If your Virginia business is required file income tax returns in multiple states, you may be paying too much in BPOL taxes. Virginia localities are authorized to impose a Business, Professional and Occupational License (BPOL) tax for the privilege of doing business in the locality. The tax is also known as a “business privilege tax” or “gross receipts tax.” It’s bad enough that the Virginia BPOL tax imposed by most localities in the Commonwealth is a tax on all business receipts regardless of expenses. To make matters worse, the most broadly applicable exclusion allowable to multistate businesses is often misrepresented by localities, leaving the unsuspecting taxpayer with a larger annual bill than may be necessary.
Generally, gross receipts subject to BPOL taxation include only those receipts attributed to a place of business within a jurisdiction. For a service provider, gross receipts are attributed to the place of business from where the services are performed or from which the services are directed or controlled.
However, in computing a business’s BPOL tax liability, a deduction is allowed for receipts attributable to business conducted in another state if the taxpayer is subject to an income tax return in that state. This deduction is often overlooked by taxpayers, as the localities’ returns are typically formatted in a way that leads taxpayers to believe that the initial allocation of receipts to a definite place of business in the locality and the deduction are one in the same.
In recent years, the Virginia Department of Taxation has issued a number of rulings that aim to clarify the out-of-state deduction. The key principle from these rulings is that the sourcing of revenue for state income tax purposes is not the basis for determining the amount of the BPOL deduction. Unfortunately, a taxpayer preparing a seemingly uncomplicated BPOL tax return shouldn’t be blamed for believing that the two sourcing regimes are the same. Take one look at the instructions to a Fairfax County BPOL return. A taxpayer will find specific instructions asking them to provide, in support of the deduction, all of its state income tax returns as well as the apportionment schedules included with the returns.
Thus, most taxpayers tie their receipts sourced to Virginia localities on their BPOL tax returns to the receipts sourced within and outside of Virginia on their state income tax returns. Depending on the facts of how a particular business provides it services, the amounts could be the same. However, believing that is always the case can result in significant over-reporting of gross receipts for BPOL tax purposes. If your business is a service provider based in Virginia and it files income tax returns in multiple states, it’s possible that you are paying too much in BPOL taxes.