Tax Type
BPOL Tax
Description
Unverifiable situs of gross receipts based on the Taxpayer's records
Topic
Local Taxes Discussion
Records/Returns/Payments
Date Issued
06-07-2011
June 7, 2011
Re: Appeal of Final Local Determination
Locality: *****
Taxpayer: *****
Business, Professional and Occupational License Tax
Dear *****:
This final state determination is issued upon the application for correction filed by ***** (the "Taxpayer") with the Department of Taxation. The Taxpayer appeals assessments of Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by the ***** (City A) for the 2007 and 2008 tax years.
The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, i.e., 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 summarized below. The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.
FACTS
The Taxpayer operated a call center in City A. The call center performed customer service, took telephone orders and performed various other customer support activities for unrelated third party customers. The Taxpayer also operated a fulfillment center in ***** (the "County"). The fulfillment center performed distribution services, such as receiving, pick-pack-ship, returns handling, cycle counts, gift wrapping, package inserts and various other distribution services for unrelated third party customers. Customers contracted with the Taxpayer for services that were provided by either the call center or the fulfillment center, or services that were performed by both the call center and the fulfillment center. In addition, the Taxpayer operated an information technology (IT) center in the ***** (City B) that provided IT support services to unrelated customers. Customers contracted with the Taxpayer for services that were provided by either the call center, the fulfillment center, or IT support center or any combination of the services that were performed by all three.
City A audited the Taxpayer for the 2007 and 2008 tax years. City A was unable to verify the situs of gross receipts based on the Taxpayer's records and determined Virginia sales reported in the sales factors on the Taxpayer's Virginia corporate income tax returns represented the total gross receipts. Because the IT center generated no gross receipts, City A and the County orally agreed to evenly divide the total gross receipts, resulting in an assessment of BPOL tax for the 2007 and 2008 tax years.
The Taxpayer filed an appeal with City A, contending that City A included all gross receipts in its assessment including those that came from the fulfillment center in the County. In its final local determination, City A upheld that audit assessment, concluding that the Taxpayer did not provide conclusive evidence of the situs of its gross receipts. The City determined it had the authority to apportion gross receipts pursuant to an apportionment agreement with the County.
The Taxpayer appeals City A's final determination to the Tax Commissioner, contending it accurately reported the gross receipts attributable to the call center on its 2007 and 2008 BPOL returns. The Taxpayer asserts that the City erroneously included gross receipts attributable to the fulfillment center in the County when issuing its assessment.
ANALYSIS
Sales Factor
The BPOL tax may be imposed by jurisdictions on "businesses, trades, professions, occupations and callings and upon the persons, firms and corporations engaged therein within the county, city or town." See Va. Code § 58.1-3703. In other words, it is a business' situs and its activity within a given jurisdiction that gives rise to its local BPOL tax liability.
According to the Taxpayer, the documentation it provided to City A accurately reported the gross receipts attributable to the call center. City A contends that because the gross receipts reported by the Taxpayer did not reconcile with the sales or payroll reported on the Taxpayer's income tax returns, it had to use the information available to reasonably determine the amount of gross receipts subject to its BPOL tax. City A believes the receipts reported in the numerator of the Virginia sales factor provide the best representation of gross receipts sitused in Virginia.
The use of the sales factor as a basis for gross receipts has been addressed in numerous rulings, including Public Document (P.D.) 97-490 (12/19/1997), P.D. 01-5 (1/04/2001), P. D. 03-15 (3/10/2003), P. D. 04-46 (8/12/2004), P. D. 05-1 (1/08/2005) and P.D. 08-86 (6/6/2008). In these rulings, the Department found that the sales factor reported on a taxpayer's Virginia corporate income tax return does not necessarily equate to a taxpayer's gross receipts as reported to a jurisdiction for purposes of the BPOL tax. The Department has ruled that the Virginia income tax sales factor is "an unreliable measure of gross receipts for purposes of the BPOL tax." See P.D. 05-58 (4/12/2005).
Situs
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; or as a last resort (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.
The Taxpayer believes the documentation it provided was sufficient to demonstrate which gross receipts were to be property sitused to City A. City A contends that the documentation was inadequate because the gross receipts reported by the Taxpayer do not reconcile back to either the Taxpayer's Virginia corporate income tax return or to payroll information on either the federal or state returns.
Virginia Code § 58.1-3703.1 A 9 requires taxpayers to keep sufficient records to enable the local taxing authority to verify the correctness of the tax paid for the license years assessable and determine the correct amount of tax assessable. When the evidence provided by a taxpayer is inconclusive, it is reasonable for the local assessing officer to request a reconciliation of such gross receipts to a taxpayer's total gross receipts reported on its financial statements or tax returns. Further, when such information is not provided, a local assessing authority must use the information available to determine gross receipts sitused within its jurisdiction.
Apportionment Agreements
Virginia Code § 58.1-3703.1 A 3 c allows local assessing officers to enter into agreements in order to apportion the gross receipts of a taxpayer that has a definite place of business in each locality. The limitations on such agreements between or among taxing localities are that the (1) gross receipts must be apportioned between definite places of business, and (2) these gross receipts must not be taxed twice. See P.D. 00-208 (12/15/2000).
Because City A was unable to ascertain the proper situs of the Taxpayer's gross receipts based on the documentation provided, City A and the County entered into an oral agreement to evenly divide the Taxpayer's gross receipts between the call center and the fulfillment center. The Taxpayer asserts that City A improperly used gross receipts from the fulfillment center and the IT center in its assessment.
Under Virginia Administrative Code (VAC)10-500-220, the local assessing authority is required to make a good faith effort to reach an apportionment agreement with the other localities involved if a taxpayer asserts that a method is likely to result in taxes on more than 100% of its gross receipts from all its definite places of business. Including the taxpayer in the process of formulating an alternative apportionment between localities would more likely result in a method acceptable to all parties.
Pursuant to a discussion between the local assessing officers, the County and City A concluded that they could not reach an accurate allocation percentage and entered into an oral agreement to apportion 50% of the gross receipts to each locality. No evidence has been presented as to why the County and City A could not agree upon a more accurate apportionment method. Payroll apportionment had been used in prior tax years.
Further, it is difficult for the Department to evaluate an oral agreement for apportioning gross receipts. The method of apportionment must be rationally related to the licensable activities transacted within a locality. The oral agreement between City A and the County provides insufficient documentation on which to derive a conclusion.
Payroll Apportionment
If it is impossible or impractical for localities to determine where the service is performed or from where the service is directed or controlled, and the localities are unable to enter into an apportionment agreement, it may become necessary to use payroll apportionment. The general payroll apportionment formula, as stated in P.D. 04-80 (8/25/2004), for determining gross receipts sitused to a Virginia definite place of business is:
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- Gross receipts from all sources multiplied by the payroll attributed to the definite place of business divided by total payroll everywhere.
- Gross receipts from all sources multiplied by the payroll attributed to the definite place of business divided by total payroll everywhere.
DETERMINATION
In this case, neither the Taxpayer nor City A has provided conclusive evidence with regard to the situs of the gross receipts. Because the issues involving the Taxpayer's records are a matter of fact, a determination as to whether such records adequately indicate the proper situs of gross receipts remains the prerogative of City A. Accordingly, I am remanding this case to City A in order to review any evidence the Taxpayer can provide concerning the amount of gross receipts derived from the call center. Such evidence must be provided within 30 days of the date of this letter.
If sufficient evidence for determining the situs of the gross receipts is not provided, the County and City A may determine to apportion gross receipts by agreement. Any agreement must rationally relate gross receipts to the licensable activities transacted within each locality. If such agreement cannot be reached, gross receipts should be apportioned to City A using the payroll of only those employees who directly participate in the businesses' licensed activity.
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Craig M. Burns
Tax Commissioner
- Craig M. Burns
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AR/1-4659259835.B
Rulings of the Tax Commissioner