My county's BPOL assessment didn't count my sales reps' home offices as business locations, denied my computer-equipment resale deduction because I sold through a government contractor instead of directly to the government, and refused my out-of-state deduction for states where I could have filed a return but chose not to -- can I fix any of this on appeal?

Plain-English summary

A business that sells computer products and services maintained a definite place of business in a Virginia county, and filed BPOL (Business, Professional and Occupational License) tax returns situsing all of its gross receipts there. Under audit, the county reduced two deductions the business had claimed -- a computer hardware/software resale deduction and an out-of-state deduction -- and issued assessments for 2016-2018. The business appealed to the county, then to the Department, raising several issues at once.

New evidence on appeal: allowed, not barred

The county argued the Department shouldn't even consider information the taxpayer hadn't previously shown the county. The Department flatly rejected that: BPOL's administrative appeals process was specifically designed to be less formal and less burdensome than court litigation, and Virginia's own regulations (23 VAC 10-500-760) expressly contemplate new issues being raised for the first time on appeal to the Department. All information submitted with an administrative appeal gets due consideration, full stop.

A new doctrine for this corpus: home offices as "definite places of business"

The taxpayer argued it had MORE definite business locations than the county recognized -- specifically, that some sales representatives' home offices (in other states) qualified, and that a proposed additional office should count for part of 2017. Virginia's definite-place-of-business test (Va. Code § 58.1-3700.1) is simple on its face: an office or location with a "regular and continuous course of dealing for thirty consecutive days or more." The Department confirmed that a home office CAN satisfy this test -- employment contracts showed some reps were expected to work from home offices in other states, which is enough to require the county to actually evaluate each one, rather than skip the question because it was raised late. No single factor (continuous presence, a phone line, receiving mail, having employees, record-keeping, advertising) is required or by itself determinative -- it's a facts-and-circumstances test, and ultimately the locality must make the call for each location.

A proposed office needed more proof. For a separate office the taxpayer said became a definite place of business mid-2017 (once its CEO began living there), the county had denied it for 2017 because no lease payments were made that year (the space was under repair). The Department held the lack of lease payments alone wouldn't disqualify it -- but the taxpayer's only evidence (an invoice showing computer equipment was delivered there) wasn't enough by itself to show the location was actually being used to conduct business, especially since the taxpayer's own tax return for that state and year didn't list any property there. The county must look deeper on remand.

Situs of gross receipts follows sales solicitation, or wherever it's directed and controlled

Where a definite place of business does the actual sales solicitation (taking customer orders, etc.), receipts are sitused there. Where solicitation doesn't happen at any definite place of business, receipts go to wherever that solicitation activity is directed or controlled -- here, the Department found the taxpayer's CEO (not a more purely administrative office in a different state) was the one actually directing and controlling sales activity, based on employment contracts showing sales reps reported to the CEO directly. If the home offices turn out to be definite places of business, though, receipts from sales made there would generally be sitused to those homes instead.

Computer hardware and software deduction: agency rules don't cross over from sales tax to BPOL

The taxpayer claimed a deduction for equipment resold to the government, even where the actual buyer of record was a government procurement AGENT rather than the government itself -- arguing that general agency law should treat a sale to an agent as a sale to its government principal. The Department rejected this, citing a long line of its own rulings: the agency principles the Department applies in the SEPARATE sales-and-use tax context (where sales to government procurement agents can be exempt) do not carry over to the BPOL tax regime, which is a fundamentally different tax based on the privilege of doing business, not a sales-and-use tax. Because Va. Code § 58.1-3732 B 1's deduction requires a sale directly "to" a government entity, and exemption/deduction statutes are strictly construed against the taxpayer, a sale to an agent doesn't qualify.

Out-of-state deduction: you actually have to file the return

Virginia's BPOL out-of-state deduction (Va. Code § 58.1-3732 B 2) requires that the business be liable for an income-based tax in another state or country -- and the regulations require that the business actually file a return there, even if no tax ends up being due. The taxpayer got the deduction for one state where it produced an actual filed franchise/excise tax return. For every other state, the taxpayer admitted it never filed, arguing only that it was "technically required to" but made a business decision not to since no tax would be owed. That argument failed -- the regulation requires an actual filed return, not a hypothetical filing obligation.

What happens next

The whole case is remanded to the county to: (1) determine which locations -- including each sales rep's home office and the disputed State B location -- qualify as definite places of business; (2) re-situs gross receipts according to where solicitation occurred, or was directed/controlled, based on that determination; and (3) apply the out-of-state deduction based on returns actually filed. The computer hardware/software deduction for sales through government agents remains denied. The county must issue a new final determination, and the taxpayer retains its normal 90-day appeal rights if it disagrees with the outcome.

What this means for you

Businesses with remote sales staff working from home, especially across state lines

A sales representative's home office CAN count as your business's "definite place of business" for BPOL situs purposes if there's a regular and continuous course of dealing there for 30+ days -- which can shift where your gross receipts are taxed. Track and document each remote employee's work arrangement; this is an emerging, fact-intensive area localities and businesses are still working through.

Businesses raising new facts or arguments for the first time in an appeal to the Department

You're not barred from doing so just because you didn't raise them with the locality first -- BPOL's appeal process explicitly allows it, unlike the more restrictive rules of court litigation.

Businesses selling equipment to government agencies through a procurement contractor or agent

Don't assume sales-and-use-tax agency rules protect you here. For the BPOL computer hardware/software deduction, the sale must be directly TO the government entity itself -- a sale to its procurement agent doesn't qualify, even though the same sale might be treated differently for sales tax purposes.

Businesses claiming an out-of-state BPOL deduction

You must ACTUALLY FILE an income-based tax return in the other state or country -- a claim that you were merely "required to" file but chose not to (because no tax was due) won't satisfy the deduction's requirements.

Common questions

Q: Can I raise new facts with the Department that I never gave my county during the local appeal?
A: Yes. BPOL's administrative appeal process to the Department is intentionally less formal than a court proceeding, and Virginia's regulations expressly allow new issues to be raised at that stage.

Q: Does my sales rep's home office count as a "definite place of business" for BPOL purposes?
A: It can -- the legal test is simply whether there's a regular and continuous course of dealing there for 30 consecutive days or more. No single feature (a phone, receiving mail, advertising) is required, and the locality must evaluate the specific facts for each location.

Q: I sold computer equipment to a government procurement agent rather than directly to the government -- does my BPOL deduction still apply?
A: No. Agency-law principles used for sales-and-use tax purposes don't extend to the BPOL deduction, which requires a sale directly to the government entity itself.

Q: I was technically required to file an income tax return in another state but didn't because no tax was owed -- can I still get the BPOL out-of-state deduction for that state?
A: No. The deduction requires that you actually filed a return in that state (even a zero-tax return), not merely that you were theoretically obligated to.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-3703.1 -- BPOL administrative appeals process; assessment deemed prima facie correct
• Va. Code § 58.1-3700.1 -- definite place of business: an office or location with a regular and continuous course of dealing for 30+ consecutive days
• Va. Code § 58.1-3703.1 A 3 a -- situs of a retailer's gross receipts: sales solicitation location, or direction/control, or last-resort payroll apportionment
• Va. Code § 58.1-3732 B 1 -- deduction for computer hardware/software resold to a federal or state government entity within two years of purchase
• Va. Code § 58.1-3732 B 2 -- out-of-state deduction for receipts attributable to business in another state where the taxpayer is liable for an income-based tax
• Va. Code § 58.1-3109 6 -- local commissioner's authority to require records for an accurate assessment
• 23 VAC 10-500-760 -- procedures for new issues raised for the first time in an administrative appeal to the Department

Case law: DKM Richmond Associates, L.P. v. City of Richmond, 249 Va. 401 (1995) -- deductions and exemptions are strictly construed against the taxpayer.

Prior rulings the Department relied on (described here, not linked): P.D. 21-61 (5/18/2021) (new evidence allowed on appeal); P.D. 97-201, P.D. 01-215, and P.D. 10-277 (definite-place-of-business factors); P.D. 14-121, P.D. 21-131, and P.D. 23-113 (home offices as definite places of business, a locality-by-locality determination); P.D. 97-317, P.D. 98-42, and P.D. 18-164 (sales solicitation as situs driver); P.D. 13-219 (dividing sales among multiple definite places of business); P.D. 97-416 (agency rules DO apply for sales-and-use tax exemption purposes -- a different tax regime); P.D. 04-45, P.D. 09-93, P.D. 11-44, P.D. 12-220, and P.D. 14-117 (agency rules do NOT apply to BPOL tax); P.D. 18-170 and P.D. 23-113 (out-of-state deduction requires an actual filed return). This ruling opens the "home office as definite place of business" doctrine for this corpus.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-89

Original ruling text

September 18, 2024

Re: Appeal of Final Local Determination

Business, Professional and Occupational License Tax

Dear *:

This final state determination is issued upon the administrative appeal filed on behalf of * (the “Taxpayer”), with the Department of Taxation. The Taxpayer disagrees with assessments of the Business, Professional and Occupational License (“BPOL”) tax issued to the Taxpayer by *** (the “County”) for the 2016 through 2018 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 as summarized below. The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website.

FACTS

During the tax years at issue, the Taxpayer, a business engaged in the sale of computer products and services, maintained a definite place of business in the County. The Taxpayer filed BPOL returns with the County, situsing all gross receipts to the County. In addition, it claimed a computer hardware and software deduction for equipment purchased and resold to the government and an out-of-state deduction.

Under audit, the County reduced the deduction for computer hardware and software sales to the government to the extent the claimed deductions were attributable to services and travel expenses. The County also disallowed the out-of-state deduction because income tax returns had not been filed in other states. As a result, assessments were issued.

The Taxpayer appealed to the County, contending that it was entitled to an out-of-state deduction. In addition, with its appeal, the Taxpayer included amended returns that sitused gross receipts among several definite places of business. Further, while it conceded that it was not entitled to the computer hardware and software deduction for service sales or travel expenses, the Taxpayer claimed that deduction for additional sales not included in the deduction on the original returns.

In its final determination, the County determined that the Taxpayer did operate from a number of definite places of business and adjusted the assessment to reflect the situsing of a portion of its gross receipts to these other business locations. The County sitused the remaining gross receipts to the County based on its finding that those sales were directed or controlled from the definite place of business located in the County. In addition, the County did not allow the additional computer hardware and software deductions because the evidence indicated those sales were not made directly to the government. Finally, the County permitted the out-of-state deduction for one state for which the Taxpayer proved that it had filed an income tax return.

The Taxpayer filed an administrative appeal with the Department, asserting that its amended returns accurately sitused its gross receipts and that the additional computer hardware and software sales were eligible for deduction. In addition, the Taxpayer appealed the County’s determination that it was ineligible for the out-of-state deduction for states in which it could have filed an income tax return even though a return was not actually filed.

ANALYSIS

New Information Provided with the Appeal

As an initial matter, the County asserts that the Taxpayer provided the Department with information it had not previously provided to the County. Consequently, the County contends that the Department is barred from considering this information in the appeal.

The administrative appeals process outlined in Virginia Code § 58.1-3703.1 and Title 23 of the Virginia Administrative Code (VAC) 10-500-640 et seq . was implemented to give taxpayers and localities an adjudication process that was less formal and less burdensome on the parties than litigating in the court system. Administrative appeals are not governed, for example, by the same rules of evidence that would exist for litigation in court. The County cites no authority for its assertion that the Taxpayer is barred from introducing information to the Department that was not provided to the County for the local appeal.

In fact, Title 23 VAC 10-500-760 outlines procedures that the Department and localities can follow to address circumstances where entirely new issues are raised for the first time in an administrative appeal to the Department. An absolute bar to providing additional information would be inconsistent with the policy of allowing new issues to be raised in the appeal to the Department. Accordingly, all information provided with an administrative appeal to the Department will be given due consideration. See Public Document (P.D.) 21-61 (5/18/2021).

Definite Place of Business

In its letter to the Department, the Taxpayer argues that it has more definite places of business than the County acknowledged in its final determination. Specifically, it states that some of its sales representatives worked from definite places of business at their residences and the County erred when it determined that one facility was not a definite place of business in 2017.

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.” A definite place of business can include a location leased or otherwise obtained from another entity on a temporary or seasonal basis. 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 P.D. 97-201 (4/25/1997), P.D. 01-215 (12/12/2001), and P.D. 10-277 (12/21/2010). Although these activities are indicative of a definite place of business, all facts and circumstances concerning the nature of a taxpayer’s operations must be considered.

Home Offices

In its final determination, the County did not address whether any of the Taxpayer’s sales representatives’ home offices qualified as definite places of business because the Taxpayer raised that issue for the first time in its appeal to the Department. Several employment contracts provided by the Taxpayer indicate that some sales representatives were expected to work from their home offices located in other states. In addition, it appears that sales representatives located in * (State A) worked from home offices after termination of an office space lease in State A.

In P.D. 14-121 (7/24/2014), the Department observed that an employee’s home may constitute a definite place of business if there is a regular and continuous course of dealing for 30 consecutive days or more. Each location must be separately evaluated under the standards set forth above to determine if it is a definite place of business. Ultimately, the determination as to whether a home office is a definite place of business must be made by a locality. See also P.D. 21-131 (9/28/2021) and P.D. 23-113 (10/19/2023).

State B Office

The Taxpayer also claimed that it had a definite place of business in * (State B) beginning in July 2017. The Taxpayer explains that the chief executive officer was residing, at least part-time, in State B as of July 2017. The County agreed that this location qualified as a definite place of business beginning in 2018 but denied that it was a definite place of business before that date because no lease payments were made in 2017. The Taxpayer submitted a lease agreement and explained that no lease payments were made in 2017 because the location was being repaired. The Taxpayer states that these repairs, however, did not prevent work from being performed there. The Taxpayer also produced an invoice showing that computer equipment and other supplies were delivered to the location in July 2017. The Taxpayer’s State B tax return for the 2017 taxable year did not, however, list any property located in State B.

The fact that no lease payments were made would not prevent the State B office from qualifying as a definite place of business if it was otherwise qualified under the standard discussed above. On the other hand, it is unclear from the information provided what the true extent of the Taxpayer’s operations was in State B during the 2017 tax year. The fact that equipment and furniture were delivered to the State B office is not sufficient to show that it was used by the Taxpayer in the conduct of its business at that specific location.

While the Department has listed some key characteristics that may be typical of definite places of business, no one characteristic is determinative nor are particular characteristics required in every case. Ultimately, all relevant facts and circumstances must be considered, and the statutory standard is simply that it be an office or location at which occurs a regular and continuous course of dealing for 30 days or more. See Virginia Code § 58.1-3700.1.

Situs

In determining the situs of gross receipts, Virginia Code § 58.1-3703.1 A 3 a 2 provides that the gross receipts of a retailer are to be taxed based on where the sales solicitation activities occur, or if sales solicitation activities do not occur at any definite place of business, then the place from which the sales solicitation activities are directed or controlled. As a last resort, when it is impossible or impractical to determine where the sales solicitation activities are performed or from where the activities are directed or controlled, the gross receipts of a retailer are sitused by payroll apportionment between definite places of business. See Virginia Code § 58.1-3703.1 A b.

Sales solicitation is the act or acts directly related to selling particular items or goods to a particular person. Sales solicitation, however, does not include non-solicitation activities prior or subsequent to sales solicitation activities. See Title 23 VAC 10-500-10. Taking customer orders is considered a sales solicitation activity. See P.D. 97-317 (7/30/1997), P.D. 98-42 (3/6/1998), and P.D. 18-164 (9/26/2018). If the Taxpayer’s sales representatives’ home offices were definite places of business, then gross receipts from their sales likely would be sitused to those homes because sales solicitation activities were occurring there.

To the extent sales solicitation activities did not occur at a definite place of business, the County sitused gross receipts to the County on the basis that the Taxpayer’s chief executive officer worked from a definite place of business located in the County and that he was the sole individual who directed and controlled the sales activities. The employment contracts provided support this reasoning because they generally provided that the sales representatives would report directly to the chief executive officer.

The Taxpayer contends that any sales that did not occur at a definite place of business should be sitused to its office in * (State C) because all contracts were required to be submitted through and approved by the Taxpayer at its State C office. The information provided, however, fails to show to what, if any, extent the staff at the State C office provided direction and control. The description of job duties for the one employee of the State C office included managing a software application, reviewing sales quotes to ensure that the quotes met company guidelines, managing the mail, managing banking activities, and negotiating with lenders. Such activities appear to have been more administrative in nature and are not indicative of activities normally associated with direction and control of the sales staff.

Alternatively, the Taxpayer points out that even if sales activities were directed and controlled by its chief executive officer, because he divided his time between the County and State B, the sales should be divided between those definite places of business. See, e.g., P.D. 13-219 (12/12/2013). For the 2018 tax year, the County acknowledged the Taxpayer had a definite place of business in State B and sitused a portion of gross receipts accordingly. For the 2017 tax year, this argument is predicated on there being sufficient evidence to show that the State B office was a definite place of business.

Computer Hardware and Software Deduction

Virginia Code § 58.1-3732 B 1 provides a deduction from gross receipts subject to BPOL tax for:

Any amount paid for computer hardware and software that are sold to a United States federal or state government entity provided that such property was purchased within two years of the sale to said entity by the original purchaser who shall have been contractually obligated at the time of purchase to resell such property to a state or federal government entity. This deduction shall not occur until the time of resale and shall apply to only the original cost of the property and not to its resale price, and the deduction shall not apply to any of the tangible personal property which was the subject of the original resale contract if it is not resold to a state or federal government entity in accordance with the original contract obligation.

The County did not allow the deductions claimed by the Taxpayer in cases where the computer hardware and software were sold to a third party rather than directly to a government entity. In such cases, the property was sold to a third party who, according to the Taxpayer, was acting as a procurement agent on behalf of the government. The Taxpayer argues that, pursuant to general agency law, such sales should be treated as being made to the government. The County determined that the statute only allows a deduction for direct sales “to a United States federal or state government entity” and not to a third party because agency rules do not apply to the BPOL tax regime.

The Taxpayer points to the Department’s application of agency rules in determining whether transactions may be exempt from sales and use tax when the sales are made through government procurement agents. See, e.g., P.D. 97-416 (10/14/1997). The Department has repeatedly held that the rules applicable in the sales and use tax setting are not applicable to the local license tax regime which is based on the privilege of engaging in business. See P.D. 04-45 (8/13/2004), P.D. 09-93 (6/11/2009), P.D. 11-44 (3/23/2011), P.D. 12-220 (12/21/2012), and P.D. 14-117 (7/23/2014). In P.D. 97-416, the Department expressly stated that regulations had been issued clarifying that sales made to agents on behalf of government entities were exempt from retail sales and use tax. This regulation, however, does not apply to BPOL tax.

The Taxpayer argues that there is no statutory or regulatory support for denying the deduction. On the contrary, by reason of their character as legislative grants, statutes relating to deductions or exemptions allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See DKM Richmond Associates, L.P. v. City of Richmond , 249 Va. 401 (1995). Regardless of the question concerning the application of the common law standards regarding agency relationships in BPOL tax, Virginia Code § 58.1-3732 B 1 clearly states that a deduction is permitted for the amount “paid for computer hardware and software that are sold to a United States federal or state government.” A sale to a procurement agent for a government is not a sale to a government entity.

Out-Of-State Deduction

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.” Pursuant to Title 23 VAC 10-500-80 A 2, a business must file an income or income-like tax return in a state or foreign country, even if there is no actual tax liability in a given year, in order to claim the deduction in that state or foreign country.

In its final determination, the County disallowed the out-of-state deduction for all states other than State C because the Taxpayer did not provide tax returns for any other states. During the course of the appeal, the Taxpayer provided a copy of its 2017 State B Franchise and Excise Tax return. State B imposes an excise tax at the rate of 6.5% on the net earnings of all persons doing business within State B. See State B Code Ann . § 67-4-2107(a). State B also imposes a franchise tax at the rate of $0.25 per $100 on the net worth of a person doing business in State B. See State B Code Ann . § 67-4-2105(a) and § 67-4-2106(a). Entities subject to the State B franchise and excise taxes include, but are not limited to corporations, limited partnerships, and limited liability companies. See State B Code Ann. § 67-4-2004(36).

The Taxpayer’s 2017 State B return provided indicates that it was subject to both the excise and franchise portion of the tax for the 2017 taxable year. Because the excise portion is a tax based on net income, to the extent any receipts otherwise sitused to the County were attributable to business conducted in State B, the Taxpayer would be entitled to an out-of-state deduction.

The Taxpayer admits it did not file income tax returns in any states other than State A, State B, and State C. It argues, however, that it was technically required to file returns in other states but made a business decision not to file because no tax would be due. The regulations are clear and require that a return actually be filed in order to take the deduction. See also P.D. 18-170 (10/10/2018) and P.D. 23-113.

DETERMINATION

Under the provisions of Virginia Code § 58.1-3109 6, the local commissioner of the revenue is empowered with the authority to require records and other information necessary to make an accurate assessment of a person’s license taxes. As such, it is incumbent upon a taxpayer to prove to the satisfaction of the local taxing authority that it properly sitused and reported gross receipts on its tax returns.

Based on the analysis above, the Department is remanding this case to the County. First, the County must determine which locations qualified as definite places of business in accordance with the standards discussed in this letter. This review will require the County to evaluate the status of each of the sales representatives’ home offices. In addition, it should reconsider whether the State B office, or the chief executive officer’s State B home office, qualified as a definite place of business in 2017.

The Department recognizes that the increasing use of home offices presents a challenge for the BPOL tax regime that it was not historically designed to address. In addition, as an emerging issue, the impact of a home office as a definite place of business on situs has not been an issue businesses and localities have had the opportunity to work through fully during an audit or the local appeals process. As stated above, no one characteristic determines whether a location was a definite place of business nor are particular characteristics required in every case. All relevant facts and circumstances must be considered, and the statutory standard is simply that it be an office or location at which occurs a regular and continuous course of dealing for 30 days or more. See Virginia Code § 58.1-3700.1.

Next, the County must determine the situs of the gross receipts based on the situsing rules discussed above. Only to the extent that sales solicitation activities were not performed at a definite place of business would they be sitused to the place from which they were directed or controlled. Finally, from the remaining pool of gross receipts sitused to the County, the County must determine the extent to which the Taxpayer was eligible for the out-of-state deduction and grant such deduction based on the returns filed in State B and State C.

The Taxpayer is not entitled to a deduction from gross receipts for the cost of computer hardware and software in cases where the sales were made to or through government agents.

The Taxpayer should work with the County to provide any further relevant information the County may request within a mutually agreed upon timeframe. The County should review and address any and all information the Taxpayer is able to provide, including information provided during the appeal process. The additional information will be limited to documentation related to definite places of business.

Upon the conclusion of its review, the County must issue a new final determination that fulfills all of the requirements of the BPOL regulations. Once the County has issued its final determination, the Taxpayer may file an appeal with the Department within 90 days pursuant to Title 23 VAC 10-500-720 if it disagrees with any of the County’s conclusions.

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

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/4673.X

Related Documents

97-201

97-317

97-416

98-42

01-215

04-45

09-93

10-277

11-44

12-220

13-219

14-117

14-121

18-164

18-170

21-61

21-131

23-113