Recent Supreme Court Of Virginia Decisions Demonstrate The Urgent Need For New Tax Regulations

The January 2015 Supreme Court of Virginia opinion in The Nielsen Company LLC v. County Board of Arlington County sent two important messages to state and local governments in Virginia. First, local governments should permit taxpayers to use an estimation methodology when determining a deduction for gross receipts taxed in other states for purposes of the business, professional, and occupational license (BPOL) tax if it is impossible to determine the exact amount of the deduction. Second, the state government, specifically, the Virginia Department of Taxation (tax department) needs to reconsider its current policy of issuing guidelines and public documents instead of regulations in an effort to meaningfully promote taxpayer compliance and minimize tax controversy disputes.

Multi-State Businesses Must Deduct Gross Receipts Taxed By Other States

Since 2009, the Supreme Court of Virginia has delivered three very important opinions concerning the BPOL tax imposed by many Virginia local governments on the businesses operating within their boundaries. Each of these cases involves the proper method of calculating the BPOL tax owed by larger businesses and businesses that operate in multiple states. The Virginia General Assembly reformed the BPOL tax in 1996 to reign in local government officials' over-reaching interpretations of the tax and to provide uniformity on how the tax is imposed in different localities in Virginia.1 Despite the reformation of the BPOL tax, major issues regarding differing interpretations on the proper method of calculating the BPOL tax still exist for businesses that operate in multiple states. In connection with the 1996 reform, the tax department promulgated regulations concerning the BPOL tax, but has failed to update them since they were first promulgated in 2008.2 Because the BPOL regulations have not been updated, multi-state businesses continue to be forced to incur unnecessary costs relating to administrative and judicial disputes on core issues that should have been dealt with by new regulations.

The first two BPOL tax opinions from the Supreme Court of Virginia prevented local governments from taxing gross receipts not earned in the locality. In City of Lynchburg v. English Construction Company3, the Court determined that the City of Lynchburg had no authority to tax the gross receipts of a taxpayer earned in other localities where that taxpayer maintained a definite place of business. Then, the Court in Ford Motor Credit Company v. Chesterfield County4 determined a multi-state financial service provider's receipts from an office located in a Virginia locality were not 100 percent attributable to the actions performed in the office when the loans originated in the Virginia office but were funded and serviced through offices outside of Virginia. While both of these cases involved different BPOL tax issues, the opinions correctly controlled the local government's power to tax.

Determining the BPOL Deduction for Gross Receipts Taxed in Other States

Unlike English Construction and Ford Motor Credit, the most recent dispute concerning the BPOL tax, The Nielsen Company LLC v. County Board of Arlington County5, could have been avoided had the tax department simply updated its regulations. The Nielsen case involved an appeal from the Circuit Court of Arlington County that rejected Nielsen's claim of a deduction for gross receipts taxed outside of Virginia for purposes of calculating the BPOL tax. 6 The Supreme Court of Virginia reversed the circuit court's decision and allowed the deduction as calculated by Nielsen. 7

The dispute in this case involved the interpretation of a statute allowing businesses a deduction for gross receipts taxed in other states. Specifically, the calculation of the permissible deduction was at issue. Through publicly issued rulings, the Virginia Tax Commissioner (tax commissioner) provided his interpretation of how the deduction should be computed. This methodology was not contained in the BPOL tax regulations. In these rulings, the tax commissioner determined that BPOL taxpayers who use payroll apportionment to situs their taxable receipts should use the same apportionment factor to ascertain the proper amount of the deduction permitted by Virginia Code § 58.1-3732. 8

The dispute between Nielsen and Arlington over the deduction arose upon an audit by Arlington that resulted in assessment for underpaid BPOL tax issued to Nielsen. 9 Nielsen appealed the assessments back to Arlington and ultimately to the tax...