November 17, 2020
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
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 assessments of the Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by ***** (the “County”) for the 2015 through 2019 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 cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.
FACTS
The Taxpayer had a definite place of business in the County and sitused its gross receipts between its definite place of business in the County and a larger facility located in ***** (Country A) on the basis of payroll apportionment. The County audited the Taxpayer and denied the exclusions the Taxpayer claimed under the County’s BPOL ordinances for gross receipts derived from the design, development or other creation of computer software for lease, sale or license. As a result, assessments were issued for the 2015 through 2019 tax years for additional BPOL tax due.
The Taxpayer appealed to the County, contending that 1) it developed software products; 2) the products were developed from a definite place of business in the County; and 3) the products were licensed, leased or sold by the Taxpayer. In its final determination, the County concluded that the Taxpayer was performing services and thus was not eligible for the exclusion.
The Taxpayer appeals to the Department, contending that it was eligible for the exclusion because it developed and licensed software and development occurred in the County.
ANALYSIS
Localities may exclude from the BPOL tax those gross receipts that are attributable to the design, development or other creation of computer software for lease, sale or license. See Virginia Code § 58.1-3703 B. The County’s BPOL ordinances provide for such an exclusion, but only to the extent that the gross receipts are attributed to computer software design, development or creation activities actually performed at a definite place of business in the County.
The County determined that the Taxpayer was not eligible for the exclusion because the Taxpayer was providing services rather than leasing, selling or licensing computer software. In its final determination, the County also stated that to the extent the Taxpayer did develop computer software, such activities were performed by employees working at the Taxpayer’s other definite place of business in Country A, not in the County. In addition, the County stated that the Taxpayer did not provide documentation such as copyrights, patents or trademarks to evidence that they had specific software products developed in the County.
In its appeal to the Department, the Taxpayer included some catalog entries of software products that were registered with the United States Copyright Office. The Taxpayer also included a copy of a contract in which it appears that a customer agreed to pay a license fee for use of a software product developed by the Taxpayer. In addition, it is clear from the Taxpayer’s website that the Taxpayer offers a suite of software products that have already been developed. The terms under which customers may obtain the use of such products are unclear. The Department is aware, however, that access to a software product is frequently obtained by paying some amount in return for a license to use the product.
Under the County’s ordinance, a taxpayer must do more than demonstrate that it had gross receipts attributable to the design, development or other creation of computer software for lease, sale or license. The ordinance also requires that the gross receipts be attributable to such activities actually performed at a definite place of business in the County. In this case, it is unclear what extent any such activities occurred at the Taxpayer’s definite place of business in the County. Most of the Taxpayer’s employees worked out of an office in Country A. The Taxpayer claims that two senior staff in its County office still performed software development activities. Even if that were true, there is no way for the Department to determine based on the information provided to what extent, if at all, gross receipts should be attributed to the development activities of those employees. It is not sufficient that merely some development activities occurred at the definite place of business in the County. The Taxpayer bears the burden of quantifying what specific part of those gross receipts were directly attributable to development activities that occurred at its definite place of business in the County.
DETERMINATION
Although there is some evidence indicating the Taxpayer likely had gross receipts attributable to the design, development or other creation of computer software for lease, sale or license, the Taxpayer has not provided sufficient information for the Department to determine to what extent, if at all, any such gross receipts were attributable to such activities actually performed at the Taxpayer’s office in the County. Therefore, the Taxpayer has not met its burden of proving to what extent, if at all, it qualified for the exclusion. Accordingly, the County’s assessments are upheld.
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3437.M