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.
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.