United States: Virginia Tax Commissioner Allows Deduction For Gross Receipts Attributable To Business In Other States For BPOL Purposes

The Virginia Tax Commissioner has held that, for business, professional and occupational license (BPOL) tax purposes, a multistate business service provider was entitled to an apportioned deduction from gross receipts for receipts attributable to business conducted in other states, after the company's gross receipts were sitused for BPOL tax purposes using payroll apportionment.1 The case was remanded to the county that imposed the BPOL tax to adjust the taxpayer's liability for the tax periods at issue.


In Virginia, localities are authorized to impose a BPOL tax generally based on the taxpayer's gross receipts for the privilege of conducting business.2 The tax is imposed and administered by local officials at different rates according to a taxpayer's classification.3 Generally, taxable gross receipts include only those receipts attributed to a definite place of business within a jurisdiction, which for a service provider is based upon the place where services are performed or from which they are directed or controlled.4 If a licensee performing services has more than one definite place of business and it is impractical or impossible to determine to which place of business gross receipts should be attributed under the general rule, the receipts may be apportioned between the definite places of business on the basis of payroll.5 Taxpayer appeals of BPOL assessments issued by local authorities may ultimately be addressed by the Virginia Department of Taxation, which is authorized to issue final determinations.6 However, local assessments are deemed prima facie correct.

The taxpayer at issue, a business service provider, had a definite place of business in the assessing county, as well as offices located in other states and other Virginia localities. In computing BPOL tax liability, a deduction from total gross receipts is permitted for 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.7 The taxpayer sitused gross receipts to compute the deduction using payroll apportionment for the taxable years at issue. Specifically, in 2011, the taxpayer calculated out-of-state deductions for tax years 2008 through 2010 and requested a refund of the corresponding BPOL tax. The taxpayer also filed its 2011 and 2012 BPOL tax returns claiming out-of-state deductions. The county imposing the BPOL tax8 disallowed the deductions claimed by the taxpayer, denied the requested refunds for tax years 2008 through 2010, and issued assessments for tax years 2011 and 2012. The taxpayer's appeal of these adjustments was denied by the county, based on the county's determination that the Department had overstepped its statutory authority in previous rulings addressing similar issues and that these rulings were inconsistent with applicable statutory requirements.9 The taxpayer appealed the final determination to the Department.

Allowable Deduction for Business Transacted in Another State

The Department had ruled in other matters addressing the allowable deduction from gross receipts for business conducted in another state or foreign country that when gross receipts are apportioned by using the general payroll apportionment formula, the amount of the out-of-state deduction is determined by multiplying the total out-of-state gross receipts by the same payroll factor that is being used to determine the situs of gross receipts.10

The county imposing the BPOL tax focused its arguments against reaching a similar conclusion with respect to the taxpayer at issue on the lack of specific statutory authority defining how to compute the deduction when payroll apportionment is used to situs gross receipts.

Citing the arbitrary nature of any method used to approximate income from business transactions within a state, as well as the fact that payroll apportionment is a concept based on income tax principles, the Department noted that the apportionment of gross receipts using a taxpayer's payroll factor is simply a process designed to reasonably approximate gross receipts from business transactions within a locality. Thus, the Department maintained its consistent position that using payroll apportionment to situs gross receipts does not prohibit a taxpayer from taking the out-of-state deduction.11

The Department also addressed the necessary amount of contact with out-of-state customers to justify that a taxpayer has nexus in another jurisdiction for purposes of the gross receipts deduction for business transacted in another state. Noting that nexus for income tax purposes requires only minimal contacts with customers in other states to meet the requirement for a deduction,12 the Department found it reasonable to require only minimal contacts with customers in other states for taxpayers to meet the requirements for a deduction. Thus, the Department refused to recognize any need for a business to demonstrate, in order to be eligible for the deduction at issue, that income earned by the Virginia definite place of business was included in the taxable income shown on a return filed with any other jurisdiction, or caused the taxpayer to be subject to tax in any other jurisdiction.13

The Department clearly documented the following three-step calculation to be used for computing the deduction for business transacted in another locality for BPOL purposes where gross receipts have been sitused by payroll apportionment:

  • Determine if employees from the definite place of business earn, or participate in earning receipts attributable to customers in other states where a taxpayer filed an income tax return;
  • Determine receipts eligible for deduction; and
  • Multiply (i) the receipts eligible for the deduction by (ii) the same payroll factor used to determine the situs of gross receipts.14

Accordingly, the taxpayer was permitted a deduction for gross receipts attributable to business conducted in other states and the matter was remanded to the county imposing the BPOL tax to adjust the taxpayer's 2008-2012 BPOL tax liabilities by calculating the amount of the out-of-state deduction using the methodology provided in the ruling.


This ruling supports the Virginia Tax Commissioner's belief that companies may be entitled to take a more liberal approach to apportioning gross receipts outside the state, despite the generally restrictive understanding of how to apportion gross receipts which has been employed by multiple county and city commissioners of revenue. As noted in the decision, multiple determinations addressing this dichotomy have been issued by the Virginia Tax Commissioner with similar results, despite multiple challenges from local governments seeking to disallow or decrease the deduction. This ruling confirms that the Tax Commissioner is not backing down from the state's position on this issue even in the face of these local government challenges.

Arlington County and Fairfax County are notable examples of large local jurisdictions that have challenged the Virginia Tax Commissioner's position. The Arlington County Commissioner of Revenue's conception of the out-of-state deduction has been endorsed in litigation, and it is our understanding that the taxpayer that received this adverse decision has appealed the case to the Virginia Supreme Court. In addition, Fairfax County has taken a more aggressive approach to address the issue by proactively contacting taxpayers who have used the filing methodology provided by the Virginia Tax Commissioner in this decision in currently filed returns. Fairfax County has requested that these taxpayers file amended returns that do not utilize this filing methodology in an effort to determine the difference in BPOL tax revenue resulting from the position.

Despite the continued challenges by localities, the Virginia Tax Commissioner's newest ruling provides clear, detailed guidance concerning how to utilize the payroll apportionment factor to compute the allowable out-of-state deduction for Virginia employees working on non-Virginia business in situations where the taxpayer has a definite place of business in Virginia. While previous rulings came to similar conclusions, this ruling is unique in that the calculation is clearly defined.

Taxpayers who have not yet taken advantage of the more liberal interpretation of the out-of-state deduction employed by the Virginia Tax Commissioner should file protective refund claims to ensure that they do not miss an opportunity for potential refund if the Virginia Supreme Court chooses to address this issue and ultimately rules in favor of the Virginia Tax Commissioner over its county counterparts.


1 Ruling of Commissioner, P.D. 14-30, Virginia Department of Taxation, Mar. 5, 2014.

2 VA. CODE ANN. § 58.1-3703.A.

3 VA. CODE ANN. § 58.1-3706.A.

4 VA. CODE ANN. § 58.1-3703.1.A.3(a).

5 VA. CODE ANN. § 58.1-3703.1.A.3(b).

6 VA. CODE ANN. § 58.1-3703.1.A.6. These determinations may be reviewed by the Virginia circuit courts. VA. CODE ANN. § 58.1-3703.1.A.7.

7 VA. CODE ANN. § 58.1-3732.B.2.

8 The identity of the county imposing the BPOL tax was redacted in the Commissioner's ruling.

9 Ruling of Commissioner, P.D. 10-228, Virginia Department of Taxation, Sep. 29, 2010; Ruling of Commissioner, P.D. 12-89, Virginia Department of Taxation, May 31, 2012.

10 Ruling of Commissioner, P.D. 10-228, Virginia Department of Taxation, Sep. 29, 2010; Ruling of Commissioner, P.D. 12-89, Virginia Department of Taxation, May 31, 2012; Ruling of Commissioner, P.D. 12-146, Virginia Department of Taxation, Aug. 31, 2012.

11 As evidenced by the decisions in Ruling of Commissioner, P.D. 99-87, Virginia Department of Taxation, Apr. 23, 1999; Ruling of Commissioner, P.D. 04-80, Virginia Department of Taxation, Aug. 25, 2004; Ruling of Commissioner, P.D. 05-118, Virginia Department of Taxation, Jul. 19, 2005; Ruling of Commissioner, P.D. 09-146, Virginia Department of Taxation, Oct. 8, 2009; Ruling of Commissioner, P.D. 10-228, Virginia Department of Taxation, Sep. 29, 2010; Ruling of Commissioner, P.D. 12-89, Virginia Department of Taxation, May 31, 2012; and Ford Motor Credit Co. v. Chesterfield County, 707 S.E. 2d 311 (Va. 2011).

12 Citing Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).

13 Ruling of Commissioner, P.D. 10-228, Virginia Department of Taxation, Sep. 29, 2010.

14 In addition, the Department included an example showing how the calculation would work in practice. In the example, a company with places of business in Virginia and three other states that did not have to file an income tax return in one of the states other than Virginia would calculate its out-of-state deduction by multiplying its total gross receipts by the combined payroll percentages of the two states other than Virginia in which an income tax return was filed. That product would then be multiplied by the Virginia payroll factor, which result would be the applicable out-of-state deduction. This deduction would be subtracted from gross receipts sitused to Virginia in determining the BPOL tax base.

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