Could a university use an alternative method to situs BPOL gross receipts from online courses instead of the statutory 'definite place of business' rule?

Subject

Situs : Apportionment - Alternative Method

Plain-English summary

A for-profit university with campuses in Virginia and three other states, plus online courses developed by subject-matter experts and taught by faculty located throughout the United States, was audited by a Virginia city for BPOL (Business, Professional and Occupational License) tax for the 2016 through 2018 tax years. The city allocated gross receipts to the Taxpayer's definite places of business where it was satisfied the allocation was substantiated, and deducted receipts it concluded qualified for the out-of-state deduction. The Taxpayer appealed to the city, contesting how receipts from online courses were allocated; the city denied the appeal, concluding its allocation followed the statutory method. The Taxpayer then appealed to the Department, arguing that online course receipts should instead be sitused based on where students lived -- to Virginia and other states with physical campuses based on student location, and to campus revenue proportions for students in states without a physical campus and without Taxpayer income tax filings.

The Tax Commissioner upheld the assessment. Under Va. Code §§ 58.1-3703.1 A 3 a 4 and 58.1-3703.1 A 3 b, gross receipts from services must be sitused, in order: (1) to the definite place of business where the service is performed; (2) if not performed at a definite place of business, to the place from which the service is directed or controlled; or (3) only if it is impossible or impractical to determine either of those, by payroll apportionment. A student's location is not a "definite place of business" as defined in Va. Code § 58.1-3700.1, so the Taxpayer's proposed student-location method and its campus-revenue-proportion method for out-of-state students both departed from the statutory method. The Taxpayer also had not shown whether or to what extent online services were performed at, or directed and controlled from, its physical campuses, nor established the employment classification of the subject matter experts and instructors (only employees, not independent contractors, can establish a definite place of business). Absent evidence that online operations were managed elsewhere, the Taxpayer's headquarters in the city was the logical place from which the online services were directed and controlled. Because the Department, as an executive agency, has no authority to approve an allocation method different from the statutory one absent judicial precedent or statutory authority permitting it, and because the Taxpayer did not show its receipts should have been sitused differently under the statutory method, the assessment was upheld.

What this means for you

Multi-state and online service businesses

If your business provides services across state lines -- including online courses or other remote services -- Virginia's BPOL statute requires gross receipts to be sitused first to the definite place of business where the service is performed, then to the place from which it is directed or controlled, and only as a last resort by payroll apportionment. A customer's or student's location, standing alone, is not a "definite place of business" and cannot be used as the basis for situsing receipts, no matter how intuitive that allocation might seem.

You cannot substitute your own allocation method

Even if you believe the statutory method produces a result that seems unfair or economically distorted, the Department of Taxation has no authority to approve an alternative situsing or apportionment method in place of the one the General Assembly enacted, absent clearly applicable judicial precedent or other statutory authority. Constitutional arguments (such as under the Commerce Clause) do not by themselves give the Department power to deviate from the statutory formula.

Document where remote work is actually performed and controlled

Businesses relying on remote or independent workers (such as subject matter experts and instructors located nationwide) should be prepared to show whether those individuals are employees (whose work location can establish a definite place of business) or independent contractors (whose locations cannot). Without that evidence, the default is that receipts are sitused to the location where administrative decisions about the services -- content approval, financial support, course offerings -- are made, which in this case was the Taxpayer's headquarters in the assessing city.

Common questions

Q: Did the university win its appeal and get the BPOL assessment reduced?
A: No. The Tax Commissioner upheld the city's assessment for the 2016 through 2018 tax years because the Taxpayer failed to demonstrate how its gross receipts should have been sitused differently under the statutory method.

Q: Why couldn't the Taxpayer situs online course revenue based on where the student lived?
A: A student's location is not a "definite place of business" under Va. Code § 58.1-3700.1. The statutory situsing method looks to where the service is performed or, if that cannot be determined, to the place from which the service is directed or controlled -- not to the customer's or student's location.

Q: Could the Taxpayer's physical campuses be used to situs the online course receipts?
A: Only if online services were actually performed at, or directed and controlled from, those campuses. The Taxpayer had not established whether or to what extent that was true, so the campuses could not automatically absorb the online receipts.

Q: Does it matter whether the subject matter experts and instructors were employees or independent contractors?
A: Yes. The Department's position is that a location can only be considered a definite place of business based on activities performed by employees, not independent contractors. The Taxpayer did not provide information on how the SMEs and instructors were classified.

Q: If no definite place of business could be established for online services, where are those receipts sitused?
A: To the place where the service is directed or controlled -- here, the location where decisions about course offerings, financial support, and content approval are made. Absent evidence that these functions occurred elsewhere, that was the Taxpayer's headquarters in the assessing city.

Q: Can a taxpayer ask the Department to approve an "alternative method" of allocation if it believes the statutory method is unconstitutional or unfair?
A: The Department, as an executive agency charged with administering the tax laws as enacted, will not permit a method of allocation different from the statutory method absent clearly applicable judicial precedent or other statutory authority granting it that power.

Citations and references

Statutes:

• Va. Code § 58.1-3703.1 (BPOL tax administration and situs of gross receipts from services)
• Va. Code § 58.1-3700.1 (definition of "definite place of business")

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-9

Original ruling text

February 2, 2021

Re: Appeal of Final Local Determination

Taxpayer: *

Locality Assessing Tax: *

Business, Professional and Occupational License (BPOL) 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) tax issued to the Taxpayer by *** (the “City”) 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 summarized below. The Code of Virginia sections and public document 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 operates as a for profit university with campuses in Virginia and three other states. The Taxpayer also offers courses online. These courses are developed by subject matter experts and taught by faculty located throughout the United States. Online students may seek assistance and services at the campus location closest to them. Otherwise, students who are not located in a state with a physical location may seek assistance and services by telephone.

The City audited the Taxpayer and allocated gross receipts to the Taxpayer’s definite places of business to the extent the City was satisfied that such allocation was substantiated. The City also deducted gross receipts that it concluded qualified for the out of state deduction.

The Taxpayer filed an appeal with the City, contesting the City’s allocation of receipts attributable to its online courses. The City denied the appeal concluding that its allocation was consistent with the statutory method for situsing the gross receipts of a service business.

The Taxpayer appeals the City’s final determination to the Department, asserting that gross receipts from online courses should be sitused based on students location in the states where the Taxpayer had physical campuses and the students resided. For students in states that had no physical campuses and in which the Taxpayer had no income tax filings, online receipts should be sitused in proportion to the revenue of the physical campuses.

ANALYSIS

In determining the situs of gross receipts, Virginia 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 impractical to determine where the service is performed or from where the service is directed or controlled, by payroll apportionment between definite places of business. Virginia Code § 58.1-3703.1 A 3 b also states that gross receipts may not be apportioned to a definite place of business unless some business activities occurred at, or were controlled from, such definite place of business.

Virginia Code §§ 58.1-3703.1 A 3 a 4 and 58.1-3703.1 A 3 b clearly indicate a preference that gross receipts from services to be attributed to a definite place of business. A “definite place of business” is defined as an office or a location at which occurs a regular and continuous course of dealing for 30 consecutive days or more. See Virginia Code § 58.1-3700.1. 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) and advertising or otherwise holding oneself out as engaging in business at the particular location. See Public Document (P.D.) 97-201 (4/25/1997).

To the extent that any gross receipts are not attributable to services performed at a definite place of business, then they must be sitused to the definite place of business from which the services are directed and controlled. Only if it is not possible or practical to determine where the service is performed or where the service is directed or controlled, then the receipts must be sitused based on payroll apportionment.

The Taxpayer contends that its gross receipts from online courses should be sitused based on the student’s location if the student lives in a state where the Taxpayer has a physical campus. The student’s location, however, is not a definite place of business of the Taxpayer. In addition, while the Taxpayer’s physical campuses are likely definite places of business, the Taxpayer has not established whether and to what extent online services were provided at such locations or were directed and controlled from these campuses.

The Taxpayer also contends that with respect to students who live in states without a physical campus and where the Taxpayer does not file an income tax return, gross receipts attributable to such students should be sitused in proportion to the campus revenues. Again, a student’s location is not a definite place of business, and assigning receipts from online courses in proportion to physical campus revenue does not follow the statutory method of assigning gross receipts to a definite place of business where the specific services in question were performed or alternatively, were directed and controlled.

The Taxpayer further asserts that online services are not headquartered in the City. The Taxpayer, however, has not established from where such services are performed, directed and controlled. The Taxpayer explains that Subject Matter Experts (SME’s) develop the course material, instructors present that material to students, and that both of these groups of individuals are located throughout the United States. The question then becomes whether the locations of the SMEs and instructors could be considered a definite places of business. The Taxpayer has not provided information on the classification of SMEs and instructors. It is the Department’s position that such activities may only constitute a definite place of business when being performed by employees, not independent contractors. See P.D. 14-121 (7/24/2014). If a definite place of business cannot be established at employee’s locations, then the definite place of business for online services becomes the place where decisions are made regarding the courses being offered, financial support, content approval and other such administrative activities. Absent evidence that online operations were managed at another location, the Taxpayer’s headquarters in the City appears to be the logical choice.

DETERMINATION

The Taxpayer has not demonstrated how its gross receipts should have been sitused under the statutory method. In essence, the Taxpayer seeks an alternative method of situsing its gross receipts different from the statutory method. It appears that the Taxpayer believes that the City’s methodology results in such an excessive amount of gross receipts being sitused to the City that it violates the Commerce Clause of the United States Constitution. The Taxpayer argues that its method of allocation is reasonable under the facts and satisfies constitutional requirements.

As an executive agency of the Commonwealth charged with the administration of the tax laws as enacted by the General Assembly, it would be improper for the Department to permit taxpayers to adopt methods of allocation that differ from the statutory method, in the absence of clearly applicable judicial precedent that alter its application or in the absence of other statutory authority that gives the Department the power to approve alterations to the method.

Under Virginia Code § 58.1-3703.1, receipts from services are to be taxed based on a definite place of business where services are performed, or the place where the service is directed and controlled, or as a last resort, based on payroll apportionment. As explained above, an online student’s location cannot be a definite place of business and the Taxpayer has provided no evidence to support a SME or instructor performing services a definite place of business of the Taxpayer.

In this case, the Taxpayer has failed to demonstrate how its gross receipts should have been sitused under the statutory method. In addition, the Department does not have the authority to grant a method of situsing gross receipts different from the statutory method. Accordingly, the assessment is 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/3322.A

Related Documents

97-201

14-121