How should a multinational service firm apply BPOL payroll apportionment and the deduction for business conducted outside Virginia?

Subject

Payroll apportionment upheld; additional outside-receipts deduction required proof

Plain-English summary

Virginia upheld payroll apportionment of the multinational consultant's worldwide receipts to its county office. Because the firm had definite places of business both inside and outside Virginia, it could not first subtract every receipt from a state where it filed an income-tax return and then apportion the remainder.

Service receipts first followed the statutory situs hierarchy. When payroll apportionment was necessary, the formula used receipts from all sources multiplied by county payroll divided by total payroll everywhere.

The formula might not capture every receipt eligible for the separate out-of-state-business deduction. The firm received 45 days to prove that qualifying outside receipts exceeded the amount already assigned outside Virginia; the county then had to adjust the assessments.

What this means for you

• Definite places of business outside Virginia affected how receipts entered the formula.
• Filing an income-tax return elsewhere did not justify deducting all customer receipts there before apportionment.
• A further statutory deduction remained possible for a demonstrated shortfall.
• The taxpayer bore the burden of supplying adequate records within 45 days.

Citations and references

• Va. Code §§ 58.1-3703.1(A)(3) and 58.1-3732(B)(2).
• 2000 BPOL Guidelines § 2.6.
• P.D. 04-90.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-56

Original ruling text

May 4, 2009

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 you on behalf of * (the "Taxpayer") with the Department of Taxation. You appeal an assessment of Business, Professional and Occupational License (BPOL) taxes issued to the Taxpayer by *** (the "County") for tax years 2001 through 2005.

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. That is, 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, regulations 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, a multinational corporation, maintains several offices throughout the world, including one in the County. The Taxpayer provides investment consulting, performance reporting, and research to nonprofit institutions and private clients. It also serves several foundations, museums, hospitals, and various pension, agency and government funds. Taxpayer employees travel to client sites to perform their services. In filing its BPOL returns, the Taxpayer concluded that it was impossible or impractical to determine the situs of its gross receipts under the general situs rules and apportioned its gross receipts based on payroll.

For BPOL tax purposes, the Taxpayer calculated gross receipts by subtracting from its total world wide gross receipts those gross receipts generated from each state in which it filed an income tax return and multiplied the net total by the percentage of its Virginia payroll to total payroll. The County audited the Taxpayer for the tax years at issue and disallowed the subtraction for the gross receipts attributed to states in which the Taxpayer filed income tax returns. As a result, the County and assessed the Taxpayer additional BPOL tax.

The Taxpayer appealed the assessments to the County, contending it was not permitted a deduction for gross receipts attributable to business conducted in other states. In its final local determination, the County upheld the audit assessment, concluding that the Taxpayer's method for determining gross receipts attributable to the office in the County was flawed.

The Taxpayer appeals the County's final determination to the Tax Commissioner, claiming it has been denied the deduction for gross receipts attributable to business conducted in other states or foreign countries.

ANALYSIS

Situs

Before addressing the issues as to whether the Taxpayer is entitled to a deduction for gross receipts attributable to business conducted in other states or foreign country, a determination must be made as to whether the situs of the gross receipts has appropriately been determined. 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 the County.

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 impracticable 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 those instances where a taxpayer has a definite place of business in another state or foreign country, the preferred approach is to assign gross receipts to each office, both out-of-state and in Virginia, following the statutory hierarchy set out above. From the receipts assigned to an office in Virginia, certain deductions are authorized by statute, including a deduction for receipts attributable to states in which the taxpayer is subject to an income-based tax. The deduction is allowed to the extent that the receipts to be deducted were assigned to a Virginia office in the first step.

When it becomes necessary to use payroll apportionment, the general payroll apportionment formula 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 Taxpayer contends that this method fails to account for the out-of-state deduction to which it is entitled and points to P.D. 04-90 (8/31/04) as the proper formula for determining its taxable gross receipts. In P.D. 04-90, the out-of-state deduction was taken before the gross receipts were apportioned.

A careful review of P.D. 04-90 reveals, however, that it only applies in very limited circumstances. In that case, a taxpayer had multiple definite places of business in Virginia, but no definite place of business outside Virginia. Because all the gross receipts were sitused to Virginia, the deduction for gross receipts attributable to business conducted in another state or foreign country could be applied before apportionment without the possibility of deducting receipts sitused to a definite place of business outside Virginia. In these limited circumstances any deduction may be taken before apportioning income between the Virginia definite places of business, if such method more accurately reflects gross receipts subject to a BPOL tax.

In the instant case, the Taxpayer has multiple definite places of business within and without Virginia. By deducting gross receipts derived from clients in states other than Virginia where the Taxpayer files income tax returns, the Taxpayer cannot guarantee that gross receipts sitused to facilities outside Virginia are not included in the deduction for business conducted in another state or foreign country.

Out-of-State Deduction

Virginia Code § 58.1-3732 B 2 provides a deduction for receipts "attributable to business conducted in another state of foreign country in which the taxpayer is liable for income or other tax based on income." The 2000 BPOL Guidelines § 2.6 notes that a taxpayer needs to file a return in these states, even if there is no actual tax liability in a given year, to claim the deduction. The Taxpayer contends that it is entitled to this deduction because it has revenue from customers in states in which it files a return for income or other tax based on income.

The general payroll apportionment formula captures only the relationship between the Taxpayer's payroll and the percentage of gross receipts apportioned to the County. This formula may not completely capture those gross receipts subject to an income or income-like tax in other states for which the Taxpayer is entitled to a deduction as provided for in Va. Code § 58.1-3732(B)(2). In such cases, the burden of proof is upon the taxpayer to demonstrate that the formula assigns less than the full value of the receipts in other states or foreign countries for which it is entitled a deduction. If a taxpayer can demonstrate a difference between the two, it is entitled to deduct the difference from its taxable gross receipts in the County.

DETERMINATION

Based on the facts presented, using the general payroll apportionment formula conforms to the principles of the BPOL tax. Accordingly, I find that the County correctly applied the payroll apportionment method in determining gross receipts sitused to the Taxpayer's definite place of business within its jurisdiction.

The Taxpayer may, however, be entitled to a deduction for gross receipts attributable to business conducted in another state of foreign country if it can demonstrate that the general payroll apportionment formula assigns less than the full value of the receipts in other states or foreign countries. The Taxpayer must furnish the County with such information within 45 days of the date of this determination. Upon receipt of adequate information from the Taxpayer, the County is instructed to make appropriate adjustments to the Taxpayer's BPOL tax assessment for the tax years at issue.

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

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2241676592.B