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Virginia Businesses: STOP Overpaying Local BPOL Tax\

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Virginia Businesses: STOP Overpaying Local BPOL Tax\

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Join Aronson tax experts Michael L. Colavito, Jr. and Grant Patterson as they guide you in determining if your business is paying too much in Virginia local business license tax, also known as BPOL tax. Each year taxpayers oftentimes misinterpret “out-of-state deductions” and the common deductions and exclusions related to BPOL tax. With the Supreme Court of Virginia weighing in on the “out-of-state” deduction in 2015 and regulations on the horizon, many taxpayers are discovering that they have been making significant overpayments in BPOL tax.

By the end of this webinar, participants will:
-Have an understanding of the BPOL tax;
-Recognize the common deductions and exclusions available to taxpayers;
-Determine if the “out-of-state” deduction is available to a taxpayer;
-Compute the out-of-state deduction; and
-Know what to expect if they decide to file a refund claim with a locality.

Who should watch this webinar?
The topics discussed are particularly relevant to members of the accounting and finance departments for Virginia businesses providing services, such as:

-Government contractors
-Information technology companies
-Consulting businesses

Join Aronson tax experts Michael L. Colavito, Jr. and Grant Patterson as they guide you in determining if your business is paying too much in Virginia local business license tax, also known as BPOL tax. Each year taxpayers oftentimes misinterpret “out-of-state deductions” and the common deductions and exclusions related to BPOL tax. With the Supreme Court of Virginia weighing in on the “out-of-state” deduction in 2015 and regulations on the horizon, many taxpayers are discovering that they have been making significant overpayments in BPOL tax.

By the end of this webinar, participants will:
-Have an understanding of the BPOL tax;
-Recognize the common deductions and exclusions available to taxpayers;
-Determine if the “out-of-state” deduction is available to a taxpayer;
-Compute the out-of-state deduction; and
-Know what to expect if they decide to file a refund claim with a locality.

Who should watch this webinar?
The topics discussed are particularly relevant to members of the accounting and finance departments for Virginia businesses providing services, such as:

-Government contractors
-Information technology companies
-Consulting businesses

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Virginia Businesses: STOP Overpaying Local BPOL Tax\

  1. 1. Virginia Businesses: STOP Overpaying Local BPOL Tax Michael L. Colavito, Jr. Grant Patterson June 20, 2017
  2. 2. 2© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | Agenda • Overview of the Virginia BPOL tax • Tax Base • “Situsing” rules • Deductions • Returns & Refund Claims
  3. 3. 3© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | BPOL Overview
  4. 4. 4© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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
  5. 5. 5© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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
  6. 6. 6© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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
  7. 7. 7© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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
  8. 8. 8© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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
  9. 9. 9© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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
  10. 10. 10© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | BPOL Tax Base
  11. 11. 11© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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
  12. 12. 12© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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
  13. 13. 13© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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
  14. 14. 14© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | “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”
  15. 15. 15© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | “Situs” of Gross Receipts 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
  16. 16. 16© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | “Situs” of Gross Receipts 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)
  17. 17. 17© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | “Situs” of Gross Receipts 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
  18. 18. 18© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | “Situs” of Gross Receipts 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
  19. 19. 19© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | Deductions from “Taxable Pool”
  20. 20. 20© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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
  21. 21. 21© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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)
  22. 22. 22© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | “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
  23. 23. 23© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | “Out-of-State” Deduction 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
  24. 24. 24© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | “Out-of-State” Deduction 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?
  25. 25. 25© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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
  26. 26. 26© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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
  27. 27. 27© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | “Out-of-State” Deduction 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
  28. 28. 28© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | “Out-of-State” Deduction 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
  29. 29. 29© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | “Out-of-State” Deduction 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
  30. 30. 30© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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)
  31. 31. 31© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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)
  32. 32. 32© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | 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
  33. 33. 33© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs | Contact Information Michael L. Colavito, Jr., JD 301.231.6298 mcolavito@aronsonllc.com Grant Patterson 240.364.2684 gpatterson@aronsonllc.com

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