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.

Background

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.

Commentary

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.

Footnotes

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions