Virginia Supreme Court Rules on Important BPOL Case

For almost 200 years, the Business, Professional and Occupational License (BPOL) tax has been a major source of funding for many counties and cities throughout Virginia. As a gross receipts-based tax, the BPOL is regressive in nature; a business that is sustaining significant losses is still subject to the tax. Far from being simple, a multi-state business with numerous locations must address a number of complexities in calculating its BPOL tax liability.

The Virginia Supreme Court recently reversed and remanded a decision by the Arlington County Circuit Court which limited certain taxpayers from deducting out-of-state receipts from their gross receipts tax base. The Court determined that the Arlington County Commissioner must defer to the Virginia Tax Commissioner’s interpretation of the deduction, which was more favorable to the taxpayer. Now with the case remanded back to the Arlington County Circuit Court to determine if the deduction will be permitted, the Court must consider the state’s more favorable interpretation of the deduction.

When a business has more than one “definite place of business,” defined by state statute, only the receipts attributable to the business location within the locality are taxed. If it is difficult or impossible to determine the amount of receipts attributable to each separate place of business, the receipts may be divided among the business locations based on a percentage of payroll within the locality. In addition, a deduction is permitted for gross receipts that are subject to an income tax outside the state of Virginia. Herein lies the controversy: When payroll apportionment is used to calculate the locality’s gross receipts, how is the out-of-state deduction determined?

Counties throughout Virginia have taken a very restrictive approach, requiring a manual accounting to determine this deduction. Travel records and other proof are generally requested during an audit to determine if employees located at the definite place of business actually participated in generating the out-of-state revenue. Only receipts where the taxpayer proves employees within the jurisdiction participated in earning the out-of-state revenue can be considered for the deduction. Further, the taxpayer must show that the out-of-state receipts were included in the tax base prior to the deduction. This becomes nearly impossible when the payroll apportionment method is used, and the deduction is often denied.

In this case, however, after proving that the employees within the jurisdiction participated in earning the out-of-state revenue, the state of Virginia determined it was reasonable to apply the same payroll apportionment methodology to all receipts subject to an out-of-state income tax in calculating the permissible deduction.

Although the Supreme Court has not specifically approved the more favorable interpretation allowed by the state, it has remanded the case back to the Circuit Court. In turn, the Circuit Court must now take into account the state’s interpretation as authoritative. Therefore, if you use payroll apportionment to assign receipts among multiple places of business, you should determine if a refund opportunity is available.

(Nielsen Co. (US), LLC v. County Board of Arlington County, Virginia Supreme Court, Record No. 140422, Jan. 8, 2015.)

For more information, please contact your Cherry Bekaert Tax Professional.