How should a disregarded LLC calculate Virginia BPOL receipts when its corporate owner reports the LLC's out-of-state business on income tax returns?

Subject

Formula for determining the gross receipts for BPOL tax purposes

Plain-English summary

Virginia said the disregarded LLC could claim the BPOL out-of-state business deduction when its corporate owner reported the LLC's receipts on an income or income-like tax return in the other jurisdiction. The owner's separate, combined, or consolidated filing format did not control.

The deduction covered only receipts attributable to the LLC's own out-of-state business. The taxpayer had to provide gross-receipts figures, not merely income-tax amounts, and show that the owner actually reported those receipts in a jurisdiction where the LLC would otherwise be liable for an income or income-like tax.

The calculation order was: determine worldwide gross receipts; identify the receipts from business activity sitused in Virginia; subtract the allowable out-of-state deduction from those Virginia receipts; then apportion the remainder among Virginia localities where the taxpayer had definite places of business.

What this means for you

• A disregarded entity can look to its owner's other-state return for the statutory filing condition.
• Combined or consolidated filing can qualify if the entity's own receipts are demonstrably included.
• Build receipt-level schedules; income or taxable-income figures are not substitutes for gross receipts.
• Apply the out-of-state deduction before allocating the remaining Virginia receipts among localities.

Common questions

Did the corporate owner have to pay tax in the other state? No. The ruling required liability and filing, not an actual positive payment.

Did consolidated filing prevent the deduction? No. The owner could file separately, combined, or consolidated.

What records did the LLC need? Figures isolating its own out-of-state gross receipts and proof that its owner reported them on the relevant returns.

Citations and references

• Va. Code § 58.1-3701, § 58.1-3700.1, and § 58.1-3732(B)(2).
• 2000 BPOL Guidelines § 2.6.
• P.D. 05-1 (January 18, 2005) and P.D. 97-343 (August 28, 1997).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-142

Original ruling text

September 5, 2007

Re: Request for Advisory Opinion

Taxpayer: *

Business, Professional and Occupational License Tax

Dear *:

This is in response to your letter in which you request an advisory opinion regarding the deduction from gross receipts attributable to business conducted in another state or foreign country.

The local license fee and tax are imposed and administered by local officials. Section 58.1-3701 of the Code of Virginia authorizes the Department to promulgate guidelines and issue advisory opinions on local license tax issues. The following opinion has been made subject to the facts presented to the Department summarized below. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia , regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.

FACTS

* the "Taxpayer") is a single member LLC owned by *** (LLC A). As a disregarded entity , , 1 the Taxpayer is not directly liable for an income or an income-like tax in Virginia and other jurisdictions. Instead, all receipts attributable to the Taxpayer's business are included on LLC A's income tax returns.

LLC A is a member of a family of corporate entities. LLC A has elected to be taxed as a corporation for federal and state income tax purposes. As a member of an affiliated group, depending upon state law, LLC A may file its income taxes on a separate, combined or consolidated basis.

The Taxpayer requests a ruling for BPOL tax purposes that it can deduct those gross receipts attributable to business conducted in other states and foreign countries and reported by LLC A where LLC A files an income or an income-like tax return.

OPINION

Deductions from Gross Receipts

The BPOL tax is based on a taxpayer's gross receipts, which are defined in Va. Code § 58.1-3700.1 as "the whole entire total receipts, without deduction." There are some specific statutory exclusions and deductions from gross receipts. Virginia Code § 58.1-3732 B 2 provides a deduction for "Any receipts attributable to business conducted in another state or foreign country in which the taxpayer (or its shareholders, partners or members in lieu of the taxpayer) is liable for an income or other tax based upon income." [Emphasis added.]

The regulations further provide that the taxpayer must be liable for an income or an income-like tax in the other state and file a return in that state to take advantage of the deduction. The Virginia taxpayer, however, need not actually pay any tax to take the deduction. See 2000 BPOL Guidelines § 2.6.

In the present case, the question is, can the Taxpayer deduct from its gross receipts those receipts attributable to business in another state or foreign country that flow through to LLC A? Second, in those instances where LLC A files as a part of an affiliated group, is LLC A considered to have filed an income tax return for purposes of the BPOL tax out-of-state deduction? Finally, how are these receipts to be determined?

1. Can the Taxpayer deduct those gross receipts that flow through to LLC A?

The statute and regulations are clear. Only to the extent to which the Taxpayer does business in other states or foreign countries in which the Taxpayer would be liable for an income or income like tax and LLC A actually reports those receipts on behalf of the Taxpayer on its out-of-state income tax returns, can the Taxpayer deduct those receipts for BPOL tax purposes. It is incumbent upon the Taxpayer to produce figures relating solely to gross receipts attributed to its business in other states (not income tax figures) in computing the out-of-state deduction. It does not matter how LLC A is required to file in other states, but it must file an income or income-like tax return in those states.

2. Does deduction apply when LLC A files as a part of an affiliated group?

For BPOL tax purposes, it is of little consequence as to whether LLC A files a separate, combined or consolidated income tax returns in other states. If the Taxpayer can demonstrate to the locality's satisfaction that those gross receipts attributed to the Taxpayer's business in other states are subject to income or income-like taxes and reported by LLC A, either separately or as a member of an affiliated group, those gross receipts must be deducted from gross receipts attributable to Virginia for purposes of the BPOL tax.

3. How are these receipts subject to the deduction determined?

Gross receipts must be attributed to a taxpayer's definite place of business, or absent a definite place of business, to the situs from which a taxpayer's business is controlled. In Public Document (P.D.) 05-1 (1/18/2005), the Department found that for a taxpayer with a definite place of business in Virginia, the out-of-state deductions allowed pursuant to Va. Code § 58.1-3732 B 2 are calculated before the remaining receipts are apportioned among the definite places of business that a taxpayer has in Virginia.

The formula for determining the gross receipts for BPOL tax purposes when a taxpayer has one or more definite places of business in Virginia is as follows: the taxpayer must calculate its world wide gross receipts, determine those receipts that are attributed to Taxpayer's business activity sitused in Virginia, subtract those Virginia gross receipts permitted as an out-of-state deduction, and then apportion the remaining gross receipts among those localities that have a definite place of business in Virginia.

As discussed above, in the Taxpayer's case the deductible gross receipts would be those receipts for which the Taxpayer would ordinarily be liable for an income or income like tax, but, because of the organizational structure of the Taxpayer, are reported by LLC A or the affiliated group.

If you have any questions regarding this opinion, you may call * Office of Policy and Administration, Appeals and Rulings at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-113685951H

1 The Taxpayer has elected to be treated as a disregarded entity for federal and state income tax purposes. See Public Document (P.D.) 97- 343 (08/28/1997) for further explanation.