees engaged in the Taxpayer's licensed activity in the City. Virginia Code § 58.1-3703.1 A 3 a (2) only stipulates that the gross receipts of a retailer shall be attributed to the definite place of business at which sales solicitation activity occurs. The statute does not stipulate that only the payroll of those employees actively engaged in sales solicitation shall be used for apportionment purposes.
This question was previously addressed in Public Document ("P.D.") 97-308 (07/22/1997). In that case, the Tax Commissioner found that in determining payroll used for apportionment purposes, a "governing body may include only those employees who directly participate in the businesses' licensed activity." The Taxpayer's business activity is that of catalog and Internet retail sales. The Taxpayer is not solely engaged in the business of sales solicitation. The local commissioner of the revenue must make the factual determination as to the extent to which administrative personnel and those employees in the Taxpayer's creative and marketing departments are directly involved in the business of catalog and Internet sales. The payroll of those personnel directly involved in the business of catalog and Internet sales would be included for purposes of determining apportionment.
Out-of-State Deduction
Absent any exclusions or deductions provided for by statute, the Taxpayer's gross receipts attributable to the sales solicitation activity conducted in the City would be subject to the City's BPOL tax. Among the deductions provided for by statute, however, is the deduction for:
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- Any 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. See Virginia Code § 58.1-3732 B 2.
The 2000 BPOL Guidelines § 2.6, Example 1, describes a hypothetical scenario that is similar to the Taxpayer's situation:
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- Merchant sells goods to a North Carolina resident and ships the goods to him in that state. Gross receipts from the sale of the goods are attributable to a definite place of business in Virginia. North Carolina imposes an income tax and Merchant files a North Carolina income tax return. Merchant reports sales delivered to customers in North Carolina in the numerator of its sales factor for North Carolina income tax apportionment purposes. Gross receipts from sales delivered in North Carolina are deductible from Merchant's Virginia BPOL taxable gross receipts (or the cost of the purchases are deductible from the tax base if the merchant is taxable on purchases.)
The Guidelines emphasize that a taxpayer must file an income or income-like tax return in another state or foreign country in order to qualify for the deduction provided under Va. Code § 58.1-3732 B 2. While a taxpayer does not necessarily have to have paid a tax in another state, it must offer proof that it is required to, and has filed, an income or income like tax return in order to qualify for the deduction.
Public Document ("P.D.") 98-42 (03/06/1998) specifically addresses the BPOL taxation of gross receipts attributed to sales made from a call center in a Virginia locality. In that advisory opinion, the Tax Commissioner found the gross receipts attributed to telephone sales from a Virginia-based call center are subject to the local BPOL tax. From these gross receipts, the locality is required to deduct the receipts from business conducted in other states that are subject to an income tax or income-like tax. The taxpayer must, however, provide the locality with documentation (proof of income tax filings) to support the deduction.
The Department has addressed the interpretation of this provision in several public documents. See Public Documents (P.D.) 97-490 (12/19/97), P.D. 98-41 (3/6/98), P.D. 02-165 (12/19/02), P.D. 05-1(01/18/05) and P.D. 05-58 (04/12/05).
DETERMINATION
In this case, in order to calculate the gross receipts generated by business activity at the call center in the City, the payroll apportionment method is properly used. The payroll of those personnel directly involved in the business of catalog and Internet sales must be included for purposes of determining apportionment. The Commissioner of the Revenue must make the factual determination regarding the extent to which employees in the Taxpayer's creative and marketing departments are directly involved in the business of catalog and Internet sales.
The Taxpayer is entitled to deduct those receipts attributable to sales made in other states where the Taxpayer files an income or income-like tax return. The Taxpayer is not liable for a tax on those receipts attributable to sales in other states where it is liable for, and filed, income or income-like tax returns.
I am remanding this appeal to the City with the instruction to reconsider its determination. If requested by the City, the Taxpayer must provide supporting documentation in order to claim the out-of state deduction.
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/53916H
Rulings of the Tax Commissioner