Virginia Businesses: STOP Overpaying Local BPOL Tax · 2020-02-10 · –“The sales factor...

Virginia Businesses: STOP Overpaying Local BPOL Tax Michael L. Colavito, Jr.

Grant Patterson

June 20, 2017

2 © 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs |

Agenda

• Overview of the Virginia BPOL tax

• Tax Base

• “Situsing” rules

• Deductions

• Returns & Refund Claims

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BPOL Overview







Overview of Determining Your BPOL Tax Liability

7. Apply applicable rate to the tax base

6. Take any allowable deductions from the taxable base

5. Apply the “situsing rules” to determine the “taxable pool”

4. Back out any applicable exclusions from “gross receipts”

3. Obtain businesses total gross receipts

2. Properly classify the business (this determines the tax rate)

1. Determine if your business has a “definite place of business” in the locality







BPOL Overview

Authority to Impose

• Virginia localities are authorized to impose Business,

Professional, and Occupational License (BPOL) tax based

on gross receipts

• State law provides model ordinance provisions that must

be adhered to by localities imposing a BPOL tax

• Definitions

• Situsing rules

• Items excluded from the tax base

• Tax rate limitations







BPOL Overview

Nature of the BPOL Tax

• Tax for the privilege/license for doing business in the

locality

• A BPOL return is either an application for a license or a

renewal of the license to do business in the locality

– This is why an initial BPOL return (i.e., application) requires a

payment of the tax based on estimated amounts

• Tax base - gross receipts; not net income

• Rates - vary by locality and by business classification







BPOL Overview

Rates

• Maximum rates provided by state law.

– Contractors - $0.16 per $100 of gross receipts (i.e., .0016)

– Retailers - $0.20 per $100 of gross receipts (i.e., .0020)

– Financial, real estate, professional services - $0.58 per $100 of gross

receipts (i.e., .0058)

– Repair, personal and business services, and all others not specifically

provided for - $0.36 per $100 of gross receipts (i.e., .0036)

– Other industry specific limitations

• Wholesalers

• Photographers

• Those that “pretend to tell fortunes”

– Special Local Rates – for example, $0.03 per $100 of gross receipts in

Fairfax for certain government contractor R&D services







BPOL Overview

Basis For Imposing a BPOL Tax

• Imposition of a BPOL tax is generally contingent upon the business

having a “definite place of business” in the locality

– “Definite place of business”

• Office or location at which occurs a regular and continuous course

of dealing for 30 consecutive days or more

• May include a location leased or otherwise obtained from another

person on a temporary or seasonal basis

• A person's residence can be deemed a definite place of business if

there is no other definite place of business maintained

– Contractors – subject to tax on business done in locality when

receipts exceed $25,000 in any year despite not meeting 30

consecutive day test







BPOL Overview

What Businesses are Subject to BPOL Tax

• Depends on the “licensable activities” that each locality taxes

• Generally, localities that have a BPOL tax impose it on a broad

range of businesses

• For example, Arlington’s ordinance provides under each

classification a catchall of all “other” occupations

• Certain exemptions apply

– Certain public service corporations and motor carriers, common carriers, and

other carriers of passengers or property

– Printing or publishing of periodicals (e.g., newspaper, magazine, newsletter,

etc.)

– Manufacturers

– Certain nonprofit organizations







BPOL Tax Base







Tax Base

• Base year - generally gross receipts from prior calendar

year

• Initial license year – the tax is based on an estimate of

gross receipts for the year

– EXAMPLE

• Business files initial business license on June 1, 2017

• The 2017 BPOL tax is paid with the application (or paid once

bill is issued) based on an estimate of gross receipts from

6/1/2017 through 12/31/2017

• Second License year – typically based on estimate as well

because prior license period was not a full calendar year







Tax Base

• “Gross receipts” – NOT NET INCOME

– “Gross receipts” means the whole, entire, total receipts, without

deduction. Va. Code Ann. § 58.1-3700.1

• Exclusions from “gross receipts” provided by state law

– Receipts representing the return of principal of a loan transaction in

which the licensee is the creditor

– Occasional sale or exchange of assets other than inventory (regardless

of gain or loss for federal income tax purposes)

– Investment income

– Receipts from members of the same affiliated group

• Locality specific exclusions

– Fairfax County excludes receipts from software development.

– Arlington excludes receipts from operating a radio or television

broadcasting station







“Situs” of Gross Receipts

• What is “situsing” for BPOL purposes?

• The determination of which receipts are attributed to a “definite

place of business" within the locality

– Locality is only permitted to tax those gross receipts attributed to the

exercise of a licensable business activity at a definite place of business

within the locality

• End result after situsing is your “taxable pool” of gross receipts

– Additional deductions may be allowed from the “taxable pool”








Sales Factor Sourcing Rules ≠ BPOL Situsing

• VA Department of Taxation Rulings

– “The sales factor reported on a taxpayer's Virginia corporate income

tax return does not necessarily equate to a taxpayer's gross receipts as

reported to a jurisdiction for purposes of the BPOL tax.” Va Pub. Doc.

No. 08-86

– The income tax sales factor is “an unreliable measure of gross receipts

for purposes of the BPOL tax.” Va. Pub. Doc. 05-58








Two Situsing Rules

1. General Rule - receipts are “attributed” to a definite place of

business as follows

– Retailers

• To the definite place of business at which sales solicitation activities occur

– Wholesalers/Distribution Houses

• To the definite place of business from which deliveries of the goods are made

– Service Providers

• To the definite place of business from which the services are performed

– Contractors

• To the definite place of business at which his services are performed (except

when $25,000 discussed above applies)








General Situsing Rule Example

• Facts

– Master Caterers operates a catering business from its office in County A

– The company serves customers within County A, and in other

surrounding localities in Virginia

– In 2016, the company provided catering services at events located in

County A and in County B

• Gross Receipts

– $1,000,000 from County A events and $500,000 from County B events

• Situsing of Receipts

– All $1.5M in gross receipts are sitused to County A

• Services are not performed at any definite place of business in County B

• Services are directed and controlled from County A








Two Situsing Rules

2. Apportionment

– If impractical or impossible to apply the general rule, gross receipts can

be apportioned based on payroll

– Payroll factor only includes wages of employees “who directly

participate in the businesses' licensed activity”

– Salaries representing administrative functions excluded from

calculation this apportionment







Deductions from “Taxable Pool”







Allowable Deductions from “Taxable Pool”

• “Out-of-State Deduction”

– Any receipts attributable to business conducted in another state or

foreign country in which the taxpayer is liable for an income or other tax

based upon income

• Hardware/Software Resold to Fed. or State Govt.

– Amount paid for computer hardware and software that is sold

federal or state government

• Property must be purchased within two years of the sale to the govt.

• Taxpayer is contractually obligated at the time of purchase to resell the

property to the government entity

• Deduction allowed at the time of resale (not when purchased)

• Applies to the original cost of the property (not to its resale price)







“Out-of-State” Deduction

• Determine the “pool” of taxable gross receipts

• The “pool” is the portion of total (federal) receipts attributable to the definite place of business in the locality

Step 1

Situsing

• “Out-of-state” deduction for otherwise taxable gross receipts

• Permitted for receipts attributable to business conducted in another state or foreign country in which the taxpayer is liable for an income tax

Step 2

Deduction

Determining Your BPOL Tax - Two Step Process

Don’t Skip Step 2








Why the Confusion?

• Taxpayers often simply look to their income tax

returns

• The income tax sales factor sourcing rules are

not the source for determining the amount of the

deduction

• Despite some BPOL returns implying as much








General Rules

• The deduction is from receipts that “would otherwise be taxable”

• Contingent upon being subject to an income tax

• VA’s guidance states that income tax return must be filed

• However, the taxpayer need not actually pay any tax

• Difficult Issue - how do you compute the out-of-state deduction?







Deductions from the “Taxable Pool”

VA Rulings Addressing the “Out-of-State” Deduction

• Va. Pub. Doc. No. 08-86 (June 6, 2008) • Taxpayer was a provider of technical, construction services

• On it’s BPOL return, the Taxpayer segregated gross receipts attributable

to services performed by each office

• County issued assessment based on Taxpayer's Virginia income tax

return sales factor, and concluded out-of-state deduction was not allowed.

• Ruling Concluded

1. The situsing rules require all gross receipts attributable to services

performed from the Taxpayer’s office in the locality be sitused to the County

2. However, the Taxpayer is permitted to deduct from such amount receipts

derived from customers located in states where the taxpayer filed an income

tax return







Deductions from the “Taxable Pool”

VA Rulings Addressing the “Out-of-State” Deduction

• Va. Pub. Doc. No. 97-490 (Dec. 19, 1997)

• Insight into the rational for the method used to compute the

deduction

• “Gross Receipts Attributed”

– Different than “adjusted income or other financial information reported on an

income tax return filed in another state”

– “Does not mean apportioned net income or amounts appearing in sales

factors or other like factors for apportioning income”

– Illogical to use other jurisdictions’ income tax returns because the lack of

uniformity of policies

– Common basis needed for deduction computation

– Department concluded that the proper measure for the deduction is revenue

derived from customers located other states








The Nielsen Co. v. Cty. Bd. of Arlington, 767 SE.2d 1 (Va. 2015).

• Taxpayer used payroll apportionment to situs receipts

• Thus, “taxable pool” was total gross receipts multiplied by the

definite place of business's percentage of Nielsen's total payroll

• Issue - what methodology can be used to determine deduction

when payroll apportionment situsing is used

• County - regardless of the situsing rule used, taxpayer must

prove by manual accounting the receipts attributable to business

conducted in another state were captured in the pool of taxable

gross receipts








The Nielsen Co. (cont.)

1. Determine whether employees at the Virginia definite place of business

participated in interstate transactions. If not, then there is no deduction. If

there has been participation, then;

2. Determine whether any of the interstate participation can be tied to specific

receipts. If so, then those receipts are deducted; however, if payroll

apportionment situsing was used, then it’s unlikely that any receipts can be

specifically linked to interstate transactions. If not, then;

3. The payroll factor used for the Virginia definite place of business is applied to

the gross receipts assigned to definite places of business in states in which

the taxpayer filed an income tax return








House Bill 1961

• Requires Dept. of Taxation to establish regulations

clarifying methodology for determining deductible gross

receipts

• Regulations are required to be based on the Nielsen

decision







Out-of-State Deduction

EXAMPLE 1 – General Situsing Rule • Govt. contractor headquartered in the VA County, which also has offices in MD and DC,

has determined that $18M of its $30M of gross receipts is attributable to services

performed in the VA County after application of situsing rule

• The govt. contractor files an income/franchise tax return in MD and DC (in addition to

VA)

• $8,000,000 of the gross receipts sitused to the County under step 1 are with respect to

services performed in the County for customers located in MD or DC

• Govt. contractor can deduct the $8,000,000 regardless of whether those receipts are

included in the Virginia income tax return sales factor numerator

Step 1 Situsing Step 2 Deduction Tax Due

“Taxable Pool”

18,000,000

Receipts from MD/DC

Customers

$8,000,000 ($28k reduction in tax)

$35,000 (instead of $63k)







Out-of-State Deduction

EXAMPLE 2 - Nielsen • X, an IT consulting company, has definite places of business in MD, NC, and

VA locality, and files income tax returns in these states

• Employees in VA perform services for customers located in NC, and MD.

• Total gross receipts are $10,000,000, and payroll is 40% VA, 30% MD, and

30% NC

• Deduction Amount

• Determine receipts assigned to other states using payroll % for those

states; here $6,000,000 in receipts are assigned to MD and NC

• Multiply $6,000,000 receipts by VA payroll – 40%

Step 1 Situsing Step 2 Deduction Tax Due

“Taxable Pool”

$4,000,000

Deduction

$2,400,000 ($6M x .40)

$5,600 (instead of $14k)







Practical Application

Preparing your Return

• Make sure to breakout the application of the situsing rules and

deduction (separate steps)

• Confirm you documentation to support any exclusion or deductions.

• Know why the BPOL tax base differs from income tax returns

Refund Claim

• Confirm the statute of limitations

• Documentation required – expect a document request

– Income tax returns

– Contracts – place of performance

• It’s going to take at least 6-8 months

• Cost/Benefit







Contact Information

Michael L. Colavito, Jr., JD 301.231.6298

[email protected]

Grant Patterson 240.364.2684

[email protected]






Virginia Businesses: STOP Overpaying Local BPOL Tax · 2020-02-10 · –“The sales factor...

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