Which healthcare affiliates had Virginia BPOL filing duties, and where were their service receipts sitused?

Plain-English summary

The three Virginia healthcare affiliates had potential BPOL filing duties, while affiliates with no Virginia definite place of business did not file merely because service-company payroll was allocated to them. Each Virginia affiliate had office space, property, records, phone, mail, and a public business presence.

BPOL service receipts followed a statutory sequence: where services were performed; if none, where they were directed or controlled; and only as a last resort, payroll apportionment among definite places of business.

Each Virginia affiliate had one definite place of business. Virginia therefore treated all of that affiliate's services as performed or directed from its Virginia facility regardless of where the shared-service company's employees worked. All receipts were sitused to that locality.

An out-of-state-business deduction appeared unlikely because the Virginia affiliates had no property or payroll elsewhere and thus seemed unlikely to owe an income-based tax in another jurisdiction.

What this means for you

• Analyze BPOL filing entity by entity, even within one corporate group.
• Allocated payroll does not create a definite place of business by itself.
• Apply service-performance and direction rules before payroll apportionment.
• An out-of-state deduction requires the statutory tax-liability conditions.

Common questions

Q: Did every affiliate file in Virginia?
A: No. Only affiliates with a Virginia definite place and licensable activity had potential filing duties.

Q: Could regulatory payroll allocations determine BPOL situs?
A: Not before applying the statutory situs sequence.

Q: Where were the Virginia affiliates' receipts sitused?
A: To each affiliate's sole Virginia definite place of business.

Citations and references

• Va. Code §§ 58.1-3700.1, 58.1-3701, 58.1-3703.1(A)(3), and 58.1-3732(B)(2).
• 23 VAC 10-500-10.
• Virginia Public Document 97-201 (April 25, 1997).

Subject

Parent ruling on which affiliates should file which tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-145

Original ruling text

August 5, 2011

Re: Request for Advisory Opinion

Business, Professional and Occupational License Tax

Dear *:

This is in response to your letter in which you request an advisory opinion regarding the application of the Business, Professional and Occupational License (BPOL) tax to a group of affiliated corporations located both within and without Virginia.

The local license fee and tax are imposed and administered by local officials. Virginia Code § 58.1-3701 authorizes the Department to 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 these facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulation 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

A parent corporation (the "Parent") maintains its corporate headquarters outside of Virginia. It wholly owns a service company ("Servco") that performs services for and on behalf of all the Parent's other affiliates. None of the affiliates have employees. Servco allocates payroll as a cost of performance to each of the affiliates based on an intercompany agreement using a methodology that requires the approval of various state government insurance regulatory agencies.

The Parent owns a network of affiliated health maintenance organizations (HMOs) and insurance companies. Each of the Parent's affiliates provide managed care to its members. Affiliates contract directly with independent physicians, hospitals and other providers. They reimburse the caregivers on a fee-for-services basis based on claims received from the physicians, hospitals or other care providers. Their services include, but are not limited to actuarial services, provider contracting, claims processing, pricing, and customer service.

Three affiliates operate in Virginia localities. Each Virginia affiliate has office space and tangible property. Records are kept at their respective Virginia offices. Each Virginia affiliate has a phone, receives mail and holds itself out to the public as doing business in their respective Virginia localities. All other affiliates have no physical presence in Virginia.

The Parent provides shared services, such as billing to Virginia and non-Virginia affiliates. In addition, the Servco supervisory staff its almost entirely located outside of Virginia.

The Parent requests a ruling as to which of the affiliates are required to file BPOL returns in Virginia locality. If some affiliates are required to file, the Parent asks how the gross receipts should be sitused. If gross receipts are to be sitused through payroll apportionment, the Parent inquires whether the affiliates could rely on the payroll allocation approved by state government agencies. The Parent then asks whether the out-of-state allocations of payroll should be included in the denominator of the payroll factor of the affiliates.

OPINION

Definite Place of Business

The BPOL tax is imposed on businesses and professionals for the privilege of doing business in a locality. Where a Virginia locality has adopted a BPOL ordinance that requires a license, every person engaged in a licensable activity at a definite place of business in such locality must apply for a license.

Virginia Code § 58.1-3700.1 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. Title 23 of the Virginia Administrative Code (VAC) 10-500­-10 interprets a definite place of business to include "an office or a location at which occurs a regular and continuous course of dealing where one holds one's self out or avails one's self to the public for 30 consecutive days or more, exclusive of holidays and weekends." Some characteristics that may help determine whether the location is a definite place of business include, but are not limited to, the following onsite activities: (1) a continuous presence; (2) having an office with a phone; (3) the reception of mail; (4) having employees; (5) record keeping; (6) and advertising or otherwise holding oneself out as engaging in business at the particular location. See Public Document (P. D.) 97-201 (4/25/1997).

Each Virginia affiliate has office space, tangible property, a phone and holds itself out to the public as doing businesses its respective Virginia locality. As such, each Virginia affiliate would be required to file a BPOL tax return provided it is engaged in a licensable activity and its Virginia locality imposes a BPOL tax.

The Parent also asks whether the non-Virginia affiliates would have a BPOL filing requirement if they were allocated Virginia payroll by Servco. As stated above, a person must be engaged in a licensable activity at a definite place of business in a locality in order to apply for a license. In the instant case, non-Virginia affiliates do not appear to have a definite place of business as defined in Va. Code § 58.1-13700.1. As such, the non-Virginia affiliates would not appear to have a Virginia BPOL filling requirement even if Servco employees performed services for them in Virginia.

Situs

The general rule for establishing situs for the BPOL tax is that whenever the tax is measured by gross receipts, "the gross receipts included in the taxable measure shall be only those gross receipts attributed to the exercise of a privilege subject to licensure at a definite place of business within [the] jurisdiction." See Va. Code § 58.1-3703.1 A 3 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.

In this case, each Virginia affiliate has only one definite place of business. As such, the services performed by the Virginia affiliates would be deemed to have been conducted or directed or controlled from their Virginia facilities regardless of where Servco's employees were located. Accordingly, all of the gross receipts of the Virginia affiliates would be sitused to their respective definite places of business within Virginia.

Out of State Deduction

If the Virginia affiliates have gross receipts from activity conducted outside Virginia, Va. Code § 58.1-3732 B 2 provides a deduction for taxable receipts for an amount "attributable to business conducted in another state or foreign country in which the taxpayer is liable for income or other tax based on income." Because the Virginia affiliates have no payroll or property outside of Virginia, it would appear unlikely that they would be liable for an income or other tax based on income in another state or foreign country.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4664179124.B