How should a city calculate the BPOL out-of-state gross-receipts deduction when receipts are sitused by payroll apportionment?

Plain-English summary

Virginia rejected the city's method and remanded the BPOL out-of-state deduction for a payroll-factor calculation. The city had allowed a deduction only when gross receipts taxed by another state exceeded the receipts apportioned there for income-tax purposes.

Virginia said the statute instead allowed qualifying receipts attributable to business conducted in another state or foreign country where the taxpayer was liable for an income or income-like tax. When payroll apportionment was used to situs receipts, the calculation required three steps:

1. Determine whether employees at the Virginia definite place of business participated in interstate transactions.
2. Directly identify and deduct specific interstate receipts when possible.
3. For remaining receipts that could not be directly traced, apply the payroll factor used for the Virginia definite place of business to gross receipts assigned to jurisdictions where the taxpayer filed and owed qualifying income tax.

The procedure could be adjusted for separate lines of business or different sourcing methods. Virginia sent the 2003-2007 assessments back to the city for recalculation and appropriate refunds.

Common questions

Q: Did any out-of-state sale automatically qualify?
A: No. Virginia-office employees had to participate in the interstate business, and the other jurisdiction had to impose a qualifying income-based tax on the taxpayer.

Q: Was the city allowed to deduct only receipts exceeding another state's income-tax apportionment?
A: No. The ruling required the stated direct-tracing and payroll-factor methodology.

Citations and references

• Va. Code §§ 58.1-3703.1 and 58.1-3732(B)(2).
• Virginia Public Document 10-228 (September 29, 2010).

Subject

Out-of-state deduction; Deduction for gross receipts: Methodology for calculating the out-of-state deduction

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-88

Original ruling text

May 31, 2012

Re: Appeal of Final Local Determination

Locality Assessing Tax: *

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 assessments of Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by the *** (the "City") for the 2003 through 2007 tax years.

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 section and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.

FACTS

In Public Document (P.D.) 10-228 (9/29/2010), the Department remanded the case back to the City in order to adjust the assessments for the 2003 through 2006 tax years to allow for a deduction under Va. Code § 58.1-3732 B 2 for gross receipts attributable to business conducted in another state or foreign country (hereinafter, the "out-of-state deduction"). The determination instructed the Taxpayer to provide additional evidence to show that it is entitled to the deduction.

The Taxpayer filed an amended request for an out-of-state deduction that would result in a refund of BPOL tax for the 2001 through 2005 tax years. The County revised the calculation of the out-of-state deduction and adjusted the BPOL assessments for the tax years at issue.

In addition, the City audited the Taxpayer for the 2007 tax year and adjusted the Taxpayer's 2007 tax liability and assessed additional BPOL tax. The Taxpayer appealed the assessment to the City, contending it was not permitted a deduction for gross receipts attributable to business conducted in other states.

In its final determination, the City only permitted a deduction to the extent that amount of gross receipts taxed by another state exceeded the amount of gross receipts apportioned to such state for income tax purposes. The Taxpayer appeals the City's final determination, contending that its methodology for calculating the out-of-state deduction was properly computed in accordance with P.D. 10-228.

ANALYSIS

Virginia Code § 58.1-3732 B 2 provides a deduction from gross receipts otherwise taxable for any receipts "attributable to business conducted in another state or foreign country in which the taxpayer . . . is liable for an income or other tax based upon income." Because revenues are sitused by directly assigning receipts to the taxpayer's definite place of business, it would be entitled to claim the deduction for those gross receipts that are attributable to business conducted in another state or foreign country in which it was liable for an income or income like tax based on income.

In P.D. 10-228, the Department ruled that when gross receipts are apportioned by using the general payroll apportionment formula, the amount of the out-of-state deduction would be determined by multiplying the total out-of-state gross receipts by the same payroll factor used to determine situs of gross receipts.

If payroll apportionment is used to source gross receipts to the Virginia definite place of business, then determining the receipts that can be deducted requires a three-step analysis.

1. Ascertain whether any employees at the Virginia definite place of business participated in interstate transactions by, for example, shipping goods to customers in other states, participating with employees in other offices in transactions, etc. If there has been no participation in interstate transactions, then there is no deduction. If there has been participation, then;

2. Ascertain whether any of this interstate participation can be tied to specific receipts. If so, then those receipts are deducted; however, if payroll apportionment had to be used to assign receipts to the definite place of business, then it is very unlikely that any of those apportioned receipts can be specifically (linked to interstate transactions. If not, or if only some of the participation can be tied to specific receipts, then;

3. The payroll factor used for the Virginia definite place of business would be applied to the gross receipts assigned to definite places of business in states in which the taxpayer filed an income tax return. Note that payroll apportionment would probably be needed to assign receipts to definite places of business in other states.

This procedure may need to be adjusted depending on the facts and circumstances of each taxpayer. For example, a taxpayer may have two lines of business, receipts for one of which can be assigned using the statutory method while the other requires use of payroll apportionment. In such a case the deduction would be the sum of the deductions computed for each line of business.

For example, presume a taxpayer (Taxpayer A) has an office in Virginia and offices in six other states. It has $10,000,000 in gross receipts and a payroll of $1,000,000. It files an income tax return and pays income tax in four of the six states. Employees from the Virginia office travel to the offices in the other states and generate receipts attributable to the customers the other states. Taxpayer A, situses its gross receipts using payroll apportionment. The out-of-state deduction would be computed as follows:

Payroll Payroll Factor Apportioned Gross Receipts* Income Tax Return Field Eligible for Deduction Gross Receipts Eligible for Deduction

Virginia $500,000 50.0% $5,000,000

State A $200,000 20.0% $2,000,000 Yes Yes $2,000,000

State B $150, 000 15.0% $1,500,000 Yes Yes $1,500,000

State C $75,000 7.5% $750,000 Yes Yes $750,000

State D $25,000 2.5% $250,000 Yes Yes $250,000

State E*** $20,000 2.0% $200,000 No No

State F*** $30,000 3.0% $300,000 No No

Total $4,500,000 Virginia Payroll Factor 50.0% Out-of-State Deduction $2,250,000

• Payroll Factor State Payroll/Total Payroll

** Apportioned Gross Receipts = Total Gross Receipts x State Payroll Factor

*** State E does not impose an income tax and State F exempts the Taxpayer from income tax

DETERMINATION

Based on the foregoing, I am remanding this case to the City to compute the out­-of-state deduction in accordance with this determination. The City should adjust the assessments for the 2003 through 2007 tax years and issue the appropriate refunds.

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

Sincerely,

Craig M. Burns

Tax Commissioner

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