February 2, 2021
Re: Appeal of 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 an assessment of Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by ***** (the “City”) for the 2016 through 2018 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 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 operates as a for profit university with campuses in Virginia and three other states. The Taxpayer also offers courses online. These courses are developed by subject matter experts and taught by faculty located throughout the United States. Online students may seek assistance and services at the campus location closest to them. Otherwise, students who are not located in a state with a physical location may seek assistance and services by telephone.
The City audited the Taxpayer and allocated gross receipts to the Taxpayer’s definite places of business to the extent the City was satisfied that such allocation was substantiated. The City also deducted gross receipts that it concluded qualified for the out of state deduction.
The Taxpayer filed an appeal with the City, contesting the City’s allocation of receipts attributable to its online courses. The City denied the appeal concluding that its allocation was consistent with the statutory method for situsing the gross receipts of a service business.
The Taxpayer appeals the City’s final determination to the Department, asserting that gross receipts from online courses should be sitused based on students location in the states where the Taxpayer had physical campuses and the students resided. For students in states that had no physical campuses and in which the Taxpayer had no income tax filings, online receipts should be sitused in proportion to the revenue of the physical campuses.
ANALYSIS
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 place 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. 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.
Virginia Code §§ 58.1-3703.1 A 3 a 4 and 58.1-3703.1 A 3 b clearly indicate a preference that 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 Public Document (P.D.) 97-201 (4/25/1997).
To the extent that any gross receipts are not attributable to services performed at a definite place of business, then they must be sitused to the definite place of business from which the services are directed and controlled. Only if it is not possible or practical to determine where the service is performed or where the service is directed or controlled, then the receipts must be sitused based on payroll apportionment.
The Taxpayer contends that its gross receipts from online courses should be sitused based on the student’s location if the student lives in a state where the Taxpayer has a physical campus. The student’s location, however, is not a definite place of business of the Taxpayer. In addition, while the Taxpayer’s physical campuses are likely definite places of business, the Taxpayer has not established whether and to what extent online services were provided at such locations or were directed and controlled from these campuses.
The Taxpayer also contends that with respect to students who live in states without a physical campus and where the Taxpayer does not file an income tax return, gross receipts attributable to such students should be sitused in proportion to the campus revenues. Again, a student’s location is not a definite place of business, and assigning receipts from online courses in proportion to physical campus revenue does not follow the statutory method of assigning gross receipts to a definite place of business where the specific services in question were performed or alternatively, were directed and controlled.
The Taxpayer further asserts that online services are not headquartered in the City. The Taxpayer, however, has not established from where such services are performed, directed and controlled. The Taxpayer explains that Subject Matter Experts (SME’s) develop the course material, instructors present that material to students, and that both of these groups of individuals are located throughout the United States. The question then becomes whether the locations of the SMEs and instructors could be considered a definite places of business. The Taxpayer has not provided information on the classification of SMEs and instructors. It is the Department’s position that such activities may only constitute a definite place of business when being performed by employees, not independent contractors. See P.D. 14-121 (7/24/2014). If a definite place of business cannot be established at employee’s locations, then the definite place of business for online services becomes the place where decisions are made regarding the courses being offered, financial support, content approval and other such administrative activities. Absent evidence that online operations were managed at another location, the Taxpayer’s headquarters in the City appears to be the logical choice.
DETERMINATION
The Taxpayer has not demonstrated how its gross receipts should have been sitused under the statutory method. In essence, the Taxpayer seeks an alternative method of situsing its gross receipts different from the statutory method. It appears that the Taxpayer believes that the City’s methodology results in such an excessive amount of gross receipts being sitused to the City that it violates the Commerce Clause of the United States Constitution. The Taxpayer argues that its method of allocation is reasonable under the facts and satisfies constitutional requirements.
As an executive agency of the Commonwealth charged with the administration of the tax laws as enacted by the General Assembly, it would be improper for the Department to permit taxpayers to adopt methods of allocation that differ from the statutory method, in the absence of clearly applicable judicial precedent that alter its application or in the absence of other statutory authority that gives the Department the power to approve alterations to the method.
Under Virginia Code § 58.1-3703.1, receipts from services are to be taxed based on a definite place of business where services are performed, or the place where the service is directed and controlled, or as a last resort, based on payroll apportionment. As explained above, an online student’s location cannot be a definite place of business and the Taxpayer has provided no evidence to support a SME or instructor performing services a definite place of business of the Taxpayer.
In this case, the Taxpayer has failed to demonstrate how its gross receipts should have been sitused under the statutory method. In addition, the Department does not have the authority to grant a method of situsing gross receipts different from the statutory method. Accordingly, the assessment is 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/3322.A