How should a global telemarketing company apportion direct-response receipts to a Virginia call center for BPOL tax?

Subject

Global call-center receipts used payroll apportionment with a possible further deduction

Plain-English summary

Virginia upheld the city's use of general payroll apportionment for the telemarketer's direct-response receipts. The company operated call centers worldwide, including one in the city. It could directly assign customized-operator-service revenue to particular centers, but could not trace direct-response call revenue to individual locations.

Virginia's service-receipt hierarchy first looks to where the service is performed, then where it is directed or controlled, and finally uses payroll apportionment when those locations are impossible or impractical to determine. With definite places of business both inside and outside Virginia, the applicable formula multiplied worldwide gross receipts by the Virginia center's payroll percentage.

The taxpayer could not automatically subtract receipts associated with every state where it filed an income-tax return before applying that formula. That approach risked deducting receipts already sitused to out-of-state facilities. It could, however, obtain a further statutory deduction if it proved that payroll apportionment assigned less than the full value of qualifying out-of-state or foreign receipts and therefore left some such receipts in the city's base.

What this means for you

• Service receipts are assigned under a hierarchy, with payroll apportionment as the last resort.
• Companies with offices outside Virginia generally cannot use a pre-apportionment deduction designed for businesses whose definite places of business are all in Virginia.
• Payroll apportionment may not fully capture every qualifying out-of-state receipt, but the taxpayer bears the burden of proving the difference.
• Filing an income-based return in another state was relevant to the deduction even if no actual tax was due that year.

Common questions

What payroll formula applied?

Gross receipts from all sources multiplied by payroll at the Virginia definite place of business, divided by total payroll everywhere.

Why could the company not subtract other-state receipts first?

Because it had definite places of business outside Virginia, a pre-apportionment subtraction could remove receipts already sitused outside the city.

Was any further deduction still possible?

Yes. The taxpayer had 45 days to prove that the payroll formula left qualifying out-of-state or foreign receipts in the city's taxable base.

Citations and references

• Va. Code §§ 58.1-3703, 58.1-3703.1(A)(3), and 58.1-3732(B)(2).
• 23 VAC 10-500-80.
• Virginia Public Documents 04-80, 04-90, and 05-1.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-146

Original ruling text

October 8, 2009

Re: Appeal of Final Local Determination

Locality:

Taxpayer:

Business, Professional and Occupational License Tax

Dear **

This final state determination is issued upon the application for correction filed by you on behalf of ** (the “Taxpayer”) with the Department of Taxation. You appeal an assessment of Business, Professional and Occupational License (BPOL) taxes issued to the Taxpayer by the * (the “City”) for tax years 2001 through 2006. I apologize for the delay in responding to your letter.

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. That is, 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 summarized below. The Code of Virginia sections, 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 out-of-state telemarketing provider that maintains call centers throughout the world, including one center located in the City. The Taxpayer provides customized operator services (COS) to select customers. COS contracts are performed by a single identified call center and gross receipts are directly attributed to call centers where the services are performed. The Taxpayer also provides direct response services (DR). In DR, incoming calls are directed to the Taxpayer’s corporate headquarters. The calls are then directed by corporate headquarters to the individual call centers. The Taxpayer is unable to associate call revenue to individual call centers.

The Taxpayer apportioned DR revenue on its original BPOL returns based on call center volume. The Taxpayer concluded that it was not filing its returns using the correct apportionment method. It determined that it was impossible or impractical to determine the situs of its gross receipts under the general situs rules and filed amended returns that apportioned its DR gross receipts based on payroll.

For BPOL tax purposes, the Taxpayer calculated DR gross receipts by subtracting from its total world wide gross receipts those gross receipts generated from each state in which it filed an income tax return and multiplied the net total by the percentage of its Virginia payroll to total payroll. The City audited the Taxpayer for the tax years at issue, disallowed the subtraction for the gross receipts attributed to states in which the Taxpayer filed income tax returns, and assessed additional BPOL tax.

The Taxpayer appealed the assessments to the City, contending it was not permitted a deduction for gross receipts attributable to business conducted in other states. In its final local determination the City upheld the audit assessment, concluding that the deduction afforded by Va. Code § 58.1-3732 B 2 is not applicable to the Taxpayer because the Taxpayer was not otherwise taxable by the City.

The Taxpayer appeals the City's final determination to the Tax Commissioner, claiming it has been denied the deduction for gross receipts attributable to its DR business conducted in other states or foreign countries.

ANALYSIS

Situs

Before addressing the issue as to whether the Taxpayer is entitled to a deduction for gross receipts attributable to business conducted in other states or foreign countries, a determination must be made as to whether the situs of the gross receipts has appropriately been determined. The BPOL tax may be imposed by jurisdictions on “businesses, trades, professions, occupations and callings and upon the persons, firms and corporations engaged therein within the county, city or town.” See Va. Code § 58.1-3703. In other words, it is a business’ situs and its activity within a given jurisdiction that gives rise to its local BPOL tax liability. The question becomes whether the measure of the Taxpayer's business activity is related to its presence in the City.

In determining the situs of gross receipts, Va. Code §§ 58.1-3703.1 A 3 a (4) and 58.1-3703.1 A 3 b state that receipts from services are to be taxed based on (in order): (i) the definite place of business at which the service is performed, or if not performed at any definite place of business, (ii) the place from which the service is directed or controlled; and as a last resort, or (iii) when it is impossible or impracticable to determine where the service is performed or from where the service is directed or controlled, by payroll apportionment between definite places of business.

In those instances where a taxpayer has a definite place of business in another state or foreign country, the preferred approach is to assign gross receipts to each office, both out-of-state and in Virginia, following the statutory hierarchy set out above. From the receipts assigned to an office in Virginia, certain deductions are authorized by statute, including a deduction for receipts attributable to states in which the taxpayer is subject to an income-based tax. The deduction is allowed to the extent that the receipts to be deducted were assigned to a Virginia office in the first step.

When it becomes necessary to use payroll apportionment, the general payroll apportionment formula, as stated in Public Document (P.D.) 04-80 (8/25/2004), for determining gross receipts sitused to a Virginia definite place of business is:

Gross receipts from all sources multiplied by the payroll attributed to the definite place of business divided by total payroll everywhere.

Out-of-State Deduction

The Taxpayer contends the method for situsing gross receipts in P.D. 04-80 fails to account for the out-of-state deduction to which it is entitled. The Taxpayer believes P.D. 04-90 (8/31/2004) and P.D. 05-1 (1/18/2005) provide the proper formula for determining its gross receipts subject to the County's BPOL tax. In both P.D. 04-90 and P.D. 05-1, the out-of-state deduction was taken before the gross receipts were apportioned.

A careful review of P.D. 04-90 and P.D. 05-1 reveals, however, that it only applies in the very limited circumstances. In each case, a taxpayer had multiple definite places of business in Virginia, but no definite places of business outside Virginia. Because all the gross receipts were sitused to Virginia, the deduction for gross receipts attributable to business conducted in another state or foreign country could be applied before apportionment without the possibility of deducting receipts sitused to a definite place of business outside Virginia. In these limited circumstances, any deduction may be taken before apportioning income between the Virginia definite places of business, if such method more accurately reflects gross receipts subject to a BPOL tax.

In the instant case, the Taxpayer had one definite place of business in Virginia and multiple definite places of business outside Virginia. By deducting gross receipts derived from call centers in states other than Virginia where the Taxpayer files income tax returns, the Taxpayer cannot guarantee that gross receipts sitused to facilities outside Virginia are not included in the deduction for business conducted in another state or foreign country. As such, the general payroll apportionment formula set out in P.D. 04-80 is applicable.

Virginia Code § 58.1-3732 B 2 provides a deduction for receipts “otherwise taxable” that are “attributable to business conducted in another state of foreign country in which the taxpayer is liable for income or other tax based on income.” Title 23 of the Virginia Administrative Code 10-500-80 notes that a taxpayer needs to file a return in these states, even if there is not actual tax liability in a given year, to claim the deduction. The Taxpayer contends that it is entitled to this deduction because it has revenue from customers in states in which it files a return for income or other tax based on income. The City contends that the Taxpayer is not entitled to this deduction because the Taxpayer has a definite place of business in states in which it is liable for an income tax, and therefore are “not otherwise taxable” by the City.

In P.D. 04-80, the taxpayer had multiple definite places of business outside Virginia. The Commissioner determined that the general payroll apportionment formula captures only the relationship between the City's payroll and the percentage of gross receipts apportioned to the City. This formula may not completely capture those gross receipts subject to an income or income-like tax in other states for which the Taxpayer is entitled to a deduction as provided for in Va. Code § 58.1-3732 B 2. In such cases, the burden of proof is upon the taxpayer to demonstrate that the formula assigns less than the full value of the receipts in other states or foreign countries for which it is entitled a deduction. If a taxpayer can demonstrate a difference between the two, it is entitled to deduct the difference from its taxable gross receipts in the City.

DETERMINATION

Based on the facts, using the general payroll apportionment formula conforms to the principles of the BPOL tax. Accordingly, I find that the City correctly applied the payroll apportionment method in determining gross receipts sitused to the Taxpayer's definite place of business within it jurisdiction.

The Taxpayer may, however, be entitled to a deduction for gross receipts attributable to business conducted in another state of foreign country if it can demonstrate that the general payroll apportionment formula assigns less than the full value of the receipts in other states or foreign countries. The Taxpayer must furnish the City with such information within 45 days of the date of this determination. Upon receipt of adequate information from the Taxpayer, the City is instructed to make appropriate adjustments to the Taxpayer's BPOL tax assessment for the tax years at issue.

If you have any questions regarding this determination, you may contact *

in the Department’s Office of Tax Policy, Appeals and Rulings, at **..

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2539366332