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October 8, 2013
In Search of a Win-Win for the Virginia BPOL Tax
by Brian Strahle

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Brian StrahleThere are constant calls for the elimination of the Virginia business, professional, and occupational license (BPOL) tax by the business community, government, and others. In fact, the current Virginia gubernatorial candidates -- Attorney General Ken Cuccinelli (R), Democrat Terry McAuliffe, and Libertarian Robert Sarvis -- agree, and have issued preliminary proposals to reduce or eliminate the BPOL tax.

According a recent Tax Foundation article1 about the candidates' tax proposals, each would eliminate or reduce the BPOL tax, the machine and tool tax, and the merchants' capital tax -- or allow localities the option to eliminate or reduce these taxes.

Cuccinelli said he would like to do this while "maintaining local revenue." McAuliffe said he wants to maintain local revenue by establishing a task force to identify new revenue sources for localities. In other words, the pot will stay the same and only the rules will change. The end result would be similar to a poker game; some would win and some would lose, but the game itself is revenue neutral. But if every proposal would seek to maintain local revenue or be revenue neutral, is there any hope the replacement tax(es) would be better than the BPOL tax?

Several studies have been conducted to determine options to eliminate the BPOL tax -- one of the most recent being an April 2012 report by Michael W. Thompson of the Thomas Jefferson Institute for Public Policy.2 Despite the study, the question remains: Should the levy be eliminated? Is it simply an easy political target every year? Is the BPOL tax really a deterrent to businesses and economic growth? These questions are not unlike the questions that cause federal legislation such as the Business Activity Tax Simplification Act to get introduced year after year without passage.

Therefore, perhaps shining more light on the areas that cause the most pain will help move us along the path to a cure -- even if that means the BPOL tax isn't eliminated, but retooled.

Deceptively Simple, Endlessly Complicated

Each locality has the option to impose a BPOL tax, which is currently imposed by 39 cities and 46 of Virginia's 95 counties. Localities that impose a BPOL tax require a license for every person engaged in a licensable activity at a definite place of business in the locality; however, not all activities may be subject to tax, as there are exemptions.

The BPOL tax, like most other areas in state tax, is deceptively simple and endlessly complicated. As a result of this complexity, companies that do business in Virginia must consider the following questions:

  • Is my activity licensable?
  • Do I have a "definite place of business" in Virginia? More than one?
  • Do any exemptions apply?
  • How are intercompany transactions treated?
  • Do I need a license for each of my businesses (multiple businesses)?
  • How are affiliated groups treated?
  • What is the basis of the tax and the rate of tax?
  • Are there any exclusions and deductions from taxable gross receipts?
  • How do I determine the situs of my gross receipts?
  • How do you apportion gross receipts among more than one definite places of business?
  • If I have a disagreement with a locality regarding the BPOL tax, what are my options for appeal?

Unfortunately, the answers to these questions lead to taxpayer problems and call for the tax's repeal.

Areas of Contention

Taxpayers frequently complain that:
  • BPOL tax rates differ among the various localities that impose the tax.
  • The BPOL tax is imposed on gross receipts instead of income -- resulting in companies without profits still paying tax.
  • The sourcing rules differ for the performance of services and the sale of tangible personal property.
  • The sourcing rules are different from those used to assign receipts for income and franchise tax purposes or sales and use tax purposes. As a result, taxpayers with little or no Virginia income tax liability may have a significant BPOL tax liability.
  • The BPOL tax is imposed and administered by local officials, but Virginia Code section 58.1-3703.1 authorizes the Virginia Department of Taxation to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, that is, the local assessment will stand unless the taxpayer proves that it is incorrect. Hence, once a local jurisdiction issues an assessment, the burden rests on the taxpayer to prove it is incorrect.
  • Appeal decisions made by the Department of Taxation are frequently remanded back to the locality to review and agree to final calculations and liability; thus, the process to obtain a fair resolution can be costly and time consuming.

Tax commissioner rulings involving the BPOL tax reflect misunderstandings, incorrect assumptions and record-keeping by taxpayers, and incorrect basis for assessments by localities. The main areas of contention come from a few areas: determining whether a taxpayer has a definite place of business, the application of the out-of-state deduction, situsing of gross receipts, and apportioning gross receipts among more than one definite place of business.

Definite Place of Business

Any taxpayer must apply for a license for each business or profession performed in a jurisdiction if:
  • the taxpayer has a definite place of business in the jurisdiction;
  • the taxpayer has no definite place of business anywhere, but resides in the jurisdiction; or
  • the taxpayer has no definite place of business in the jurisdiction, but is classified as an itinerant merchant, peddler, carnival, circus, contractor, or public service corporation.

Whether a particular activity is subject to license taxation depends on the local ordinance.3

A definite place of business is defined as an office or a location at which occurs a regular and continuous course of dealing for 30 consecutive days or more, exclusive of holidays and weekends. For a taxpayer engaged in business, it may include a location leased or otherwise obtained from another person temporarily or seasonally and real property leased to another. A person's residence is considered to be a definite place of business if there is no definite place of business maintained elsewhere and the person is not subject to licensure as a peddler or itinerant merchant.4

Out-of-state contractors and companies often find it difficult to determine if they have established a definite place of business. For example, contractors that maintain a presence at a construction site for at least 30 consecutive days may be held to have established a definite place of business, but what about contractors that move frequently to different job sites and spend only a few days at each one? Some rulings have held in those situations that the contractor did not establish sufficient presence to be considered to have a definite place of business.5 In most cases, an out-of-state company that has no office in Virginia will not owe any business license tax, but each situation should be analyzed carefully.

Independent contractors residing in Virginia have surprisingly learned they have BPOL tax obligations as well. For example, an independent truck driver hauling for a single company situated outside a locality was determined to be subject to local licensure and tax because the trucker was a resident in the jurisdiction, even though none of his hauling jobs were performed within the jurisdiction. According to Virginia Code, the BPOL tax applies to independent contractors residing in a jurisdiction if their business or profession has "no definite place of business anywhere." The truck driver's BPOL liability was not affected by the location of the company hiring him to perform the hauling jobs.6 Companies that hire independent contractors residing in Virginia -- especially out-of-state companies -- may want to inform those contractors of this potential obligation.

Out-of-State Deduction

An often overlooked or misunderstood deduction is the out-of-state gross receipts deduction. Virginia Code provides a deduction from gross receipts for "any receipts attributable to business conducted in another state or foreign country in which the taxpayer (or its shareholders, partners, or members in lieu of the taxpayer) is liable for an income or other tax based upon income."7

The first question that causes problems for taxpayers is whether the taxpayer has the ability to take the deduction. What are the requirements to be able to take the deduction? Does that taxpayer actually have to pay tax? Better yet, does the taxpayer have to actually file a return? According to Virginia Code, to claim the deduction a taxpayer must file an income or income-like tax return in a state or foreign country even if there is no actual tax liability in a given year. However, a taxpayer does not have to actually pay any tax to take the deduction.8 This is a common misconception by taxpayers and localities, causing taxpayers to make incorrect assumptions and localities to make incorrect assessments.

The tax return filing requirement can become more confusing when affiliated groups operate within Virginia via a single-member limited liability company (SMLLC). The confusion arises because Virginia has held that limited liability companies are subject to the BPOL tax, regardless of whether they are disregarded entities for corporate income tax purposes under federal check-the-box regulations. If the SMLLC maintains a definite place of business within the taxing jurisdiction, it is subject to the BPOL tax. The amount of tax is the gross receipts received by the LLC that are attributable to the definite place of business. If both a parent LLC and an operating LLC have a definite place of business in Virginia, both entities are subject to the BPOL tax.9

If an SMLLC is owned by a member of an affiliated group, can the SMLLC take the out-of-state deduction? Since other states or foreign countries may not recognize an SMLLC and require it to file a return separate from its owner, will the filing of a return by the SMLLC's owner meet the filing requirement and allow the SMLLC to take the out-of-state deduction?

According to a Virginia ruling,10 an SMLLC taxpayer owned by a member of an affiliated group of corporate entities (LLC A) may deduct gross receipts that are attributable to business in another state or foreign country that flow through to LLC A, but only to the extent the taxpayer's business in another state or foreign country is subject to an income or income-like tax and LLC A actually reports those receipts for the taxpayer on LLC A's out-of-state income tax returns. The deduction would apply whether LLC A files a separate, combined, or consolidated income tax return in other states as long as the taxpayer can demonstrate to the locality's satisfaction that those gross receipts attributed to the taxpayer's business in other states are subject to income or income-like taxes and reported by LLC A.

The second question that causes problems for taxpayers and localities is how to quantify the amount of the deduction. Cities and counties often mistakenly look to the sales factor as reported on a Virginia state income tax return to determine the out-of-state gross receipts deduction.

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. For example, a taxpayer was required to file income tax returns in a number of states where its customers were located, even though the employees providing the services to these customers may not have been located in the customer's state. At issue was whether the gross receipts attributable to services performed at the taxpayer's definite place of business in the county resulting from business conducted in other states were eligible for the deduction. The taxpayer provided evidence of actual accounting of revenues derived from customers located in other states properly sitused to the taxpayer's office and income tax returns filed in the states where the customers were located. This evidence indicated that the taxpayer properly computed its out-of-state deduction on its original return.11

In a different ruling,12 the city was required to recompute the out-of-state deduction for gross receipts attributable to business conducted by the taxpayer in other states because the city's final determination only permitted a deduction to the extent that the amount of gross receipts taxed by another state exceeded the amount of gross receipts apportioned to the state for income tax purposes. In reaching the conclusion, the tax commissioner referenced P.D. 10-228, in which the Department of Taxation ruled that when gross receipts are apportioned by using the general payroll apportionment formula, the amount of the out-of-state deduction should be determined by multiplying the total out-of-state gross receipts by the same payroll factor used to determine situs of gross receipts.

If payroll apportionment was used to source gross receipts to the Virginia definite place of business, then determining the receipts that can be deducted requires a three-step analysis:

  • Ascertain whether any employees at the Virginia definite place of business participated in interstate transactions by, for example, shipping goods to customers in other states, participating with employees in other offices in transactions, etc. If there has been no participation in interstate transactions, then there is no deduction. If there has been participation, then proceed to step 2.
  • Ascertain whether any of this interstate participation can be tied to specific receipts. If so, then those receipts are deducted; however, if payroll apportionment had to be used to assign receipts to the definite place of business, then it is very unlikely that any of those apportioned receipts can be specifically linked to interstate transactions. If not, or if only some of the participation can be tied to specific receipts, then proceed to step 3.
  • The payroll factor used for the Virginia definite place of business would be applied to the gross receipts assigned to definite places of business in states in which the taxpayer filed an income tax return. Note that payroll apportionment would probably be needed to assign receipts to definite places of business in other states.

That procedure may need to be adjusted depending on the facts and circumstances of each taxpayer. For example, a taxpayer may have two lines of business, receipts for one of which can be assigned using the statutory method while the other requires use of payroll apportionment. In such a case the deduction would be the sum of the deductions computed for each line of business.

For example, assume a taxpayer (Taxpayer A) has an office in Virginia and offices in six other states. It has $10 million in gross receipts and a payroll of $1 million. It files an income tax return and pays income tax in four of the six states. Employees from the Virginia office travel to the offices in the other states and generate receipts attributable to the customers in the other states. Taxpayer A situses its gross receipts using payroll apportionment. The out-of-state deduction would be computed as in the table.

                                                Income             Gross
                                   Apportioned  Tax     Eligible   Receipts
                       Payroll     Gross        Return  for        Eligible for
             Payroll   Factor*     Receipts**   Filed   Deduction  Deduction

 Virginia   $500,000  50 percent   $5 million
 State A    $200,000  20 percent   $2 million     Yes     Yes       $2 million
 State B    $150,000  15 percent   $1 million     Yes     Yes     $1.5 million
 State C     $75,000  7.5 percent    $750,000     Yes     Yes         $750,000
 State D     $25,000  2.5 percent    $250,000     Yes     Yes         $250,000
 State E***  $20,000  2 percent      $200,000     No      No
 State F***  $30,000  3 percent      $300,000     No      No

 Total $4.5 million Virginia payroll factor 50 percent out-of-state deduction
 $2.250 million.

                               FOOTNOTES TO TABLE

      * Payroll factor = state payroll/total payroll.

      ** Apportioned gross receipts = total gross receipts x state payroll

      *** State E does not impose an income tax and State F exempts the
 taxpayer from income tax.

                           END OF FOOTNOTES TO TABLE

In ruling P.D. 13-170,13 a taxpayer with multiple locations within and without Virginia calculated its gross receipts by subtracting from its total worldwide gross receipts those receipts generated from each state in which it filed an income tax return and multiplied the net total by the percentage of its Virginia payroll to total payroll. The city disallowed the subtraction. Under appeal, the taxpayer contended it was eligible for an out-of-state deduction for gross receipts attributable to contracts for which the customer was located outside of Virginia and the taxpayer filed an income-like tax return.

The taxpayer argued that the Virginia code directly supported its assertion. An example14 in the code stated that a merchant is permitted to deduct all gross receipts from the sale of goods to a North Carolina resident because the merchant filed a North Carolina income tax return. The city disagreed with the taxpayer's calculation of the out-of-state deduction, citing Ford Motor Credit v. Chesterfield County.15 It contended that the out-of-state deduction is limited to those receipts actually reported on the out-of-state tax return and that the statute does not provide for the deduction to be applied to gross receipts attributed to an out-of-state customer location. It also argued that the example referenced by the taxpayer is inapplicable because it addresses a retailer rather than a service provider.

The department has stated that because of the differences between income tax apportionment principles and situsing gross receipts, gross receipts attributable to another state or foreign country cannot be directly attributed to apportioned income or other financial information reported on an income tax return filed in another state or country.16 Accordingly, the department concluded that the gross receipts resulting from revenue derived from customers located in a state or country other than Virginia, in which a return for an income or income-like tax was filed, is the proper measure for the out-of-state deduction.

While the taxpayer was a service provider and the merchant in the example is a retailer, the department has found that -- in the case of business services -- the proper measure of the out-of-state deduction is based on gross receipts, or revenues derived from customers located in a state or country other than Virginia.17 Accordingly, when a taxpayer has a definite place of business in Virginia and does business in other states where it is liable for an income or income-like tax, and files a tax return in those states -- a deduction is allowed for the receipts derived from customers located in those states. This deduction is allowed even if a taxpayer does not have a definite place of business in those states or services are directed or controlled in those states.

Situs of Gross Receipts

The general rule for establishing situs for the BPOL tax is that whenever the tax is measured by gross receipts, "the gross receipts included in the taxable measure shall be only those gross receipts attributed to the exercise of a privilege subject to licensure at a definite place of business within the jurisdiction."18

In determining the situs of gross receipts, receipts from services are to be taxed based on (in order): (i) the definite place of business at which the service is performed, or if not performed at any definite place of business; (ii) the place from which the service is directed or controlled; or (iii) as a last resort when it is impossible or impractical to determine where the service is performed or from where the service is directed or controlled, by payroll apportionment between definite places of business.19

Situsing gross receipts can be difficult when companies have several locations within Virginia and/or have more than one type of business (for example, retail, wholesale, services, etc.). The difficulty arises because of the different sourcing methods for retail, wholesale, and service receipts.

For example, the gross receipts of a retailer are attributed to the definite place of business where sales solicitation activities occur. Sales solicitation activities that are not performed at any definite place of business are attributed to the definite place of business from which the sales solicitation activities are initiated, directed, or controlled.20

The gross receipts of a wholesaler based on purchases are attributed to the definite place of business from which the goods are physically delivered to customers or at the shipping point to customers. Purchases include all goods, wares, and merchandise received for sale at each definite place of business of a wholesale merchant and also include the cost of manufacture of all goods, wares, and merchandise manufactured by any wholesale merchant and sold or offered for sale.21 If a wholesaler is not subject to a BPOL tax measured by purchases (because the jurisdiction's tax on gross receipts was "grandfathered"), its gross receipts are attributed in the same manner as retail sales.22

Gross receipts from the performance of services are attributed to the definite place of business where the services are performed or, if not performed at any definite place, to the definite place of business where the services are directed or controlled.23

Taxpayers often maintain that it is impractical to situs gross receipts using the statutory method (i or ii above), and thus, use payroll apportionment. For example, in the same ruling discussed earlier, P.D. 13-170, the taxpayer with multiple locations in Virginia and outside Virginia apportioned its gross receipts based on payroll. Under appeal, the taxpayer claimed it was now able to situs gross receipts to the definite place of business where the work was performed. The taxpayer was able to trace labor charges made by each of its employees located in the city. It then determined the total labor cost charged to these contracts by its employees nationwide. Using these two calculations, a fraction was then developed with the numerator being the direct labor charges at the city's definite place of business and the denominator being total direct labor charges. This fraction was multiplied against total receipts from the contracts that the employee working at the city's definite place of business worked on to determine gross receipts attributable to the city.

Virginia Code24 clearly states that payroll apportionment is to be used only as a last resort when it is impossible or impractical to situs gross receipts from services to where the service is performed or directed and controlled. In P.D. 13-170, the taxpayer provided a method of directly situsing its gross receipts. In response to the appeal, the city acknowledged that the taxpayer's direct labor method appeared to situs gross receipts in accordance with the statutory method. However, the city stated it has not had the opportunity to examine the documentation. Hence, the department remanded the case back to the city to evaluate the taxpayer's method.

More Than One Definite Place of Business

To determine the gross receipts when it has one or more definite places of business in Virginia, the taxpayer must:
  • calculate its worldwide gross receipts;
  • determine which receipts are attributed to its business activity sitused in Virginia;
  • subtract those Virginia gross receipts permitted as an out-of-state deduction; and then
  • apportion the remaining gross receipts among those localities that have a definite place of business in Virginia.

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 apportioned between the definite places of business 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.25

For example, a group medical practice has offices in County A and City B. County A does not tax gross receipts. Patient visits and record-keeping functions occur in County A, but physicians regularly see patients in the City B offices. 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.26

Assessors may enter into agreements with any other political subdivision of Virginia concerning how gross receipts should be apportioned among definite places of business. However, the sum of the gross receipts apportioned by the agreement should not exceed the total gross receipts attributable to all of the definite places of business affected by the agreement. Upon being notified by a taxpayer that its method of attributing gross receipts is fundamentally inconsistent with the method of one or more political subdivisions in which the taxpayer is licensed to engage in business and that the difference has, or is likely to, result in taxes on more than 100 percent of its gross receipts from all locations in the affected jurisdictions, the assessor should make a good-faith effort to reach an apportionment agreement with the other political subdivisions involved. If an agreement cannot be reached, either the assessor or taxpayer may seek an advisory opinion from the department.27


A Virginia House delegate in the past couple years was quoted as saying, "I'm not a fan of BPOL, but I know we just can't stop it because localities rely heavily on the tax revenue. But I would like to . . . wean ourselves off of that, because it is a deterrent to businesses moving and expanding here."28

Those statements -- not to mention various studies and coalitions -- arguing for the BPOL tax's elimination will most likely continue; however, options such as expanding the sales tax base to services or increasing the sales tax are generally not viewed as politically viable options. Therefore, perhaps a more plausible option would be to improve and simplify the BPOL tax in the areas causing taxpayers the most pain. Wouldn't that approach help localities maintain revenue while also decreasing the compliance burden of businesses -- making the BPOL tax less of a deterrent?

* * * * *

The SALT Effect is written by Brian Strahle, owner and managing member of LEVERAGE SALT LLC. Strahle provides state and local tax research, writing, and help-desk services to accounting firms and other organizations. He is also the author and creator of the state tax blog LEVERAGE SALT ( He welcomes comments at


1 Scott Drenkard, "Virginia Gubernatorial Candidates Eye Cumbersome Tax Code," Tax Foundation, July 15, 2013.

2 Available at

3 Section 58.1-3703.1; 23 VAC 10-500-30.

4 Section 58.1-3700.1; 23 VAC 10-500-10.

5 Ruling of Commissioner, P.D. 97-21.

6 Ruling of Commissioner, P.D. 97-125.

7 Section 58.1-3732; 23 VAC 10-500-80.

8 23 VAC 10-500-80.

9 Ruling of Commissioner, P.D. 99-9.

10 Ruling of Commissioner, P.D. 07-142.

11 Ruling of Commissioner, P.D. 08-86.

12 Ruling of Commissioner, P.D. 12-88.

13 Ruling of Commissioner, P.D. 13-170.

14 23 VAC 10-500-80.

15 707 S.E. 2d 311 (2011).

16 Ruling of Commissioner, P.D. 97-490.

17 Ruling of Commissioner, P.D. 08-86.

18 Sections 58.1-3703.1(A)(3)(a).

19 Section 58.1-3703.1(A)(3)(a)(4) and 58.1-3703.(A)(3)(b).

20 Section 58.1-3703.1; 23 VAC 10-500-170.

21 Section 58.1-3703.1; 23 VAC 10-500-180.

22 Section 58.1-3703.1; 23 VAC 10-500-170.

23 Section 58.1-3703.1; 23 VAC 10-500-200.

24 Section 58.1-3703.1(A)(4)(b).

25 Section 58.1-3703.1; 23 VAC 10-500-210.

26 23 VAC 10-500-210.

27 Section 58.1-3703.1(A)(3)(c).

28 "House Votes to Freeze BPOL Tax,", Feb. 5, 2012 available at


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