In June, Michael L. Colavito, Jr. and Grant Patterson hosted an informative webinar, “Virginia Businesses: STOP Overpaying Local BPOL Tax,” where they guided taxpayers in determining if they are paying too much in Virginia local business license tax, also known as BPOL tax. As a follow up to this webinar, Michael and Grant have prepared answers to the questions asked by the webinar attendees. To watch the complete webinar, please visit Aronson’s website.
Would government contractors who provide engineering services, logistics, or training be taxed under the contractor or retailer BPOL classification?
A government contractor that provides engineering, logistics, and training services would not be classified as a contractor for BOPL purposes. It is also unlikely that the taxpayer would be taxed as a retailer.
“Contractors” are defined for BPOL purposes under state law Va. Code Ann. § 58.1-3714(D) and are limited to construction contractors. “Retailers” or “retail” sales are not specifically defined under state law for BPOL purposes. Typically, local ordinances have their own definition. For example, Fairfax County defines a “retail merchant” as a person who sells goods, wares, or merchandise at retail only and not for resale. A business primarily providing services would not be classified as a retailer.
Most government contractors are likely to be classified as providing a “business service” or “specialized occupation.” Keep in mind that the correct classification will vary by locality. When separate service types are provided with respect to a taxpayers contracts rise to the level of being separate business activities, then separate licenses may be required for each business. For example, a service provider may have a substantial number of contracts related to procurement services and a number of contracts providing engineering services. In this case, the taxpayer may have to obtain a license under the “professional services” classification for the engineering services, and another license under the “business services” classification for the procurement services.
Are virtual manufacturing businesses exempt from BPOL?
Virginia does not define the term “manufacturer” for purposes of the BPOL exemption. The Supreme Court of Virginia has developed a test involving three essential elements in determining whether a manufacturing activity is being undertaken. These elements are:
In Virginia Public Document Ruling No. 99-239, 08/23/1999, the Department of Taxation states that “for BPOL purposes, a manufacturer is one engaged in a processing activity whereby the original materials are transformed into a product that is substantially different in character from the original materials. These three elements are all equally important; if any one of these elements is missing, a business cannot fairly be said to be engaged in manufacturing.”
If a business is designing a product, subcontracting out the building and processing activities, but is still the seller of the product being produced, the manufacturing exemption may still apply. The BPOL guidelines issued by the Department of Taxation, that addresses the scope of the manufacturing exemption, concluded that the “manufacturing process consists of work subcontracted out but under the taxpayer’s control at all times, work in the taxpayer’s shop, and work by the taxpayer’s employees at the customer’s location.”
Still, additional facts regarding the activity would be needed to reach a more definite conclusion.
Are rental receipts and other revenue, not normally business income sources, subject to the BPOL tax?
Per Virginia § 58.1-3703(C)(19), gross receipts from the sale and rental of real estate and buildings are taxable by the locality in which they are located, provided the locality is authorized to tax such businesses. Gross receipts from the rental of real estate are generally exempt from tax, unless the localities tax on the activity is “grandfathered” in because they imposed such a tax on January 1, 1974.
Ultimately, this activity would likely be considered a separate business activity for which an additional license would be needed.
Is revenue from employees who work onsite at government facilities located in DC and MD subject to the BPOL tax? What if the employees report to managers in the Virginia locality?
Government contractors that derive revenue from employees working at government facilities in other jurisdictions, such as DC and MD, should not report their revenue to the VA locality even if the activity is managed from there. These receipts would not be reported to the VA locality based on one of two filing positions.
First, the receipts derived from the employees’ activities in MD and DC would be sitused to those locations because it is considered a “definite place of business” outside of the VA locality. If the employees are working at the facility for at least 30 consecutive days, it would then be correct to situs those receipts. All services performed at the DC and MD locations would only be sitused to the VA locality if the locations where the services are performed are not “definite places of business.”
Second, even if the services are not performed from definite places of business in DC and MD, the out-of-state deduction would still apply. It is assumed that the government contractor is filing income and franchise tax returns in DC and MD. Although the receipts would initially sitused to VA, where the services are being managed and controlled from, the out-of-state deduction can be utilized to reduce these “otherwise” taxable receipts.
Does the deduction for the resale of hardware and software to the government apply if the resale is not performed in the Virginia locality?
This particular deduction is from “otherwise taxable receipts.” If the applicable receipts are sitused to the VA locality under the applied situsing rules, then the deduction would be available. However, depending on the facts, these receipts may not be sitused to the applicable locality to begin with. Review a recording of the webinar for a complete understanding on the process that is generally applicable to most taxpayers.
In this particular case, no deduction would be needed. For businesses that are reselling hardware and software to the government, it’s possible that the deduction can be performed first and the remaining receipts are sitused accordingly.
My company has no office, but we rent a building in Fairfax County with servers and other hardware to do cloud hosting, software development, and consulting services provided by remote employees. What is best way to situs receipts?
Typically, service revenue derived from remote employees should be sitused to the location from where they are managed and controlled. Their residence would only be considered a “definite place of business,” and the receipts can be sitused if the business has absolutely no other office location. This typically occurs only with sole proprietors. Services performed by remote employees should not be sitused to the building being rented in the County because the employee services are not managed and controlled there.
In terms of renting a building to maintain servers and other hardware, it would be difficult to argue that the building is not a “definite place of business,” for BPOL purposes. It is extremely likely that no services are being performed from that location. Therefore, no receipts would be sitused to the location for BPOL.
If you have any additional question about Virginia BPOL, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301-231-6200 or email@example.com.
Paul Zee-Cheng was a contributing author to this post.
Effective July 1, 2017, Virginia will require out-of-state retailers to collect Virginia sales tax if they maintain inventory in Virginia. This change, which is estimated to increase annual revenue by $21 million, will mainly impact retailers that rely on third parties to store inventory. For example, many online retailers selling their goods on Amazon also take advantage of Amazon’s fulfillment services. Amazon currently operates three fulfillment centers in Virginia, and recently announced plans to open a fourth to facilitate sales of larger customer items such as big-screen televisions, kayaks, and patio furniture.
Amazon fulfillment centers are just one example of a third party logistics provider available to retailers. Through a simple Internet search, one can find that many more have facilities in Virginia. Out-of-state, online retailers often rely on ‘fulfillment centers’ to take care of the logistics of getting their products to customers more efficiently. The use of these services allows retailers to avoid maintaining offices, employees, business locations, or warehouses in Virginia.
Before the enactment Bill No. 962 on April 5, 2017, retailers were shielded from the obligation to Virginia to collect sales tax if their only presence in the Commonwealth was inventory maintained in a third party fulfillment center. This was made clear in a 2015 ruling where the Department of Taxation concluded that Virginia law did list the maintenance of inventory in Virginia as one of the activities that triggered a sales tax collection obligation. The ruling further reasoned that the performance of such activity by a fulfillment center did not result in the retailer having an agent or representative in the Commonwealth. With the enactment of the new legislation, taxpayers can no longer rely on the Department’s ruling.
Retailers using a third party fulfillment center should take action now, and review their inventory activity within Virginia. If a third party fulfillment center uses a Virginia warehouse without informing the taxpayer, then a retailer may have a sales tax obligation and not even be aware of it. Luckily, retailers who rely on Amazon are able to generate their own reports to track down inventory storage locations.
If you have questions about your company’s sales and use tax compliance, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
The Virginia General Assembly has enacted legislation requiring the Department of Taxation to adopt regulations consistent with recently issued guidance pertaining to the Local Business License Tax (BPOL) deduction for receipts attributable to other states. This development does not change the state of the applicable law, as the Virginia Supreme Court addressed the particular issue in 2015. However, having a regulation will hopefully give taxpayers clear guidance in a single source instead of having the rules spread out over a lengthy court decision, and multiple Department letter rulings. Additional background on the out-of-state deduction can be found here.
The legislation itself (HB 1961) is brief and to the point. It simply states that the Department must adopt regulations regarding the methodology for determining deductible gross receipts attributable to business conducted in another state consistent with the holding in The Nielsen Company v. County Board of Arlington County and rulings issued by the Department. Assuming the regulation will merely address the particular application of the out-of-state deduction at issue in Nielsen, taxpayers can expect the regulation to provide guidance on how to determine the allowable deduction when the BPOL tax base is computed using the payroll apportionment method.
Essentially, a taxpayer that uses payroll apportionment in initially computing its gross receipts attributable to the locality must be able to provide evidence that employees in the locality earn, or participate in earning, receipts attributable to customers in other states where the taxpayer filed an income tax return. If the taxpayer can provide such evidence, the taxpayer can claim a deduction from the tax base that is determined by multiplying the payroll factor percentage for the locality by the amount of gross receipts assigned to the states where the taxpayer filed an income tax return. Initially, this methodology was proposed and applied by the Department in a handful of rulings, and was affirmed as a reasonable approach by the court in the Nielsen ruling.
The more telling aspect of the developments on this issue is that they further support that the out-of-state deduction is not based on income tax apportionment rules. This is a common position taken by Virginia localities on audit or when deciding if a taxpayer is due a refund. Granted, the ability to claim the deduction is contingent upon a taxpayer filing an income tax return in the jurisdiction for which the deduction of the receipts is based. However, multiple Virginia rulings as well as the Nielsen decision make it clear that the amount of the deduction is not somehow tied to the amount of a taxpayer’s sales sourced to that state on its income tax returns. Indeed, such a requirement could result in similarly situated taxpayers ending up with different deduction amounts merely because the deduction is claimed with respect to states that have different sales factor sourcing rules for income tax purposes.
Whether a particular taxpayer has the ability to reduce their BPOL tax liability using the out-of-state deduction depends on how a taxpayer provides its services to its customers. Thus, the facts in each case become very important in assessing whether a taxpayer has been over reporting its BPOL tax. The best approach for any Virginia service provider is to seek out an experienced tax practitioner before filing that first BPOL tax return so the reporting is correct from the start. While refund claims can be great, the localities typically put up a fight even in the clearest cases. Taxpayers are typically required to provide extensive substantiation to support the claim. Still, many taxpayers overstate their BPOL tax base by such a large amount that the refund is substantial enough to endure dealing with a locality that is understandably reluctant to accept such a drastic change in the tax base without sufficient substantiation.
If you have concerns about whether your business is overpaying its BPOL tax, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
Register here for our upcoming webinar “Virginia Businesses: STOP Overpaying Local BPOL Tax”.
Massachusetts has joined the growing number of states that have implemented a sales tax collection obligation for out-of-state retailers. On April 3, 2017, the Massachusetts Department of Revenue issued a directive announcing that the Department is adopting an “administrative bright-line rule” for sales tax collection requirements for Internet vendors (Directive 17-1). Effective July 1, 2017, an Internet vendor with a principal place of business located outside of Massachusetts is required to collect the state’s sales tax if it had in excess of $500,000 in Massachusetts sales or 100 or more transactions with Massachusetts customers in the preceding 12 months.
On its face, the Directive appears to continue the trend of requiring remote sellers to collect sales tax merely due to a certain threshold of in-state sales being met. Besides Massachusetts, the most recent state to adopt a bright-line “economic nexus” standard for sales tax collection is Wyoming, where Gov. Matt Mead signed a bill establishing a sales tax collection threshold of $100,000 of annual sales or more than 200 sales to Wyoming customers. Similar rules have been passed in Alabama, South Dakota, and Tennessee, with the South Dakota rule likely headed to the state’s highest court.
However, Massachusetts’ strategy appears to be slightly different from the others states. Legislation passed in the other states require sales tax collection by retailers with no in-state physical presence, which is clearly at odds with the nexus standard established by the U.S. Supreme Court in the 1992 case of Quill Corporation v. North Dakota. The presumed strategy of the states enacting such provisions is to have the issue taken up by the courts in light of the failed attempts by Congress to address the issue through federal legislation.
Rather than attacking Quill head on, Massachusetts is attempting to distinguish what constitutes a physical presence for a mail order retailer as opposed to an Internet retailer. The ruling in Quill addressed the sales tax collection obligation of a mail order retailer, and concluded that the court’s bright-line “physical presence” standard was not met by a retailer whose only connection with customers in a taxing state is by common carrier or the United States mail. The Massachusetts Directive reasons that the business activities of Internet retailers are factually distinguishable from the business of mail order retailers because Internet retailers do not limit their contacts with the state to mail and common carriers. The directive concludes that Internet retailers have a physical presence in Massachusetts because (1) retailer-owned software is affirmatively downloaded through the use of “native” or “mobile” apps or downloaded by a customer’s general use of the retailer’s website; and (2) retailer-owner proprietary cookies are placed on their customers’ computers and devices.
The troubling nature of the Directive is it seems to ignore that the Quill decision concluded that a sufficient physical presence was not established through mailings made into the state that were owned by the retailers. The in-state mailings did establish some existence of a physical presence for the mail order retailer, but it was not sufficient in the eyes of the Court. Any software and cookies that are downloaded by an in-state customer seemingly serve the same purpose as a mailed catalog. The analogous nature of mailed catalogs and downloaded software arguably should result in the same non-sufficient physical presence as concluded in Quill. Whether online retailers abide by this directive is yet to be seen. If the developments in other states are any indication, the issue of remote seller sales tax collection could very well be litigated in Massachusetts in the near future. It seems that it is only a matter of time before the U.S. Supreme Court will be forced to address the issue again.
If you have any questions regarding your sales tax collection obligations, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
On February 20, 2017, the Governor of Virginia signed legislation into law that will require the Virginia Department of Taxation to administer a tax amnesty program. The legislation, House Bill 2246, requires the program to take place sometime between July 1, 2017 and June 30, 2018, for a period of 60-75 days. This amnesty program is Virginia’s first since 2009.
Participating taxpayers with unpaid tax liabilities due to Virginia will receive a waiver of all civil or criminal penalties and one-half of the interest due in exchange for payment of the outstanding tax liability. The program is available to taxpayers with liabilities resulting from nonpayment, underpayment, non-reporting, or under-reporting of their tax liabilities. Any tax administered or collected by the Department is eligible for the program.
The amnesty program does have limitations related to tax periods and assessments that are eligible for amnesty. For income tax purposes, the program generally will not apply to any tax liability that is attributable to taxable years beginning on and after January 1, 2016. Further, a liability with respect to an outstanding assessment dated less than 90 days prior to the first day of the amnesty program is not eligible for the program. As with many state tax amnesty programs, a 20% post-amnesty penalty will be assessed against any taxpayer that does not participate in the program on any tax balance remaining after the amnesty program ends. The Department will issue additional details on the exact dates of the program and the participation procedures.
The amnesty program is separate from Virginia’s ongoing voluntary disclosure program, which is generally available to out-of-state non-registered business taxpayers with an outstanding Virginia tax liability. Any businesses considering coming forward to pay their Virginia tax liabilities should examine which program is more beneficial. One important distinction is that the voluntary disclosure program grants a waiver of all tax, penalties, and interest for periods older than a three-year look-back period. Thus, businesses with a tax exposure that is greater than three years may find the voluntary disclosure program more appealing despite it not offering the same level of penalty and interest waivers for the periods for which tax will be paid.
If you have any questions about Virginia’s amnesty program, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.