Could a Virginia county apply the local definite place of business's payroll factor to known gross receipts from business conducted in another state when calculating the BPOL out-of-state deduction?

Subject

Known out-of-state receipts could support BPOL deduction calculation

Plain-English summary

A county could apply the Virginia payroll factor to the actual amount of out-of-state business when that amount was known and usable for BPOL purposes. The calculation derived the portion of that business attributable to the taxpayer's local definite place of business.

The source data still required careful review. An income-tax apportionment schedule could include receipts from goods shipped or services performed by offices in other states, making that schedule unsuitable without further analysis or apportionment.

Result: actual out-of-state receipts could be used, but only with a payroll-factor calculation and reliable BPOL-specific data.

What this means for you

• Use the best available data to calculate the BPOL out-of-state deduction.
• Apply the local Virginia payroll factor when payroll apportionment was used to situs receipts.
• Do not automatically import another state's income-tax apportionment figures.
• Check whether the data include receipts generated by unrelated definite places of business.

Citations and references

• Va. Code §§ 58.1-3701 and 58.1-3732(B)(2).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-171

Original ruling text

August 18, 2015

Re: Request for Advisory Opinion
Business, Professional & Occupational License (BPOL) Tax

Dear *:

This will respond to your letter in which the * (the “County”) requests an advisory opinion as to the proper methodology for calculating the out-of-state deduction in light of the Virginia Supreme Court's decision in Nielsen Company (US), LLC v. County Board of Arlington County , 767 S.E.2d 1 (2015) for the purpose of the Business, Professional and Occupational License (BPOL) Tax.

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 tax license 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 and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.

FACTS

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 a taxpayer's definite place of business, the taxpayer 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 Public Document (P.D.) 10-228 (9/29/2010), 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 the situs of gross receipts. The Department further clarified how the out-of-state deduction should be computed when payroll apportionment is used to situs gross receipts in P.D. 12-88 (5/31/2012), P.D. 12-146 (8/31/2012), and P.D 14-29 (3/5/2014). In Nielsen , the Virginia Supreme Court upheld the Department's methodology computing the out-of-state deduction when payroll apportionment is used to situs gross receipts because it "strikes a balance between the competing interests of the licensing jurisdiction and the taxpayer."

Virginia Code § 58.1-3701 provides that while the Department has the authority to address the BPOL statutes, it is not required to interpret any local ordinance. The County asks whether it is permissible to apply the Virginia payroll percentage to the actual amount of business conducted in another state, when the amount is known, rather than to the amount previously apportioned to the state via payroll apportionment.

OPINION

In P.D. 12-88, the Department provided a three-step analysis to determine the out-of-state deduction when payroll apportionment is used to situs gross receipts. The three steps are as follows:

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.

Underlying the procedures set out in P.D. 12-88 is the use of the best data available. The most accurate way to calculate the deduction would be to analyze each receipt assigned to the definite place of business in your locality and the transaction that generated it in order to determine if the receipt is also attributable to business done in a state in which the taxpayer is liable for income tax. This is not possible when payroll apportionment has been used to assign receipts to the definite place of business in your locality because there is no link between the gross receipts assigned to the definite place of business and specific transactions.

When payroll apportionment is used to situs gross receipts, the receipts attributable to states in which the taxpayer is liable for income tax should be examined to determine which, if any, of those receipts are also attributable to the definite place of business in your locality. If the actual amount of gross receipts for business done in another state is available, the deduction may be computed by applying the payroll factor to that amount to derive the portion of that business attributable to the definite place of business in your locality.

The source of the information must be carefully evaluated, however, to ensure that it is usable for purposes of Virginia's BPOL tax. For example, using the gross receipts shown on the apportionment schedule of the taxpayer's income tax return for the other state is unlikely to be usable for this purpose because it may include goods shipped and services rendered from definite places of business in states other than the state in question. See P.D. 03-15 (3/10/2003). The underlying circumstances that require payroll apportionment to situs gross receipts will very likely require a similar apportionment calculation to determine the gross receipts for business conducted in the state in question.

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/1-6066910183.M