January 7, 2020
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
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 your client, ***** (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 2013 through 2016 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 document 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, a Virginia corporation, is a wholly owned subsidiary of ***** (the “Parent”). The Parent is engaged in the business of providing Cable service. The Parent’s headquarters is located in ***** (State A), and it has significant operations in numerous other states. The Parent licenses programming from content providers and broadcasts through its network operation centers, which are located outside of the County. The Parent’s policy, procurement and operational decisions are made by executives at the State A headquarters. Customer service personnel, who can be reached by telephone or the company site portal, are located outside of the County.
The Taxpayer maintains two locations in the County pursuant to requirements in a franchise agreement. It has a customer service center where cable subscribers may make payments, purchase self-installation kits, and request repairs or return equipment. There is a separate location where customer service technicians are dispatched. Technicians perform all work in the County and in ***** (Locality A), an adjacent locality. The personnel working at the County locations are employed by ***** (Company A), a separate wholly owned subsidiary of the Parent.
The gross receipts reported by the Taxpayer on its income tax returns for the 2013 through 2016 tax years consisted of cable subscription and other fees paid by all customers located in the County and Locality A. The Taxpayer filed BPOL tax returns with the County for the tax years at issue, situsing a portion of its gross receipts out of Virginia using payroll apportionment. The County audited the Taxpayer and determined that all of its gross receipts should have been sitused to its two locations within the County. As a result, assessments of BPOL tax, penalty and interest were issued.
The Taxpayer filed an appeal with the County, contending that payroll apportionment is the proper method to situs its gross receipts. In its final local determination, the County held that all of the Taxpayer’s gross receipts were subject to tax and that payroll apportionment was unnecessary. The Taxpayer appeals the County’s final determination to the Department, asserting that payroll apportionment was the correct method to situs gross receipts because it was impossible or impractical to determine where its services were performed.
ANALYSIS
Situs
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 the definite place of business where the service is performed or from where the service is directed or controlled, by payroll apportionment between definite places of business. Virginia Code § 58.1-3703.1 A 3 b also states that gross receipts may not be apportioned to a definite place of business unless some business activities occurred at, or were controlled from, such definite place of business.
The Taxpayer had a definite places of business in the County and was subject to the BPOL tax. The Taxpayer contends, however, that a portion of its gross receipts should be sitused out-of-state because the licensing and broadcasting services provided by the Parent were paid for by County cable subscribers. It further asserts that it is impractical or impossible to determine gross receipts from the County because the receipts are attributable to services performed outside of the County. The County argues that the Taxpayer was a separate legal entity and that it cannot be merged with the Parent for purposes of the BPOL tax.
In Public Document (P.D.) 08-84 (6/6/2008), a cable television provider headquartered in a Virginia locality maintained an office in a separate Virginia locality in accordance with a franchise agreement. The office, located in locality where the headquarters was not located, provided customer service including the accepting, initiating and processing orders for new services, cancellations, upgrades and downgrades; receiving payments on accounts; distributing or exchanging converter boxes, cables, and other equipment; and taking orders for repair services. Additionally, the studio and transmission equipment for providing public and government access programming was located in the facility. The Department concluded that the gross receipts should have been sitused to the locality where the services occurred, not the locality where the Taxpayer was headquartered.
The Taxpayer asserts that it sitused a portion of its gross receipts outside of the County because that was where some of the services provided to subscribers occurred or were directed and controlled, consistent with P.D. 08-84. The County, however, distinguishes P.D. 08-84 because the taxpayer in that case was one entity with offices in two localities. In this case, however, the Taxpayer is a separate legal entity from the Parent and other subsidiaries that do not have definite places of business in the County.
In P.D. 05-168 (12/12/2005), a company, located outside of Virginia, provided on-line college level instruction and degrees. A wholly owned pass-through entity maintained an office in a Virginia locality that was staffed by one employee of the company. All the actual educational and administrative services were provided from the company’s office. The only activity that the pass-through entity provided was the ability to accept tuition payments, which were then forwarded to the company’s out-of-state office. In addition, all correspondence, telephone calls were routed to the company’s office. All literature and diplomas were generated and mailed from the company offices. Both the company’s and the pass-through entity’s websites were maintained at the company’s out-of-state corporate office. The Department determined that while the pass-through entity maintained a definite place of business in the Virginia locality, the actual services it provided were performed, directed and controlled from the company’s out-of-state offices. As such, the gross receipts should have been sitused to the company’s out-of-state office where the actual services were performed, directed and controlled.
The Taxpayer contends that like the taxpayer in P.D. 05-168, a significant portion of its gross receipts were attributable to services performed by the Parent outside Virginia. In addition, it asserts that its activities actually performed in the County were directed and controlled by the Parent from locations outside the County. According to the County, only the gross receipts attributable to those services performed by the Taxpayer within the County were utilized in assessing the BPOL tax.
Situsing the Taxpayer’s gross receipts is a three-step process. First, it must be determined what services the Taxpayer performs. In this case, the services that the Taxpayer provides must first be determined. Then, it must be determined whether the services are provided at the Taxpayer’s definite places of business within the County. Third, if the services are not provided in the Taxpayer’s definite place of business within the County, then they must be sitused to the definite place of business where the services are directed and controlled. Only, if it impossible or impractical to determine the definite place of business where the Taxpayer’s services were performed, or where they are directed or controlled, can payroll apportionment be used.
The Taxpayer contends that services provided by the Parent or other Parent-owned subsidiaries are gross receipts derived from subscribers in the County, and therefore should be sitused outside of Virginia. The County argues that the Taxpayer was a separate legal entity with its definite places of business, and it is irrelevant where the Parent is located.
The Taxpayer is, in effect, arguing that there was a unitary relationship between the Parent, subsidiaries and itself and, therefore, all gross receipts should be sitused based on these entities’ definite places of business. Pursuant to P.D. 07-191 (11/21/2007), when a taxpayer holds a certificate of incorporation from the State Corporation Commission (SCC) and has its own federal employer identification number (FEIN) for federal income tax purposes, it is considered a separate taxable entity for local business tax purposes. Therefore, any unitary relationship that a taxpayer has with its Parent or affiliated subsidiaries has no bearing on the taxpayer’s local tax liability. See P.D. 11-44 (3/23/2011). As such, only gross receipts derived from services performed by the Taxpayer should be sitused when determining its BPOL tax liability in the County.
The franchise agreement that the Taxpayer entered into with the County states that the Taxpayer was responsible for maintaining the mix, quality, level of service related to television broadcast signals, educational broadcast signals, non-commercial governmental, educational and community access programming, commercial leased programing, sports programming, new programming, premium programming, and general entertainment programming. In addition, the Taxpayer was accountable for upgrading and maintaining the cable system and installing the home subscriber cable equipment. Customer service was provided at one of the definite places of business located in the County. The franchise agreement that the Taxpayer entered into with Locality A states that it will provide the same cable services to customers in that jurisdiction that it provided to its customers located in the County.
Subscribers paid for access to cable television programming. While the licensing of content and video signals may have originated by the Parent or other out-of-state subsidiaries, the subscriber’s access to the cable was provided by the Taxpayer in accordance with the franchise agreement. In order to provide the services specified by the franchise agreement, the Taxpayer was required to update its cable system to increase its transmission speed, provide feeder cables capable of transmitting a greater number of channels and allow for the reverse direction digital information from subscribers. Further, the agreement obliged the Taxpayer to provide equipment necessary to support public, educational and government access channels.
The Taxpayer’s claim that services were performed by the Parent does not negate its responsibility under the agreement. Again, the Department’s ruling in P.D. 05-168 can be distinguished from the Taxpayer’s activities because the services were not required to be performed at a definite place of business within the locality. Because the Taxpayer’s only definite places of business were located within the County, the services could not have been directed and controlled outside the County. The only definite places of business to which the gross receipts could be sitused were located within the County.
Payroll Apportionment
The Taxpayer contends that the Parent and other subsidiaries provided a necessary and integral part of the services to subscribers. As such, it was analogous to Ford Motor Credit Co. v. Chesterfield County, 281 Va. 321, 707 S.E.2d 311 (2011) in that services performed by its Parent and subsidiaries were a necessary part of the services received by the subscribers. Because the Taxpayer asserts that it merely acted as a branch of the Parent, it asserts that payroll apportionment would have been necessary because the Parent and other subsidiary employees were located through the country and it would have been impractical or impossible to situs gross receipts to any particular locality.
The County asserts that payroll apportionment was not applicable because a Taxpayer must have at least one definite place of business located outside of the taxing jurisdiction. As stated above, the gross receipts attributed to the Taxpayer came from services provided by the Taxpayer within the County as required by the franchise agreement. Because all the gross receipts were derived from the fees paid by subscribers located in the County and Locality A, it was not impractical or impossible to situs the gross receipts.
Commerce Clause
The Taxpayer contends that imposition of the BPOL tax on all of its gross receipts violates the second prong of Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) because without payroll apportionment, the resultant tax bears no rational relationship to its business conducted in the County. As such, the situsing of all gross receipts to the County is not internally consistent. The County asserts that in accordance with Short Brothers v. Arlington County, 244 Va. 520, 423 S.E.2d. 172 (1992), the gross receipts were apportioned properly because they were only subject to taxation in the County. As such, there was no risk of double taxation.
In Complete Auto Transit, the United States Supreme Court established a four-pronged test in evaluating the validity of a local tax under the Commerce Clause. The tax must be: (1) applied to an activity with a substantial nexus with the taxing authority; (2) fairly apportioned; (3) nondiscriminatory to interstate commerce; and (4) fairly related to the services provided by the state or locality. Complete Auto Transit was applied to the taxation of transactions in interstate commerce. In Japan Line, LTD. V. County of Los Angeles, 441 U.S. 434 (1979), the United States Supreme Court held that when a state seeks to tax instrumentalities of foreign commerce, two additional factors must be considered in addition to the four-prong test articulated in Complete Auto Transit. The first factor considers whether a state tax creates an enhanced risk of multiple taxation. The second factor considers whether a state tax will impair federal uniformity in an area where federal uniformity is essential. Federal uniformity may be impaired if the tax could cause international disputes over “reconciling apportionment formulae.” See Japan Line at 450.
The second prong of Complete Auto Transit requires that the local tax must be fairly apportioned. This prong requires that an assessment be both internally and externally consistent. Goldberg v. Sweet, 488 U.S. 252 (1989). An assessment is internally consistent if applying the text of the taxing statute, and assuming that every other jurisdiction applied the same statute, the taxpayer would not be subjected to a risk of double taxation. An assessment is externally consistent if the assessment applies only to the “portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed.” Id.
The Taxpayer also cites Oklahoma Tax Commission v. Jefferson Lines, Inc. 514 U.S. 175 (1995), in which the United States Supreme Court held that the apportionment of gross receipts would not be internally consistent if a state takes more than its fair share of taxes. As such, it asserts the attribution all gross receipts derived from subscribers unfairly included those from services such as customer service, cable television content that occur outside of the County. In Short Brothers, the Virginia Supreme Court held that the second prong of Complete Auto Transit would be satisfied if the tax is based on revenues attributed solely to the taxing jurisdiction, and the taxpayer is not subject to taxation based on those revenues elsewhere.
In this case, the Taxpayer only had definite places of business in the County. It did not have a definite place of business in any other jurisdiction. As such, no other locality could impose a BPOL tax on gross receipts derived from services provided by the Taxpayer. Therefore, there was no risk of double or multiple taxation and the second prong of Complete Auto Transit was satisfied.
Penalty Waiver
Virginia Code § 58.1-3703.1 A 2 d provides that a penalty of 10% may be assessed if for the failure to pay the BPOL tax by the appropriate due date. However, no late payment may be assessed if the return was filed in good faith and the understatement of tax was not due to fraud, reckless, or disregard of the law by the taxpayer.
Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-500-560, the penalty will not be imposed or abated if the underpayment was not the fault of the Taxpayer. Lack of fault must be demonstrated by the taxpayer showing that he acted responsibly and that the failure was due to events beyond his control. A taxpayer acts responsibly if it exercised the reasonable care that a prudent person would exercise under the circumstances, and took significant steps to avoid or mitigate the failure.
The Taxpayer requests that the penalties assessed be abated because it acted in good faith and the underpayment was not due to fraud, reckless or intentional disregard of the law. As stated above, a taxpayer must show that the underpayment was due to events beyond its control. “Events beyond the taxpayer’s control” include, but are not limited to, unavailability of records due to fire or other casualty; unavoidable absence (e.g., due to death or serious illness) of the person with sole responsibility for tax compliance; or the taxpayer’s reasonable reliance in good faith upon erroneous written information from the assessing official who was aware of the relevant facts relating to the taxpayer’s business when he provided the erroneous information. The determination as to whether the Taxpayer’s underpayment of the BPOL tax was due to events beyond its control is a matter of fact to be determined by the County. Even if a locality determined that the underpayment of BPOL tax was not due to events beyond a taxpayer’s control, it still may waive the penalty at its discretion.
DETERMINATION
After carefully considering all the facts of this case and the applicable statutes, rulings and policies, I find that the County properly sitused all of the Taxpayer’s gross receipts to its definite places of business. The Taxpayer has failed to show that any services were performed by it at a definite place of business outside the County and that payroll apportionment is appropriate. Further, the methodology that the County used to situs gross receipts did not violate the Commerce Clause. Accordingly, the County’s assessments of BPOL tax for the 2013 through 2016 tax years are upheld.
I am, however, remanding this case back to the County in order for it to consider the Taxpayer’s request to waive the penalty assessed for the tax years at issue. As stated above, it is within the County’s discretion to waive the penalty
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/2029.B