United States: Virginia Supreme Court Reverses And Remands Case Disallowing Apportioned Out-Of-State Deduction For BPOL Purposes

The Virginia Supreme Court has reversed and remanded a decision by the Arlington County Circuit Court addressing the out-of-state deduction that may be taken for business, professional and occupational license (BPOL) tax purposes.1 The Arlington County Circuit Court had held that a multistate business service provider was not 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. The Virginia Supreme Court overturned this decision, ruling that the circuit court's reasoning was not appropriate to reverse the Commissioner's initial decision, but remanded the case back to the circuit court for further proceedings.

BPOL Apportionment Statute and Out-of-State Credit

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 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 tax or other tax based upon income.6

Commissioner's Rulings on BPOL Apportionment

In a ruling issued in 2014, a county argued that there was no statutory basis for allowing the out-of-state deduction when using payroll apportionment to situs gross receipts. The Commissioner rejected this argument and explained that he or she has consistently held that using payroll apportionment to situs gross receipts does not prohibit a taxpayer from taking the out-of-state deduction.7 The apportionment of gross receipts by using a taxpayer's payroll is a process designed to reasonably approximate gross receipts from business transactions within a locality. 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.8

The Commissioner clarified the three-step process for computing the out-of-state deduction:

  • 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.9

Taxpayer's Apportionment Methodology

During the 2007 tax year, the taxpayer, a global company that provides information on consumer behavior, had offices in 18 states, including Virginia. The taxpayer's only Virginia office was located in Arlington County. In computing its BPOL tax liability, the taxpayer concluded that it was impossible or impractical to determine the situs of its gross receipts under the general situs rules and apportioned its gross receipts based on payroll. Also, the taxpayer used the same payroll factor for purposes of its out-of-state deduction.


In 2010, Arlington County audited the taxpayer and issued an additional tax assessment for the 2007 tax year. This assessment was based on the county's adjustment to the subtraction for the gross receipts attributed to states in which the taxpayer filed income tax returns. After the taxpayer appealed this assessment, the county upheld the audit adjustment to the deduction and concluded that its method properly excluded gross receipts from the deduction that had already been sitused to a definite place of business outside the county.

Following an unsuccessful appeal to the county, the taxpayer subsequently appealed the case to the Virginia Department of Taxation.10 The Commissioner concluded in favor of the taxpayer, holding that the county should use the payroll percentage methodology in calculating the out-of-state deductions instead.11 The Commissioner remanded the case so that the county could adjust the additional assessment for the 2007 tax year.

The county appealed the Commissioner's ruling to the Arlington County Circuit Court, which overturned the Commissioner's position and made the taxpayer responsible for the county's initial assessment. The circuit court rejected the Commissioner's methodology for calculating the relevant tax deduction as erroneous, contrary to law and precedent, and arbitrary and capricious in its application.

The taxpayer appealed the circuit court's decision to the Virginia Supreme Court claiming three assignments of error: (i) the circuit court misinterpreted the out-of-state deduction statute;12 (ii) the circuit court should have deferred to the Commissioner's interpretation of the out-of-state deduction statute; and (iii) the circuit court erroneously placed the burden of proof on the taxpayer instead of the county.

Supreme Court Reverses and Remands Circuit Court's Decision

The Virginia Supreme Court began its analysis by addressing the procedural issues of the case, concluding that courts do not defer to administrative agencies when interpreting statutes, and do not give great weight to: (i) administrative interpretation of a tax statute unless the statute is ambiguous; or (ii) the administrative agency's prior rulings that are not addressed in regulations. Accordingly, the Supreme Court held that the circuit court did not err in refusing to defer to the Commissioner's interpretation of the out-of-state deduction statute.

Turning to the question of the propriety of the Commissioner's action regarding its original ruling on BPOL apportionment, the Supreme Court held that the Commissioner's original ruling was not contrary to law. The out-of-state deduction statute does not address the permissible methodology for calculating the deduction. As a result, the plain and unambiguous statutory language allows for the Commissioner to decide how the deduction is calculated. The Supreme Court determined that the Commissioner's ruling that required either manual accounting or payroll apportionment if manual accounting was impossible to calculate, falls within the scope of accounting methodologies permitted by the out-of-state deduction statute. In addition, the Supreme Court found the circuit court erred when it found the Commissioner's ruling was arbitrary and capricious in application.

While the Supreme Court endorsed the Commissioner's approach, the Supreme Court ultimately ruled that the case would have to be remanded to the circuit court for final determination, and directed that the case could not be remanded to the Arlington County Commissioner who originally denied the taxpayer's request. Further, the taxpayer will bear the burden before the circuit court in trying to prove the availability and amount of the out-of-state deduction under the Commissioner's guidelines.


The Virginia Supreme Court ruling supports the Commissioner's belief that taxpayers may be entitled to take a more liberal approach to apportioning gross receipts outside the state, despite the historically restrictive understanding of how to apportion gross receipts which has been employed by multiple county and city commissioners of revenue. While the Supreme Court ruled the Commissioner's past position was not contrary to law and was not arbitrary or capricious, the Supreme Court did not make a ruling affirmatively stating that the Commissioner's position was correct for this particular taxpayer. Therefore, the circuit court will have a second opportunity to determine whether or not the taxpayer's apportioned deduction from gross receipts will be allowed, though such determination will need to be made in line with the Commissioner's conception of the deduction. With Virginia BPOL filings due on March 2, 2015, taxpayers that are subject to the BPOL tax should consider their current BPOL apportionment methodology, both in light of the Commissioner's guidance on this issue, and the Supreme Court's guidance set forth in this decision. Also, there may be refund opportunities for taxpayers that could not use manual accounting but did not use payroll apportionment for purposes of the out-of-state deduction.


1 Nielsen Co. (US), LLC v. County Board of Arlington County, Virginia Supreme Court, Record No. 140422, Jan. 8, 2015.

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. § 58.1-3732.B.2.

7 Ruling of Commissioner, P.D. 14-29, Virginia Department of Taxation, March 5, 2014, citing Ruling of Commissioner, P.D. 99-87, Virginia Department of Taxation, April 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, July 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.

8 Ruling of Commissioner, P.D. 14-29, Virginia Department of Taxation, March 5, 2014, citing Ruling of Commissioner, P.D. 10-228, Virginia Department of Taxation, Sep. 29, 2010. In promulgating this method, the Commissioner considered whether the method met the statutory requirements for granting the deduction, whether it reasonably could be administered, and whether it could be applied uniformly.

9 Ruling of Commissioner, P.D. 14-29, Virginia Department of Taxation, March 5, 2014.

10 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. 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. However, local assessments are deemed prima facie correct.

11 Ruling of Commissioner, P.D. 12-146, Virginia Department of Taxation, Aug. 31, 2012.

12 Id.

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