State Tax Ruling

Plain-English summary

This ruling addresses a taxpayer's appeal of Business, Professional and Occupational License (BPOL) tax assessments issued by a Virginia county for tax years 2015 through 2019. The taxpayer had a definite place of business in the county but split its gross receipts between that office and a larger facility located abroad, using payroll apportionment. The county audited the taxpayer and denied exclusions it had claimed under the county's BPOL ordinance for gross receipts derived from designing, developing, or otherwise creating computer software for lease, sale, or license, then assessed additional BPOL tax.

Virginia Code § 58.1-3703 B lets localities exclude from the BPOL tax gross receipts attributable to the design, development, or creation of computer software for lease, sale, or license. The county's own ordinance adopted this exclusion, but only for receipts attributable to software design, development, or creation activities actually performed at a definite place of business in the county. The county denied the exclusion, reasoning the taxpayer was really providing services rather than licensing software, that any real development work happened at the foreign facility rather than the county office, and that the taxpayer had not documented specific software products (such as copyrights, patents, or trademarks) tied to the county location.

On appeal to the Department, the taxpayer submitted some U.S. Copyright Office catalog entries for its software products, a contract suggesting a customer paid a license fee to use one of its software products, and evidence from its website that it offered a suite of already-developed software products. The Tax Commissioner found this evidence showed the taxpayer likely did have some gross receipts attributable to qualifying software development, sale, or licensing activity. But the exclusion requires more: the taxpayer must also show what portion of those receipts is attributable to development activity actually performed at its county office, since most of its staff worked out of the foreign office and only "two senior staff" were claimed to still perform development work in the county.

Because the taxpayer did not quantify what part of its gross receipts, if any, was directly attributable to development activities performed at the county office, the Tax Commissioner held it had not met its burden of proof. On a BPOL appeal, the local assessment is presumed correct (prima facie correct) unless the taxpayer proves otherwise. The Tax Commissioner therefore upheld the county's assessments in full — this is not a case where the taxpayer won any partial relief.

What this means for you

Software companies with multi-location operations

If your company develops software and wants to claim a local BPOL exclusion for software design/development/creation receipts, it is not enough to show that qualifying development work happened somewhere in your organization. You must be able to trace and quantify the specific gross receipts attributable to development activity actually performed at the definite place of business located in the locality claiming the exclusion. If most of your engineering work happens at an office outside the locality, be prepared to document precisely what portion (if any) of revenue ties back to the local office's development work — general claims that "some employees" worked on development locally will not carry your burden of proof.

Business owners facing a BPOL assessment

Remember that BPOL is a local tax, administered and assessed by your county or city's commissioner of the revenue, not directly by the Department. The Department's role in a case like this is limited to deciding your administrative appeal under Va. Code § 58.1-3703.1, and it starts from the presumption that the local assessment is correct. Winning requires you to affirmatively prove the assessment wrong with documentation (contracts, copyright registrations, payroll/activity records tied to the specific location) — not simply to assert that the exclusion should apply.

Accountants and tax professionals

This ruling illustrates that even a locality's own software-development BPOL exclusion (adopted under the option in Va. Code § 58.1-3703 B) can have a situs requirement layered on top of the substantive qualification requirement. Advise clients claiming this exclusion to maintain contemporaneous records tying specific gross receipts to development work performed at the claimed definite place of business, since after-the-fact reconstruction (as attempted here) was found insufficient.

Common questions

Q: Did the taxpayer win its appeal?
A: No. The Tax Commissioner upheld the county's BPOL assessments for all five tax years (2015–2019) because the taxpayer could not prove what portion of its gross receipts was attributable to software development activity performed at its county office.

Q: Did the Department decide whether the taxpayer's product was really "software" eligible for the exclusion?
A: The Department found there was some evidence the taxpayer had gross receipts from designing, developing, or licensing software (copyright registrations and a license contract), contradicting the county's view that it was purely providing services. But this did not save the appeal, because the taxpayer still failed the separate requirement of showing the receipts were tied to development work performed at its county office.

Q: Who administers the BPOL tax, and why did the Department get involved?
A: BPOL is a local tax imposed and administered by county/city officials, not the Department. Virginia Code § 58.1-3703.1 gives the Department authority to issue determinations on taxpayer appeals of local BPOL assessments, which is the role it played here — reviewing the county's final local determination, not making the original assessment.

Q: What would the taxpayer have needed to do differently?
A: It would have needed to quantify the specific portion of its gross receipts attributable to design, development, or creation activities actually performed at its definite place of business in the county — for example, through records showing which revenue-generating software work was done by which employees at which location, rather than general assertions that some development staff worked in the county.

Citations and references

Statutes:

• Va. Code § 58.1-3703.1 (Department's authority to issue determinations on BPOL appeals; local assessment is prima facie correct)
• Va. Code § 58.1-3703 B (authorizes localities to exclude from BPOL tax gross receipts from computer software design, development, or creation for lease, sale, or license)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-189

Original ruling text

November 17, 2020

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

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 assessments of the Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by *** (the “County”) for the 2015 through 2019 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 sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.

FACTS

The Taxpayer had a definite place of business in the County and sitused its gross receipts between its definite place of business in the County and a larger facility located in * (Country A) on the basis of payroll apportionment. The County audited the Taxpayer and denied the exclusions the Taxpayer claimed under the County’s BPOL ordinances for gross receipts derived from the design, development or other creation of computer software for lease, sale or license. As a result, assessments were issued for the 2015 through 2019 tax years for additional BPOL tax due.

The Taxpayer appealed to the County, contending that 1) it developed software products; 2) the products were developed from a definite place of business in the County; and 3) the products were licensed, leased or sold by the Taxpayer. In its final determination, the County concluded that the Taxpayer was performing services and thus was not eligible for the exclusion.

The Taxpayer appeals to the Department, contending that it was eligible for the exclusion because it developed and licensed software and development occurred in the County.

ANALYSIS

Localities may exclude from the BPOL tax those gross receipts that are attributable to the design, development or other creation of computer software for lease, sale or license. See Virginia Code § 58.1-3703 B. The County’s BPOL ordinances provide for such an exclusion, but only to the extent that the gross receipts are attributed to computer software design, development or creation activities actually performed at a definite place of business in the County.

The County determined that the Taxpayer was not eligible for the exclusion because the Taxpayer was providing services rather than leasing, selling or licensing computer software. In its final determination, the County also stated that to the extent the Taxpayer did develop computer software, such activities were performed by employees working at the Taxpayer’s other definite place of business in Country A, not in the County. In addition, the County stated that the Taxpayer did not provide documentation such as copyrights, patents or trademarks to evidence that they had specific software products developed in the County.

In its appeal to the Department, the Taxpayer included some catalog entries of software products that were registered with the United States Copyright Office. The Taxpayer also included a copy of a contract in which it appears that a customer agreed to pay a license fee for use of a software product developed by the Taxpayer. In addition, it is clear from the Taxpayer’s website that the Taxpayer offers a suite of software products that have already been developed. The terms under which customers may obtain the use of such products are unclear. The Department is aware, however, that access to a software product is frequently obtained by paying some amount in return for a license to use the product.

Under the County’s ordinance, a taxpayer must do more than demonstrate that it had gross receipts attributable to the design, development or other creation of computer software for lease, sale or license. The ordinance also requires that the gross receipts be attributable to such activities actually performed at a definite place of business in the County. In this case, it is unclear what extent any such activities occurred at the Taxpayer’s definite place of business in the County. Most of the Taxpayer’s employees worked out of an office in Country A. The Taxpayer claims that two senior staff in its County office still performed software development activities. Even if that were true, there is no way for the Department to determine based on the information provided to what extent, if at all, gross receipts should be attributed to the development activities of those employees. It is not sufficient that merely some development activities occurred at the definite place of business in the County. The Taxpayer bears the burden of quantifying what specific part of those gross receipts were directly attributable to development activities that occurred at its definite place of business in the County.

DETERMINATION

Although there is some evidence indicating the Taxpayer likely had gross receipts attributable to the design, development or other creation of computer software for lease, sale or license, the Taxpayer has not provided sufficient information for the Department to determine to what extent, if at all, any such gross receipts were attributable to such activities actually performed at the Taxpayer’s office in the County. Therefore, the Taxpayer has not met its burden of proving to what extent, if at all, it qualified for the exclusion. Accordingly, the County’s assessments are upheld.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3437.M