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.
The D.C. Council recently enacted legislation that will result in a number of D.C. taxpayers no longer qualifying for certain high technology tax incentives. On October 10, 2014, the Council narrowed the definition of “Qualified High Technology Company” (QHTC) with an amendment to the District’s Fiscal Year 2015 Budget Support Congressional Review Emergency Act of 2014 (20-449). The amendment, which is expected to be made permanent by Congress, says that a company must lease or own an office in the district to qualify.
Under the old QHTC definition, a company could qualify for the incentives by either maintaining an office, headquarters, or base of operations in the District. A taxpayer-friendly interpretation by a 2012 D.C. Court of Appeals decision held that a taxpayer has a “base of operations” in the District if it has a fixed D.C. location for a sufficiently extended period of time. The holding clarified that, under the old rule, a QHTC did not need to have an office in the District. It was sufficient for company to have employees performing qualifying high technology activities in facilities not controlled or maintained by the taxpayer (e.g., a federal government facility). The amendment to the law, which applies to tax years beginning after December 31, 2014, effectively reverses the D.C. Court of Appeals decision and requires a taxpayer to own or lease an office in the District to qualify for QHTC benefits.
This amendment will directly impact D.C. taxpayers that are currently claiming the reduced franchise tax rate or the five-year franchise tax exemption afforded to QHTCs. Government contractors currently claiming QHTC status that are based outside of the District, but have significant high technology services being performed at government facilities are likely to be the most impacted by the law change.
If you have any questions about D.C. QHTCs or other District tax issues, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
This week is Maryland’s back-to-school sales tax holiday, which allows consumers to purchase qualifying clothing and footwear tax-free, so long as the purchase price for the items are $100 or less. It’s not necessarily marketed by the Comptroller as being a “back-to-school event,” but many shoppers will take advantage of the tax-free week to purchase items such as new sneakers and jeans for their kids’ upcoming school year. Sales tax holidays have been around for over 30 years, but many question whether these temporary tax respites are sound tax policy.
Proponents of sales tax holidays claim that the programs provide benefits to low-income consumers and provide a stimulus to the economy through increased sales. Clearly, low-income consumers are getting a tax break, albeit temporarily, but wealthier consumers making qualified purchases receive the same benefit. In addition, low-income shoppers may not have the necessary cash on hand to time their purchases to occur during a small time period. Further, after perusing the list of exempt items in Maryland’s program, it’s easy to find one item that most families will need to buy this time of year that is not exempt from tax under the program. For example, backpacks are not exempt during the sales tax holiday, but you’re in luck if you looking for a new fishing vest or some lingerie, which are exempt during the holiday. Virginia’s recent holiday did provide for an exemption for backpacks, but only if the price was $20 or less. Good luck finding a backpack for $20.
As stated by the Tax Foundation in a report it released last year, “if a state must offer a ‘holiday’ from its tax system, it is a sign that the state’s tax system is uncompetitive. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round.” The Tax Foundation argues that if the goal is to help needy consumers purchase supplies during the back-to-school season, then the states should distribute sales tax vouchers for those citizens or implement some other targeted program.
With respect to sales tax holidays stimulating economic growth, the Washington Post recently cited a study that suggests otherwise. Rather than increasing purchases, the study found that sales tax holidays merely change the timing of purchases that consumers were going to make anyway. Thus, there may be an increase in retail activity during the holiday, but the periods before and after the holiday reveal a decrease in sales. Further, although many retailers support sales tax holidays, these programs can create added costs for businesses such as additional tax compliance costs associated with reprogramming their sales tax systems and added complexity with respect to managing their inventory and workforce allocation.
Still, sales tax holidays remain very popular among the public – likely because it is a highly visible tax break. So long as retailers and consumers continue to support the programs, we will have to endure a marathon of shopping for one weekend per year. Of course, if you are shopping in Maryland, remember that the one of the most expensive items on the back-to-school shopping list, the backpack, is still subject to tax.
A detailed list of items that are exempt during Maryland’s sales tax holiday can be found here.
If you have any questions about sales and use tax please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
About the Author: Michael L. Colavito, Jr. is a senior manager in Aronson LLC’s Tax Services Group, where he provides multi-state taxation services pertaining to income, franchise, sales and use, and property taxes. Michael’s experience also includes representing clients at all stages of tax controversy, from audit through appellate litigation, and advising them on restructurings, state tax refund and planning opportunities.