Rulings of the Tax Commissioner

September 18, 2024

Re:    Appeal of Final Local Determination
         Business, Professional and Occupational License Tax

Dear *****:

This final state determination is issued upon the administrative appeal filed on behalf of ***** (the “Taxpayer”), with the Department of Taxation. The Taxpayer disagrees with assessments of the Business, Professional and Occupational License (“BPOL”) tax issued to the Taxpayer by ***** (the “County”) 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 as summarized below. The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website.

FACTS

During the tax years at issue, the Taxpayer, a business engaged in the sale of computer products and services, maintained a definite place of business in the County. The Taxpayer filed BPOL returns with the County, situsing all gross receipts to the County. In addition, it claimed a computer hardware and software deduction for equipment purchased and resold to the government and an out-of-state deduction. 

Under audit, the County reduced the deduction for computer hardware and software sales to the government to the extent the claimed deductions were attributable to services and travel expenses. The County also disallowed the out-of-state deduction because income tax returns had not been filed in other states. As a result, assessments were issued. 

The Taxpayer appealed to the County, contending that it was entitled to an out-of-state deduction. In addition, with its appeal, the Taxpayer included amended returns that sitused gross receipts among several definite places of business. Further, while it conceded that it was not entitled to the computer hardware and software deduction for service sales or travel expenses, the Taxpayer claimed that deduction for additional sales not included in the deduction on the original returns.

In its final determination, the County determined that the Taxpayer did operate from a number of definite places of business and adjusted the assessment to reflect the situsing of a portion of its gross receipts to these other business locations. The County sitused the remaining gross receipts to the County based on its finding that those sales were directed or controlled from the definite place of business located in the County. In addition, the County did not allow the additional computer hardware and software deductions because the evidence indicated those sales were not made directly to the government. Finally, the County permitted the out-of-state deduction for one state for which the Taxpayer proved that it had filed an income tax return.

The Taxpayer filed an administrative appeal with the Department, asserting that its amended returns accurately sitused its gross receipts and that the additional computer hardware and software sales were eligible for deduction. In addition, the Taxpayer appealed the County’s determination that it was ineligible for the out-of-state deduction for states in which it could have filed an income tax return even though a return was not actually filed.

ANALYSIS

New Information Provided with the Appeal

As an initial matter, the County asserts that the Taxpayer provided the Department with information it had not previously provided to the County. Consequently, the County contends that the Department is barred from considering this information in the appeal.

The administrative appeals process outlined in Virginia Code § 58.1-3703.1 and Title 23 of the Virginia Administrative Code (VAC) 10-500-640 et seq. was implemented to give taxpayers and localities an adjudication process that was less formal and less burdensome on the parties than litigating in the court system. Administrative appeals are not governed, for example, by the same rules of evidence that would exist for litigation in court. The County cites no authority for its assertion that the Taxpayer is barred from introducing information to the Department that was not provided to the County for the local appeal. 

In fact, Title 23 VAC 10-500-760 outlines procedures that the Department and localities can follow to address circumstances where entirely new issues are raised for the first time in an administrative appeal to the Department. An absolute bar to providing additional information would be inconsistent with the policy of allowing new issues to be raised in the appeal to the Department. Accordingly, all information provided with an administrative appeal to the Department will be given due consideration. See Public Document (P.D.) 21-61 (5/18/2021).

Definite Place of Business

In its letter to the Department, the Taxpayer argues that it has more definite places of business than the County acknowledged in its final determination. Specifically, it states that some of its sales representatives worked from definite places of business at their residences and the County erred when it determined that one facility was not a definite place of business in 2017.

Virginia Code § 58.1-3700.1 defines a “definite place of business” as “an office or a location at which occurs a regular and continuous course of dealing for thirty consecutive days or more.” A definite place of business can include a location leased or otherwise obtained from another entity on a temporary or seasonal basis. 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) advertising or otherwise holding oneself out as engaging in business at the particular location. See P.D. 97-201 (4/25/1997), P.D. 01-215 (12/12/2001), and P.D. 10-277 (12/21/2010). Although these activities are indicative of a definite place of business, all facts and circumstances concerning the nature of a taxpayer’s operations must be considered. 

Home Offices

In its final determination, the County did not address whether any of the Taxpayer’s sales representatives’ home offices qualified as definite places of business because the Taxpayer raised that issue for the first time in its appeal to the Department. Several employment contracts provided by the Taxpayer indicate that some sales representatives were expected to work from their home offices located in other states. In addition, it appears that sales representatives located in ***** (State A) worked from home offices after termination of an office space lease in State A. 

In P.D. 14-121 (7/24/2014), the Department observed that an employee’s home may constitute a definite place of business if there is 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. Ultimately, the determination as to whether a home office is a definite place of business must be made by a locality. See also P.D. 21-131 (9/28/2021) and P.D. 23-113 (10/19/2023). 

State B Office

The Taxpayer also claimed that it had a definite place of business in ***** (State B) beginning in July 2017. The Taxpayer explains that the chief executive officer was residing, at least part-time, in State B as of July 2017. The County agreed that this location qualified as a definite place of business beginning in 2018 but denied that it was a definite place of business before that date because no lease payments were made in 2017. The Taxpayer submitted a lease agreement and explained that no lease payments were made in 2017 because the location was being repaired. The Taxpayer states that these repairs, however, did not prevent work from being performed there. The Taxpayer also produced an invoice showing that computer equipment and other supplies were delivered to the location in July 2017. The Taxpayer’s State B tax return for the 2017 taxable year did not, however, list any property located in State B. 

The fact that no lease payments were made would not prevent the State B office from qualifying as a definite place of business if it was otherwise qualified under the standard discussed above. On the other hand, it is unclear from the information provided what the true extent of the Taxpayer’s operations was in State B during the 2017 tax year. The fact that equipment and furniture were delivered to the State B office is not sufficient to show that it was used by the Taxpayer in the conduct of its business at that specific location.
        
While the Department has listed some key characteristics that may be typical of definite places of business, no one characteristic is determinative nor are particular characteristics required in every case. Ultimately, all relevant facts and circumstances must be considered, and the statutory standard is simply that it be an office or location at which occurs a regular and continuous course of dealing for 30 days or more. See Virginia Code § 58.1-3700.1.

Situs

In determining the situs of gross receipts, Virginia Code § 58.1-3703.1 A 3 a 2 provides that the gross receipts of a retailer are to be taxed based on where the sales solicitation activities occur, or if sales solicitation activities do not occur at any definite place of business, then the place from which the sales solicitation activities are directed or controlled. As a last resort, when it is impossible or impractical to determine where the sales solicitation activities are performed or from where the activities are directed or controlled, the gross receipts of a retailer are sitused by payroll apportionment between definite places of business. See Virginia Code § 58.1-3703.1 A b. 

Sales solicitation is the act or acts directly related to selling particular items or goods to a particular person. Sales solicitation, however, does not include non-solicitation activities prior or subsequent to sales solicitation activities. See Title 23 VAC 10-500-10. Taking customer orders is considered a sales solicitation activity. See P.D. 97-317 (7/30/1997), P.D. 98-42 (3/6/1998), and P.D. 18-164 (9/26/2018). If the Taxpayer’s sales representatives’ home offices were definite places of business, then gross receipts from their sales likely would be sitused to those homes because sales solicitation activities were occurring there. 

To the extent sales solicitation activities did not occur at a definite place of business, the County sitused gross receipts to the County on the basis that the Taxpayer’s chief executive officer worked from a definite place of business located in the County and that he was the sole individual who directed and controlled the sales activities. The employment contracts provided support this reasoning because they generally provided that the sales representatives would report directly to the chief executive officer. 

The Taxpayer contends that any sales that did not occur at a definite place of business should be sitused to its office in ***** (State C) because all contracts were required to be submitted through and approved by the Taxpayer at its State C office. The information provided, however, fails to show to what, if any, extent the staff at the State C office provided direction and control. The description of job duties for the one employee of the State C office included managing a software application, reviewing sales quotes to ensure that the quotes met company guidelines, managing the mail, managing banking activities, and negotiating with lenders. Such activities appear to have been more administrative in nature and are not indicative of activities normally associated with direction and control of the sales staff. 

Alternatively, the Taxpayer points out that even if sales activities were directed and controlled by its chief executive officer, because he divided his time between the County and State B, the sales should be divided between those definite places of business. See, e.g., P.D. 13-219 (12/12/2013). For the 2018 tax year, the County acknowledged the Taxpayer had a definite place of business in State B and sitused a portion of gross receipts accordingly. For the 2017 tax year, this argument is predicated on there being sufficient evidence to show that the State B office was a definite place of business.

Computer Hardware and Software Deduction

Virginia Code § 58.1-3732 B 1 provides a deduction from gross receipts subject to BPOL tax for:

Any amount paid for computer hardware and software that are sold to a United States federal or state government entity provided that such property was purchased within two years of the sale to said entity by the original purchaser who shall have been contractually obligated at the time of purchase to resell such property to a state or federal government entity. This deduction shall not occur until the time of resale and shall apply to only the original cost of the property and not to its resale price, and the deduction shall not apply to any of the tangible personal property which was the subject of the original resale contract if it is not resold to a state or federal government entity in accordance with the original contract obligation.

The County did not allow the deductions claimed by the Taxpayer in cases where the computer hardware and software were sold to a third party rather than directly to a government entity. In such cases, the property was sold to a third party who, according to the Taxpayer, was acting as a procurement agent on behalf of the government. The Taxpayer argues that, pursuant to general agency law, such sales should be treated as being made to the government. The County determined that the statute only allows a deduction for direct sales “to a United States federal or state government entity” and not to a third party because agency rules do not apply to the BPOL tax regime.

The Taxpayer points to the Department’s application of agency rules in determining whether transactions may be exempt from sales and use tax when the sales are made through government procurement agents. See, e.g., P.D. 97-416 (10/14/1997). The Department has repeatedly held that the rules applicable in the sales and use tax setting are not applicable to the local license tax regime which is based on the privilege of engaging in business. See P.D. 04-45 (8/13/2004), P.D. 09-93 (6/11/2009), P.D. 11-44 (3/23/2011), P.D. 12-220 (12/21/2012), and P.D. 14-117 (7/23/2014). In P.D. 97-416, the Department expressly stated that regulations had been issued clarifying that sales made to agents on behalf of government entities were exempt from retail sales and use tax. This regulation, however, does not apply to BPOL tax. 

The Taxpayer argues that there is no statutory or regulatory support for denying the deduction. On the contrary, by reason of their character as legislative grants, statutes relating to deductions or exemptions allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See DKM Richmond Associates, L.P. v. City of Richmond, 249 Va. 401 (1995). Regardless of the question concerning the application of the common law standards regarding agency relationships in BPOL tax, Virginia Code § 58.1-3732 B 1 clearly states that a deduction is permitted for the amount “paid for computer hardware and software that are sold to a United States federal or state government.” A sale to a procurement agent for a government is not a sale to a government entity.

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 VAC 10-500-80 A 2, a business must file an income or income-like tax return in a state or foreign country, even if there is no actual tax liability in a given year, in order to claim the deduction in that state or foreign country.

In its final determination, the County disallowed the out-of-state deduction for all states other than State C because the Taxpayer did not provide tax returns for any other states. During the course of the appeal, the Taxpayer provided a copy of its 2017 State B Franchise and Excise Tax return. State B imposes an excise tax at the rate of 6.5% on the net earnings of all persons doing business within State B. See State B Code Ann. § 67-4-2107(a). State B also imposes a franchise tax at the rate of $0.25 per $100 on the net worth of a person doing business in State B. See State B Code Ann. § 67-4-2105(a) and § 67-4-2106(a). Entities subject to the State B franchise and excise taxes include, but are not limited to corporations, limited partnerships, and limited liability companies. See State B Code Ann. § 67-4-2004(36).

The Taxpayer’s 2017 State B return provided indicates that it was subject to both the excise and franchise portion of the tax for the 2017 taxable year. Because the excise portion is a tax based on net income, to the extent any receipts otherwise sitused to the County were attributable to business conducted in State B, the Taxpayer would be entitled to an out-of-state deduction. 

The Taxpayer admits it did not file income tax returns in any states other than State A, State B, and State C. It argues, however, that it was technically required to file returns in other states but made a business decision not to file because no tax would be due. The regulations are clear and require that a return actually be filed in order to take the deduction. See also P.D. 18-170 (10/10/2018) and P.D. 23-113.

DETERMINATION

Under the provisions of Virginia Code § 58.1-3109 6, the local commissioner of the revenue is empowered with the authority to require records and other information necessary to make an accurate assessment of a person’s license taxes. As such, it is incumbent upon a taxpayer to prove to the satisfaction of the local taxing authority that it properly sitused and reported gross receipts on its tax returns. 

Based on the analysis above, the Department is remanding this case to the County. First, the County must determine which locations qualified as definite places of business in accordance with the standards discussed in this letter. This review will require the County to evaluate the status of each of the sales representatives’ home offices. In addition, it should reconsider whether the State B office, or the chief executive officer’s State B home office, qualified as a definite place of business in 2017.

The Department recognizes that the increasing use of home offices presents a challenge for the BPOL tax regime that it was not historically designed to address. In addition, as an emerging issue, the impact of a home office as a definite place of business on situs has not been an issue businesses and localities have had the opportunity to work through fully during an audit or the local appeals process. As stated above, no one characteristic determines whether a location was a definite place of business nor are particular characteristics required in every case. All relevant facts and circumstances must be considered, and the statutory standard is simply that it be an office or location at which occurs a regular and continuous course of dealing for 30 days or more. See Virginia Code § 58.1-3700.1.

Next, the County must determine the situs of the gross receipts based on the situsing rules discussed above. Only to the extent that sales solicitation activities were not performed at a definite place of business would they be sitused to the place from which they were directed or controlled. Finally, from the remaining pool of gross receipts sitused to the County, the County must determine the extent to which the Taxpayer was eligible for the out-of-state deduction and grant such deduction based on the returns filed in State B and State C.

The Taxpayer is not entitled to a deduction from gross receipts for the cost of computer hardware and software in cases where the sales were made to or through government agents.

The Taxpayer should work with the County to provide any further relevant information the County may request within a mutually agreed upon timeframe. The County should review and address any and all information the Taxpayer is able to provide, including information provided during the appeal process. The additional information will be limited to documentation related to definite places of business. 

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,

James J. Alex
Tax Commissioner
Commonwealth of Virginia

AR/4673.X