February 6, 2020
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 assessments of the Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by ***** (the “County”) for the 2014 through 2017 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 Laws, Rules and Decisions section of the Department’s web site.
FACTS
The Taxpayer supplied temporary staff to various government and commercial customers throughout the United States. Sometimes, the Taxpayer supplied temporary staff who were considered employees of the Taxpayer and issued Form W-2 for income and payroll tax reporting purposes. Other times, the Taxpayer subcontracted with other individuals or businesses to supply the temporary staff and it reported such payments on Form 1099. The Taxpayer also currently advertises that it offers permanent staffing services in one field.
The Taxpayer was audited by the County for the 2014 through 2017 tax years. The County classified the Taxpayer as a business service provider and denied the deduction for gross receipts for staffing firms described under Virginia Code § 58.1-3732.4, reasoning that none of the Taxpayer’s employees performed the work. The County also concluded that the Taxpayer’s only definite place of business was the Taxpayer’s president’s residence in the County and as such, all of the Taxpayer’s gross receipts were sitused to the County. Finally, the County determined that the Taxpayer was eligible for the out of state deduction under Virginia Code § 58.1-3732 B 2 because it had filed income or income-like tax returns in some states.
The Taxpayer appealed to the County. In a letter issued in December 2018 that purported to be a final determination, the County failed to address the Taxpayer’s claim that it was eligible for the staffing firm deduction. Instead, it applied the “direct labor method” in situsing the Taxpayer’s gross receipts, which the County claimed was more advantageous to the Taxpayer. The County further determined that the Taxpayer was not eligible for the out of state deduction because it had failed to prove what part, if any, of the gross receipts attributable to the County under the “direct labor method” was attributable to County employees participating in earnings from other states. The County adjusted the assessments accordingly.
The Taxpayer appealed to the Department, disputing the County’s conclusions and methodology. In Public Document (P.D.) 19-84 (8/8/2019), the Department determined that the December 2018 letter was not a valid final determination and remanded the case back to the County to issue a proper final determination. Because one year has passed since the filing of the appeal with the County, the Taxpayer gave the required 30-day notice to the County pursuant to Virginia Code § 58.1-3703.1 A 5 e in September 2019 and filed its appeal directly with the Department.
ANALYSIS
Staffing Firm
Virginia Code § 58.1-3732.4 A provides that the gross receipts of a staffing firm do not include employee benefits paid to a contract employee “for the period of time that the contract employee is actually employed for the use of the client company pursuant to the terms of a PEO services contract or temporary help services contract.” The term “employee benefits” is defined by the statute to include “wages, salaries, payroll taxes, payroll deductions, worker’s compensation costs, benefits, and similar expenses.” The benefits listed are types of payments made to an employee under federal payroll tax rules.
Accordingly, a business that is classified as a staffing firm may exclude wages, salaries, payroll taxes, payroll deductions, workers’ compensation costs, benefits, and similar expenses from its gross receipts. Virginia Code § 58.1-3732.4 B defines a staffing firm as “a person that provides PEO [professional employer organization] services or temporary help services.” [Insert added.]
Virginia Code § 58.1-3732.4 B defines temporary help services to mean “an arrangement whereby a staffing firm temporarily assigns employees to support or supplement a client company’s workforce.” The County’s determination was unclear as to whether the Taxpayer would be considered a staffing firm. Rather, the County stated that it was more advantageous for the Taxpayer’s gross receipts to be sitused using the “direct labor method.”
Based on the sample contracts provided by the Taxpayer, it appears that the Taxpayer was providing temporary help services to client companies as a staffing firm. Therefore, any benefits paid for work under temporary help services contracts to the Taxpayer’s employees who received a Form W-2 and employees treated as nonemployees who were issued a Form 1099 would not be included in the Taxpayer’s gross receipts. See Public Document (P.D.) 09-29 (3/30/2009). Benefits paid to independent contractors who received a Form 1099, however, are not the type of benefits that would qualify for the exclusion under Virginia Code § 58.1-3732.4. See id.
In addition, information available to the Department in the public domain also indicates the Taxpayer advertises that it provides some permanent staffing services. If the Taxpayer was providing such services during the tax years at issue, it seems unlikely that such services would have qualified for the deduction under Virginia Code § 58.1-3732.4 A, and gross receipts attributable to such activities would likely have been subject to BPOL tax at the general rate for repair, personal, business and other services. The County, however, will need to examine the exact nature of such services in order to determine whether and to what extent gross receipts from such activities may have been subject to BPOL tax.
In its determination, the County failed to address the classification issue and proceeded to apply what it called the “direct labor method” to situs gross receipts. This method has been used in several cases to situs gross receipts. See P.D. 13-170 (9/13/2013) and P.D. 18-168 (9/26/2018). In both cases, however, this method was applied in circumstances where employees working out of a Virginia locality’s office and employees working elsewhere both contributed toward fulling their employer’s commercial contracts. In such circumstances, the direct labor method may accurately situs gross receipts under the statutory rules explained below. A locality, however, may not decline to apply a deduction because it believes the direct labor method – or any other method – is more advantageous to a taxpayer. As explained below, the direct labor method would not accurately situs gross receipts in this case anyway.
Definite Place of Business
Virginia Code §§ 58.1-3703.1 A 3 a 4 and 58.1-3703.1 A 3 b clearly require the gross receipts from services to be attributed to a definite place of business. A “definite place of business” is defined as an office or a location at which occurs a regular and continuous course of dealing for 30 consecutive days or more. See Virginia Code § 58.1-3700.1. Some characteristics that may help determine whether the location is a definite place of business include, but are not limited to, the following on-site activities: (1) a continuous presence; (2) having an office with a phone; (3) the reception of mail; (4) having employees; (5) record keeping; and (6) and advertising or otherwise holding oneself out as engaging in business at the particular location. See P.D. 97-201 (4/25/1997).
It appears that the County treated the Taxpayer’s client sites as definite places of business. Businesses that merely find and supply staff to clients, however, are not in the business of providing the specific services that the staff perform. As such, the clients’ definite places of business could not be considered the definite places of business of the Taxpayer. Therefore, to the extent the County’s direct labor method formula effectively attributed gross receipts to client sites, it failed to accurately situs those receipts.
In its determination, the County also claimed that the home address of the Taxpayer’s president in the County was the Taxpayer’s only definite place of business. It was to this location the County attributed all of the Taxpayer’s gross receipts that the County did not situs to client sites. The Taxpayer, however, asserts that it also had an office in ***** (State A).
Generally, a residence would not be considered to be a definite place of business. The definition of a definite place of business in Virginia Code § 58.1-3700.1 provides, however, that “[a] person’s residence shall be deemed to be a definite place of business if there is no definite place of business maintained elsewhere and the person is not subject to licensure as a peddler or itinerant merchant.” This provision does not absolutely preclude a residence from being a definite place of business when a taxpayer maintains a definite place of business elsewhere. A residence could still be a definite place of business if it is a location at which occurs a regular and continuous course of dealing for 30 consecutive days or more. Each location must be separately evaluated under the standards set forth above to determine if it is a definite place of business. Whether the State A office and the Taxpayer’s president’s residence in the County or other locations from which the Taxpayer operated constituted definite places of business is a question of fact to be determined by the County.
Situs
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.” See Virginia Code § 58.1-3703.1 A 3 a. In determining the situs of gross receipts, Virginia 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 definite place of business from which the service is directed or controlled; or as a last resort (iii) when it is impossible or impractical to determine where the service is performed or from where the service is directed or controlled, by payroll apportionment between definite places of business.
In order to determine how gross receipts should have been sitused, the Taxpayer’s definite places of business must be ascertained. In this case, either the State A office, the president’s home, or some other facility may have been definite places of business. Then, gross receipts must be sitused in the order set forth in the statute above. Again, the service was providing staff to clients, which would include all of the work performed by the Taxpayer to place staff in the assignments and any further work performed by the Taxpayer related to such placements. Such services would include all services provided by the Taxpayer, regardless of whether they were temporary or permanent placements or W-2 or 1099 personnel. The Taxpayer’s service was not the specific labor being provided by such staff at the clients’ locations.
It appears the County sitused gross receipts using the “direct labor method” described above using the percentage of the Taxpayer’s W-2 employees’ labor in a state compared to the total labor attributable to the state. As explained above, however, the locations where the staff worked have no bearing on how gross receipts should have been sitused in this case.
Out of State Deduction
Virginia Code § 58.1-3732 B 2 provides a deduction from gross receipts otherwise taxable for any receipts “attributable to business conducted in another state or foreign country in which the taxpayer . . . is liable for an income or other tax based upon income.” Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-500-80 A 2, a taxpayer must file an income or income-like tax return in a state or foreign country even if there is not actual tax liability in a given year, in order to claim the deduction in that state or foreign country.
In its determination, the County claimed that the Taxpayer was not liable for an “income” or “income like” tax in all of the state filings reviewed, without specifying which states they were. The County, however, did concede that the Taxpayer reported income or income like taxes in several states. The County ultimately determined that the Taxpayer was not eligible for the out of state deduction regardless because it had failed to prove that any employees working in the County participated in the earnings of other states.
The analysis of the out of state deduction is dependent on first establishing the taxable pool of gross receipts after applying the staffing firm deduction and the situs rules above. If any taxable gross receipts are properly sitused to the County after applying such analysis, then it will be necessary to determine the extent the Taxpayer was eligible for the out of state deduction, if at all. The Department has issued a determination thoroughly examining the issue of what constitutes an income or income-like tax for purposes of this deduction. See P.D. 18-170 (10/10/2018).
Further, as explained above, situs in this case will not be dependent on where staff performed their assignments. If, for example, the County determines that some part or all of the Taxpayer’s gross receipts should have been sitused to the County because of the president’s activities there, the County must then determine whether he earned, or participated in earning, receipts attributable to customers in other states where the business filed an income tax return. Employee travel to such states is one obvious way to demonstrate that, but certainly is not the only evidence. The nature of the business activities conducted at a Virginia definite place of business must be analyzed to determine if any of those activities involved transactions with customers in other states. In P.D. 12-88 (5/31/2012) and other public documents, additional activities were provided, including “participating with employees in other offices in transactions,” that must also be analyzed in accordance with P.D. 10-228 (9/29/2010). See also P.D. 17-159 (9/8/2017).
DETERMINATION
Because neither the Taxpayer nor the County has provided clear and objective evidence as to the facts in this case, I am remanding this case to the County to re-evaluate its findings in light of the analysis above. The County must first determine the extent to which the Taxpayer was eligible for the staffing firm deduction. The County must then situs the remaining gross receipts to one or more of the Taxpayer’s definite places of business in accordance with the statutory rules described above. Finally, from the remaining pool of taxable gross receipts, if any, the County must determine the extent the Taxpayer was eligible for the out of state deduction. To be eligible for such deduction, employees working from the definite place of business must have earned or participated in earning, receipts attributable to customers in other states where the Taxpayer filed an income or income-like tax return.
The Taxpayer must work with the County to provide any further relevant information the County may request. Failure of the Taxpayer to provide sufficient documentation to support its position will result in the assessment being upheld. Likewise, the County must thoroughly review and address any and all information the Taxpayer is able to provide. Upon the conclusion of its review, the County must issue a new final determination that fulfills all of the requirements of the BPOL regulations. Once the County has issued its final determination, the Taxpayer may file an appeal with the Department within 90 days pursuant to Title 23 VAC 10-500-720 if it disagrees with any of the County’s conclusions.
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/2207.M