On August 24, 2021 (released November 2021), the Virginia Department of Taxation (the Department) concluded that a provider of professional and information technology services was entitled to payroll apportionment of gross receipts for a local Business, Professional and Occupational License Tax (BPOL Tax) refund claim. Virginia localities may impose a BPOL Tax on the gross receipts attributed to the exercise of a privilege subject to licensure at a definite place of business within the jurisdiction. While the BPOL is administered by local officials, the Department is authorized to issue determinations on taxpayer appeals of BPOL assessments.

Receipts from services are sitused in the following order: (1) the definite place of business at which the service is performed; (2) the definite place of business from which the service is directed or controlled; and (3) when it is impossible or impractical to determine either of the above locations, by payroll apportionment between definite places of business.

The taxpayer first argued that it was entitled to payroll apportionment. The taxpayer used a cost tracking system to estimate its gross receipts attributable to the city. The system captured direct labor costs, subcontractor costs, and other direct costs, and then allocated gross receipts based on costs as they were assigned to various location codes. However, the taxpayer explained that this system was not reliable for situsing subcontractor costs because: (1) those costs were assigned in a variety of manners; (2) the taxpayer did not often know where the subcontractors performed their work; and (3) services under fixed price contracts were usually performed in multiple locations with several points of control for each contract. Although sharing the City’s concerns regarding how a business that is unable to track its contract costs could effectively manage its operations, the Department concluded that payroll apportionment was appropriate because the taxpayer’s “highly complex” business operations spanned multiple states and countries and involved a “great number of employees and contractors” to perform many of their contracts. Allocation of gross receipts to definite places of business under the first two statutory methods would be “very difficult in this case.”

The taxpayer next argued that it was entitled to claim a deduction for 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.”  The Department returned the case to the City “to determine to what extent, if at all, the Taxpayer was eligible to claim the out-of-state deduction under the process used when payroll apportionment is used to situs gross receipts.”

Va. Public Document Ruling No. 21-111, Va. Dep’t of Tax. (Aug. 24, 2021) (released Nov. 2021).