Were a fulfillment center and IT center separate definite places of business, and how should 2005 BPOL receipts be assigned among them and a call center?

Subject

Definite place of business ; Methodology for attributing gross receipts.

Plain-English summary

The fulfillment center and IT center were separate definite places of business. Each had a continuous operating presence, employees, offices and phones, and performed business or recordkeeping at its own location. The city therefore could not treat the call center as the company's only Virginia business location.

The harder question was where to assign 2005 gross receipts. A worksheet carried the call-center city's name but appeared to include broader company receipts, and neither side conclusively established how much arose from the call center, fulfillment center, or IT center.

The Department remanded the assessment and gave the taxpayer 30 days to provide evidence. If the records still could not assign receipts under the statutory service-situs rules, the city had to consider payroll apportionment using employees who directly participated in the licensed activity.

What this means for you

• Warehouses and support facilities can be definite places of business when business is regularly conducted there.
• Gross receipts from services generally follow the place where the service is performed.
• Direction or control, and then payroll apportionment, are fallback rules.
• A worksheet label does not by itself establish the legal situs of all receipts shown on it.

Common questions

Did Virginia decide the final 2005 receipt amount taxable by the call-center city?

No. It remanded the factual allocation for more evidence.

When could payroll apportionment be used?

When it was impossible or impractical to determine where services were performed or directed and controlled.

Citations and references

• Va. Code §§ 58.1-3700.1(3), 58.1-3703, and 58.1-3703.1(A)(3)(a)(4), (A)(3)(b).
• P.D. 97-201, P.D. 04-80, and P.D. 97-308, discussed in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-230

Original ruling text

September 29, 2010

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 * (the "Taxpayer") with the Department of Taxation. The Taxpayer appeals an assessment of Business, Professional and Occupational License (BPOL) taxes issued to the Taxpayer by the *** (City A) for the 2005 tax year.

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, i.e. , 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 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 operated a call center in City A. The call center performed customer service, took telephone orders and performed various other customer support activities for unrelated third party customers. The Taxpayer also operated a fulfillment center in * (the "County"). The fulfillment center performed distribution services, such as receiving, pick-pack-ship, returns handling, cycle counts, gift wrapping, package inserts and various other distribution services for unrelated third party customers. In addition, the Taxpayer operated an information technology (IT) facility in the *** (City B) that provided IT support services to unrelated customers. Customers contracted with the Taxpayer for services that were provided by either the call center, the fulfillment center, or IT support center or any combination of the services that were performed by all three.

The Taxpayer used payroll apportionment to determine the situs of gross receipts in City A for the 2005 tax year. This Taxpayer had been using payroll apportionment for a number of years because it was unable to determine the source of gross receipts under the prescribed statutory method. Under audit, City A obtained documentation attributing gross receipts to the City A location for the 2005 taxable year using the statutory method. Accordingly, City A adjusted the Taxpayer's gross receipts, which resulted in an additional BPOL tax liability for the 2005 tax year.

The Taxpayer appealed the assessment to City A, contending that the gross receipts reported in its documentation represented the gross receipts from both the call center in City A and those from the fulfillment center in the County. The Taxpayer avers that the call center, fulfillment center, and IT centers are definite places of business, and the Taxpayer lacked the accounting capacity to attribute the gross receipts between the separate businesses. In its final local determination, City A upheld the audit assessment, concluding that the business activity at the facility in the County was directed from the facility in City A and that the Taxpayer did not have a definite place of business in the County and that the facility in City B did not generate gross receipts.

The Taxpayer appeals City A's final determination to the Tax Commissioner, claiming that the payroll apportionment method was the correct methodology for attributing gross receipts.

ANALYSIS

Definite place of business

Virginia Code § 58.1-3700.1 3 defines a "definite place of business" as:

an office or a location at which occurs a regular and continuous course of dealing for thirty consecutive days or more. A definite place of business for a person engaged in business may include a location leased or otherwise obtained from another person on a temporary or seasonal basis and real property leased to another.

Some characteristics that may help determine whether the location is a definite place of business include, but are not limited to, the following on-site activities: (1) a continuous presence; (2) having an office with a phone; (3) the reception of mail; (4) having employees; (5) record keeping; and (6) advertising or otherwise holding oneself out as engaging in business at the particular location. See Public Document (P.D.) 97-201 (4/25/1997).

At issue is whether the Taxpayer had definite places of business in the County and City B. Based on the information provided, the fulfillment center had a continuous presence at a facility where its employees conducted the Taxpayer's business. The facility is primarily a warehouse, but it does have an office and phones for administration of the business and initial record keeping. In addition, fulfillment services are performed at the Taxpayer's facility in the County. Also, according to the information provided, the IT center had continuous presence at a facility where its employees conducted the Taxpayer's business. It had an office and phones for the administration of business and performed its own record keeping. As such, the Taxpayer had a definite place of business in both the County and City B.

Situs

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 City A.

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; or as a last resort (iii) when it is impossible or impractical to determine where the service is performed or from where the service is directed or controlled, by payroll apportionment between definite places of business.

According to the Taxpayer, the services provided by the call center, the fulfillment center, and IT center are part of one business activity. Some customers contracted for services from the call center, some for services from the fulfillment facility, some from the IT center, and others for a combination of services from the three centers. The Taxpayer contends that its accounting system used at the time was incapable of attributing the gross receipts resulting from contract services from two or more of the Taxpayer's centers.

During City A's audit examination, the Taxpayer provided a worksheet with a list of gross receipts, by customer, that was titled in the name of City A. The worksheet also showed gross receipts attributed to locations outside Virginia. Because the totals on this worksheet support the total reported on the Taxpayer's consolidated federal income tax return, City A asserts that the total gross receipts reported should be sitused to City A. The Taxpayer argues the totals on the worksheet represent the total gross receipts of the call center, fulfillment center and IT center, and the worksheet was titled with City A's name because the call center and fulfillment center were in close proximity to each other.

The subject worksheet does appear to include a category of gross receipts attributed to City A. The worksheet also includes categories of gross receipts attributed to other facilities located outside Virginia. The worksheet, however, includes no categories for gross receipts from the fulfillment center or the IT center. Because the Taxpayer has definite places of business in the City A, City B, and County at which services are performed, it would appear that a portion of the Taxpayer's Virginia gross receipts must be sitused to each locality. The evidence provided is inconclusive as to whether the worksheet accurately reflects the situs of the Taxpayer's gross receipts.

Payroll Apportionment

When it becomes necessary to use payroll apportionment, the general payroll apportionment formula, as stated in 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.

The statute, however, does not specify the methodology to be used. According to P.D. 97-308 (7/22/1997), the legislative history has indicated that the purpose of apportionment by payroll is to divide gross receipts among the definite places of business, not to impose a disguised payroll tax on all employees. Where a multistate business can attribute sales to its definite places of businesses within the Commonwealth, it will usually be more practical to apportion using Virginia gross receipts and Virginia payroll than national gross receipts and payroll.

DETERMINATION

In accordance the analysis above, I find that the fulfillment center and the IT center were definite places of business in their respective localities. However, neither the Taxpayer nor City A has provided conclusive evidence with regard to the situs of the gross receipts. Because the issues involving the Taxpayer's worksheet are a matter of fact, a determination as to whether the gross receipts attributed to City A on the worksheet includes all gross receipts sitused in the Commonwealth remains the prerogative of City A.

Accordingly, I am remanding this case to City A in order to review any evidence the Taxpayer can provide concerning the amount of gross receipts derived from the call center. Such evidence must be provided within 30 days of the date of this letter. If sufficient evidence is submitted within the allotted time, the 2005 tax assessment will be adjusted in accordance with this determination.

If sufficient evidence is provided, City A must decide whether the Taxpayer's worksheet should be apportioned between City A, City B, and the County by using the payroll of only those employees who directly participate in the businesses' licensed activity.

If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda D. Foster

Deputy Tax Commissioner

AR/1-4014851407.B