September 21, 2021
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 2016 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, 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 first created certain software when it had a definite place of business in ***** (the “Town”). The Taxpayer entered into an agreement with another company to advertise, market and sell the software. Under this agreement, the Taxpayer received a portion of the sales proceeds as royalties. Sales were made in the form of licenses to use the software. The Taxpayer explains that such royalties have been its sole and exclusive source of income.
The Taxpayer initially reported gross receipts to the County with no exclusions for the 2013 through 2019 tax years. The Taxpayer subsequently claimed a full exclusion for gross receipts attributable to software design, development or other creation activities conducted in the County. Under review, the County determined that the Taxpayer did not qualify for the exclusion. The County, however, abated the assessments for the 2013 through 2015 tax years on the basis that the Taxpayer had already paid BPOL tax to the Town.
The Taxpayer appealed the remaining assessments to the County. In its final determination, the County concluded that the Taxpayer did not qualify for the exclusion because it had obtained its software copyright while it had a definite place of business in the Town, and it did not sell, lease or license the software directly to consumers. The Taxpayer appealed to the Department, contending that the County’s conclusions were erroneous, the County failed to issue a final determination within a reasonable time, and upholding the assessments could result in double taxation.
ANALYSIS
Length of Time to Issue Determination
The Taxpayer argues that because of the length of time the County took to issue a final determination, the Taxpayer should prevail on its appeal simply as a matter of procedure, without an examination of the substantive issue. In support of this argument, the Taxpayer cites Title 23 of the Virginia Administrative Code (VAC) 10-500-650 2 as requiring the local assessing officer to issue a final determination within a reasonable time of the taxpayer’s timely filing its local appeal.
In this case, it look a little more than a year for the County to issue its final determination. When a locality has had a local appeal for more than a year, the regulations allow a taxpayer to appeal to the Department with 30 days’ written notice to the locality. See Title 23 VAC 10-500-712. Taxpayers, therefore, have a procedural recourse directly to the Department when they believe a final determination has not been issued within a reasonable time, as long as at least a year has passed. Neither the BPOL statutes nor regulations contain any provision authorizing the Department to find in favor of a Taxpayer should a locality fail to issue a final local determination within a reasonable time or any other period of time.
Double Taxation
The Taxpayer argues that it intends to file a refund claim with the Town and should the Town deny the refund claim, it will result in double taxation that is prohibited by Virginia Code § 58.1-3986. The statute cited refers to a court remedy in cases when there is a double assessment, one of which is erroneous and one of which is not. Because this statute refers to the court’s remedial authority, the Department declines to make a determination on this issue.
Further, it appears the Taxpayer has not had a definite place of business in the Town since it moved to the County. For tax years during which the Taxpayer did not have place of business in the Town, it would not have been subject to BPOL tax. Under such circumstances, if the Taxpayer had erroneously paid BPOL tax to the Town, an assessment by the County would not constitute double taxation on its part.
Regardless, because it is unclear how the Town will respond to any refund claim, or what the County may do if the Town were to deny part of the claim based on the statute of limitations, the issue is speculative and not ready to be decided at this time.
Software Exclusion
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’s final determination concluded that the software was authored, created and developed in another jurisdiction because that was where the previous definite place of business had been at the time the Taxpayer filed its software copyright. The County also emphasized the fact that the Taxpayer did not receive any revenue directly from sales, leases or licenses of the software to customers. Rather, it received a commission or “royalties” from another business that effectively sublicensed the software to customers.
Although the location of the definite place of business when a taxpayer files for a copyright is a factor to consider when determining where software was designed, developed or created, it is not determinative. The question concerning where something was designed, developed or otherwise created must be answered with reference to all the relevant facts and circumstances. The County’s sole emphasis on where the Taxpayer’s definite place of business was when the copyright was filed ignores additional information presented by the Taxpayer to the effect that development activities continued after the initial release of the software, including development activities that occurred within the County.
Nevertheless, 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 appears that the software at issue was developed in part in another jurisdiction prior to the date when the Taxpayer established a definite place of business in the County. Although it appears that the Taxpayer has been updating the software over time after it established its new definite place of business in the County, the information provided does not clearly establish what specific gross receipts were attributable to such activities. Again, 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. See Public Document (P.D.) 20-189 (11/17/2020).
Licensing and Royalties
In addition, the ordinance does not require that the software be sold, leased or licensed directly by the taxpayer to the customer, only that the gross receipts be derived from the sale, lease or license of the software generally. Therefore, the fact that the Taxpayer contracted with another company to advertise, market and sell the software has no bearing on whether the Taxpayer qualified for the exclusion.
DETERMINATION
Even if the County’s final determination was not issued in a reasonable time, the Department lacks authority to issue a determination in the Taxpayer’s favor merely because of the length of time the County took to issue its final determination. The Department also cannot apply the remedy against double taxation described by Virginia Code § 58.1-3986 because that statute confers such remedial authority on the court, not the Department. In any event, it is speculative whether the Taxpayer will have to pursue such a remedy because the refund claims had not been filed with the Town as of the time the Taxpayer filed its appeal with the Department.
As for the substantive issue presented, namely whether the Taxpayer qualified for the exclusion from gross receipts for software design, development or creation activities, the Taxpayer clearly developed the software in part from its definite place of business in the Town, and it appears that development activities continued to some degree in the County. Ultimately, based on the information provided, it appears that the software that was being sold during the taxable years at issue was produced from a combination of development activities, some of which occurred in the Town and some of which later occurred in the County. Because the ordinance describes an exclusion from tax, the Taxpayer bears the burden of proof as to what portion of the gross receipts, if any, should be attributable to the specific qualifying activities that took place in the County. The Taxpayer has been unable to quantify what portion of its receipts were attributable to such activities conducted in the County. The assessments, therefore, 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/3664.M