Title of Regulation: 23VAC10-500. Business, Professional and Occupational License Tax Regulations (amending 23VAC10-500-210).

Statutory Authority: § 58.1-3701 of the Code of Virginia; Chapter 50 of the 2017 Acts of Assembly.

Public Hearing Information: No public hearings are scheduled.

Public Comment Deadline: September 22, 2017.

Effective Date: October 10, 2017.

Agency Contact: Joe Mayer, Lead Policy Analyst, Department of Taxation, P.O. Box 27185, Richmond, VA 23261-7185, telephone (804) 371-2299, FAX (804) 371-2355, or email joseph.mayer@tax.virginia.gov.

Basis: Section 58.1-203 of the Code of Virginia provides the Tax Commissioner with the power to issue regulations relating to the interpretation and enforcement of the laws of the Commonwealth governing taxes administered by the Department of Taxation. The authority for the current regulatory action is discretionary.

Section 58.1-3701 of the Code of Virginia directs the department to issue business, professional, and occupational license (BPOL) tax guidelines. After July 1, 2001, the guidelines became subject to the Administrative Process Act and were given the weight of regulations. The BPOL guidelines were formally promulgated as regulations in Volume 24, Issue 23, of the Virginia Register of Regulations, effective October 6, 2008.

Chapter 50 of the 2017 Acts of Assembly (House Bill 1961) directs the department to "promulgate regulations that clarify its interpretation of subdivision B 2 of § 58.1-3732 of the Code of Virginia regarding the methodology for determining deductible gross receipts attributable to business conducted in another state or a foreign country. The regulations shall be based on previous Rulings of the Tax Commissioner regarding subdivision B 2 of § 58.1-3732 and the decision of the Supreme Court of Virginia in The Nielsen Company, LLC v. County Board of Arlington County, 289 Va. 79 (2015)."

Purpose: The BPOL tax requires a multistate business to assign its gross receipts to each office or other definite place of business. The statute specifies the criteria to be used by various types of businesses (e.g., contractors, retailers, wholesalers, etc.), but some businesses do not keep records or operate in a manner that fits the statutory criteria. Therefore the statute allows such businesses to apportion their gross receipts using payroll in each office.

Multistate businesses are allowed a deduction from the gross receipts assigned to an office to the extent that gross receipts are attributable to a state in which the business is subject to income tax. However, when a business has used payroll apportionment to assign receipts to an office, it is usually impossible to identify which of those receipts are attributable to another state. Therefore the regulation is amended to address this situation and allow payroll apportionment to be used again in computing the deduction.

Rationale for Using Fast-Track Rulemaking Process: The fast-track rulemaking process is intended for proposed regulations that are expected to be noncontroversial. As this regulatory action will incorporate policies recently upheld by the Virginia Supreme Court, this action is not expected to be controversial.

Substance: This regulatory action will amend the section of the Business, Professional, and Occupational License Tax Regulation entitled "Apportionment; in general." (23VAC10-500-210) to reflect the department's policy with respect to apportionment of gross receipts as applied in PD 12-146 and upheld by the Virginia Supreme Court in Nielsen Co. (US), LLC v. County Board of Arlington County, 289 Va. 79, 767 S.E.2d 1 (2015).

The issue is how a taxpayer can subdivide gross receipts that have been assigned to a definite place of business by means of payroll apportionment. Normally a taxpayer would have to identify specific gross receipts that qualify for any deduction or exemption. However, the use of payroll apportionment to assign gross receipts to a location compromises the ability of a taxpayer to identify specific characteristics of those receipts. Insisting on specific identification of receipts after apportionment would effectively deny any deduction or exemption for which some receipts may qualify.

Therefore, this regulatory action amends the section relating to apportionment to allow apportionment to be used a second time to calculate deductions and exemptions. An example illustrating this policy is also added.

Issues: This regulatory action ensures uniform application of the tax laws to taxpayers and may avoid the necessity for taxpayers to file appeals with the department or the courts. This regulatory action poses no disadvantages to the public or the Commonwealth.

Department of Planning and Budget's Economic Impact Analysis:

Summary of the Proposed Amendments to Regulation. The Department of Taxation (Tax) proposes to amend its Business, Professional and Occupational License (BPOL) Tax Regulation to incorporate the Tax Commissioner's private letter ruling¹ related to the apportionment of deductions to gross receipts when taxable gross receipts are apportioned using the payroll apportionment formula. Tax initiated this action after the Tax Commissioner's private letter ruling was upheld by the Virginia Supreme Court in The Nielson Company (US), LLC v. County Board of Arlington County, 289 Va. 79 (2015).² After Tax initiated this action, the General Assembly passed legislation³ requiring Tax to promulgate regulations to reflect  "previous Rulings of the Tax Commissioner regarding subdivision B 2 of § 58.1-3732 and the decision of the Supreme Court of Virginia in The Nielsen Company, LLC v. County Board of Arlington County."

Result of Analysis. Benefits likely outweigh costs for all proposed changes.

Estimated Economic Impact. Current Virginia law that allows the imposition of BPOL taxes requires that multi-state businesses assign gross receipts to an office or definite place of business whenever possible. Some businesses, however, do not have receipts that can be traced to just one definite place of business. In that case, the law allows them to apportion receipts according to the proportion of payroll employees in each of their definite places of business. Virginia law also sets out deductions that may be subtracted from gross receipts, or gross purchases, that would normally be taxable in Virginia. These deductions would also normally have to be traceable to a definite place of business. A dispute over such deductions led circuitously to this regulatory action. In 2012, the Tax Commissioner issued a private letter decision that allowed the apportionment of deductions using the payroll apportionment formula in instances where a business's taxable gross receipts had been apportioned using payroll apportionment. This private letter ruling was issued to address a tax dispute between the Nielson Company (US), LLC⁴ and Arlington County, Virginia. Arlington County appealed this decision and that case (The Nielson Company (US), LLC v. County Board of Arlington County) eventually reached the Virginia Supreme Court which upheld the Tax Commissioner's decision on this matter. Tax now proposes to amend this regulation to reflect the Tax Commissioner's guidance on apportioning deductions to taxable gross receipts.

Because the Tax Commissioner's ruling as affirmed by the Virginia Supreme Court already has the force of law, no affected entity is likely to incur costs on account of these proposed regulatory changes. Both affected businesses and Virginia localities are very likely to benefit from these proposed regulatory changes as they will likely eliminate confusion about how deductions may be apportioned.

Businesses and Entities Affected. These proposed regulatory changes will affect all businesses that have staff in Virginia and other political jurisdictions and that meet the criteria to apportion gross receipts using the payroll apportionment formula. Tax does not have an estimate for how many businesses would be affected.

Localities Particularly Affected. No locality should be particularly affected by these proposed regulatory changes.

Projected Impact on Employment. These proposed regulatory changes are unlikely to significantly affect employment in the Commonwealth.

Effects on the Use and Value of Private Property. These proposed regulatory changes are unlikely to affect the use or value of private property in the Commonwealth.

Real Estate Development Costs. These proposed regulatory changes are unlikely to affect real estate development costs in the Commonwealth.

Small Businesses:

Definition. Pursuant to § 2.2-4007.04 of the Code of Virginia, small business is defined as "a business entity, including its affiliates, that (i) is independently owned and operated and (ii) employs fewer than 500 full-time employees or has gross annual sales of less than $6 million."

Costs and Other Effects. These proposed regulatory changes are unlikely to adversely affect any small business in the Commonwealth.

Alternative Method that Minimizes Adverse Impact. No small businesses will be adversely affected by these proposed regulatory changes.

Adverse Impacts:

Businesses. Businesses in the Commonwealth are unlikely to experience any adverse impacts on account of this proposed regulation.

Localities. No localities are likely to incur costs on account of these proposed regulatory changes.

Other Entities. These proposed regulatory changes are unlikely to adversely affect other entities in the Commonwealth.

__________________________________

¹ Public Document (PD) 12-146 was issued August 31, 2012 and can be found at: https://www.tax.virginia.gov/laws-rules-decisions/rulings-tax-commissioner/12-146

² http://www.courts.state.va.us/opinions/opnscvwp/1140422.pdf

³ Chapter 50 of the 2017 Acts of the Assembly which can be found here: http://lis.virginia.gov/cgi-bin/legp604.exe?171+ful+CHAP0050

⁴ The Nielson Company, LLC promotes itself as a "global information and measurement company that provides clients with a comprehensive understanding of consumers and consumer behavior."

Agency's Response to Economic Impact Analysis: The Department of Taxation agrees with the Department of Planning and Budget's economic impact analysis.

Summary:

Pursuant to Chapter 50 of the 2017 Acts of Assembly, the amendments reflect the previous rulings of the Tax Commissioner regarding subdivision B 2 of § 58.1-3732 of the Code of Virginia and the Supreme Court of Virginia's decision in The Nielsen Company (US), LLC v. County Board of Arlington County, et al. The amendments allow apportionment of deductions using the payroll apportionment formula in instances where a business's taxable gross receipts had been apportioned using payroll apportionment.

23VAC10-500-210. Apportionment; in general.

A. If the taxpayer has more than one definite place of business and it is not possible or practical to determine at which definite place of business gross receipts should be taxed, gross receipts must be divided between the definite places of businesses by payroll. Some activity must occur or be controlled from a definite place of business for gross receipts to be taxed by the locality of the definite place of business. If an entity's definite place of business is in a locality that does not tax gross receipts, a different locality may not tax these gross receipts simply because the first locality does not have a license tax.

B. If apportionment has been used to divide the gross receipts of the business among its definite places of businesses, then the use of apportionment to assign gross receipts to a definite place of business is presumed to have compromised the ability of the taxpayer to determine the situs of the assigned gross receipts for any other purpose, such as the other-state deduction. For the purposes of this section, "other-state deducation" means a deduction for receipts attributable to business in another state in which it is subject to income tax as described in § 58.1-3732 B of the Code of Virginia. Generally, the same apportionment method used to assign gross receipts to a definite place of business must be used to subdivide those receipts unless the taxpayer has demonstrated that some other method is feasible and more accurate. This requires an analysis of the facts and circumstances applicable to each taxpayer and its definite places of business. Both of the following conditions must be satisfied before apportionment can be used to subdivide receipts assigned to a definite place of business by any method.

1. The business satisfies the conditions in subsection A of this section that make it necessary to subdivide the gross receipts assigned to a definite place of business. For example, in the case of the other-state deduction this would require determining if any employees at the Virginia definite place of business participated in interstate transactions by, for example, contacting or shipping goods to customers in other states, participating with employees in other offices in transactions, etc. If there has been no participation in transactions that generate interstate receipts, then the business is not eligible for the deduction and it has no need to subdivide the receipts assigned to the definite place of business.

2. It must be impossible or impractical to use specific criteria to subdivide the receipts assigned to the definite place of business. This will normally be the case when gross receipts have been assigned to a definite place of business by apportionment because apportionment ignores anything related to a specific transaction other than the criteria used for apportionment, which usually is payroll.

C. Examples:

1. A large electronics retailer has its main sales office in City A and maintains a satellite office with its own management in the distant County B. Sales staff from City A make the initial sales contact in County B and process all sales related paperwork. Sales staff in County B make all personal and follow-up sales contacts in County B. The definite place of business is in both City A and County B since each sales office is equally responsible for sales solicitations. If it were not possible or practical to determine which definite place of business gross receipts should be attributed to, gross receipts must be apportioned between the definite places of business on the basis of the payroll of the sales staff at each respective place of business.

2. A group medical practice has offices in County A and City B. County A does not tax gross receipts. Patient visits and recordkeeping functions occur in County A, but physicians see patients in the City B offices on a regular basis. City B may tax the gross receipts generated from services performed at offices located within its boundaries. However, City B may not tax the practice's gross receipts generated from County A simply because the county does not have a license tax.

3. A service business has two divisions, one national and the other regional. Both divisions operate out of an office in County A. While the business can segregate its receipts by division, it cannot assign the receipts of its national division to each office, and it uses payroll apportionment to assign receipts to the office in County A. The receipts of the regional division are assigned to County A using the criteria in § 58.1-3703.1 A 3 a of the Code of Virginia. Assuming that the business meets the requirements to be eligible for the other-state deduction with respect to both divisions, the business may use the same payroll apportionment factor of the national division to subdivide the receipts of the national division assigned to County A. The business will be required to identify specific receipts of the regional division assigned to County A that are eligible for the other-state deduction unless the business can show that it is impractical or impossible to identify specific receipts for this purpose.