Virginia: Receipts for business, professional and occupational licensing (BPOL) tax

Virginia: Receipts for business, BPOL tax

The Supreme Court of Virginia held for the taxpayer in case concerning a business, professional and occupational licensing (BPOL) tax dispute, and in which the issue focused on the appropriate methodology for calculating the allowable deduction for receipts attributable to other jurisdictions in which the taxpayer is subject to an income tax.

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The case is: Nielsen Company (US), LLC v. County Board of Arlington County, Record No. 140422, Virginia Supreme Court (January 8, 2015).

Read the opinion [PDF 78 KB]

With this decision, the high court affirmed the method used by the Virginia Tax Commissioner, and reversed and remanded a circuit court decision that had upheld a requirement imposed by a local commissioner of revenue that the deduction be computed by a manual accounting or direct tracing approach.

Overview of BPOL tax

Currently, 39 cities and 46 counties in Virginia require a license for the operation of certain “businesses, trades, professions [and] occupations”, and levy a BPOL tax for the privilege of engaging in the licensed activity. Va. Code Ann. §§ 58.1-3700; 58.1-3703(A); 58.1-3703.1(A)(1).

The BPOL tax is applied to gross receipts attributed to the exercise of the privilege subject to licensure at a “definite place of business” (e.g., an office) within the local jurisdiction. If the receipts are derived from activities not conducted at a definite place of business (e.g., a customer visit) the receipts are to be attributed to the definite place of business from which the activities are controlled. Va. Code Ann. § 58.1-3703.1(A)(3)(a).

If a taxpayer has more than one definite place of business (within and/or outside of Virginia), and it is impractical or impossible to determine the definite place of business to which gross receipts are to be attributed, then a taxpayer’s gross receipts may be apportioned among its various definite places of business based on the percentage of the taxpayer’s payroll at each definite business location (both within and outside Virginia). Va. Code Ann. § 58.1-3703.1(A)(3)(b).

Once this pool of taxable receipts for one or more locations in Virginia is determined, the taxpayer is allowed a deduction for receipts attributable to business conducted in another state or foreign country in which the taxpayer is also liable for an income tax or other tax based upon income (referred to below simply as the “deduction”). Va. Code Ann. § 58.1-3732(B)(2).

The deduction is allowed even if a taxpayer does not have a definite place of business in the other state or country as long as the taxpayer is liable for an income or income-like tax in such state or country. Va. Pub. Doc. Ruling No. 14-29 (March 5, 2014).

The Virginia Tax Commissioner in his/her role of hearing BPOL tax disputes from local governments has, over a number of years, ruled that if a taxpayer’s pool of taxable receipts is determined by payroll apportionment, the deduction may also be determined by payroll apportionment as long as the employees at the Virginia definite place of business participated in interstate transactions of the taxpayer and that participation could not be traced to specific receipts. Note that in determining the deduction for other jurisdiction receipts, the apportionment fraction would be adjusted to be the payroll in the Virginia definite place of business compared to total payroll in all other jurisdictions in which the taxpayer is subject to an income tax.


The taxpayer is a global information and measurement company that for the year at issue had offices in 18 states, including an office in Arlington County, Virginia.

The taxpayer filed its 2007 Arlington County BPOL return using the payroll apportionment method for determining both its taxable gross receipts as well as the deduction. On audit, the Arlington County Commissioner of Revenue assessed additional tax on the basis that the payroll apportionment method for determining the deduction was inappropriate. The Arlington County Commissioner argued that regardless of how the taxpayer calculated the pool of taxable receipts, the deduction for receipts attributable to other jurisdictions must be demonstrated by a manual accounting and tracing of such receipts by the taxpayer.

The taxpayer appealed to the Virginia Tax Commissioner, who subsequently overturned the assessment. The Arlington County Commissioner then appealed to the Circuit Court for the County of Arlington, which held that the Virginia Tax Commissioner’s use of the payroll apportionment method for determining the deduction was contrary to law, as well as arbitrary and capricious.

Supreme Court

On appeal, the Virginia Supreme Court reversed the circuit court.

The high court held that the payroll apportionment methodology used by the Virginia Tax Commissioner was not contrary to state law, finding that the BPOL tax law clearly allowed a deduction for receipts subject to an income tax in other jurisdictions, but did not specify a method of calculating the deduction. Thus, it was within the purview of the Virginia Tax Commissioner to decide how to calculate the deduction; and further, the apportionment methodology was appropriate if the deductible receipts could not be determined through manual accounting.

The high court also held that application of the apportionment methodology was not arbitrary and capricious because it is applied only where the out-of-state receipts cannot be directly determined.

The case was remanded to the circuit court for the appropriate calculation of the deduction. The high court was careful to state that it was not determining whether the apportionment methodology or the manual accounting approach would be used to determine the deduction on remand. The high court found only that the apportionment approach was not contrary to law and that the taxpayer would still have to demonstrate that apportionment was appropriate in its circumstances because the employees in the Arlington definite place of business were involved in interstate transactions and their activities could not be directly attributed to certain receipts through manual accounting, thus making apportionment appropriate as outlined in the rulings of the Virginia Tax Commissioner.

KPMG observation

The Virginia Supreme Court’s decision affirms the availability of the payroll apportionment approach for determining both: (1) taxable gross receipts attributable to a definite place of business in Virginia when there are multiple such places; and (2) the use of apportionment for determining the deduction for receipts attributable to other jurisdictions in which the taxpayer is subject to an income tax.

Taxpayers must still demonstrate that it is not possible to determine the other jurisdiction deduction through manual accounting as outlined in determinations of the Virginia Tax Commissioner. Note that the Virginia Tax Commissioner previously ruled that if taxable receipts are determined according to payroll apportionment, that apportionment is also likely to be required in determining the deductions for receipts attributable to other jurisdictions. See, for example, Va. Pub. Doc. Ruling No. 14-29 (March 5, 2014).

To the extent that the apportionment approach has not previously been used to determine the appropriate deduction, taxpayers may be eligible to file amended returns seeking refunds. The statute of limitations for refund claims in Virginia is three years from the original due date (including any applicable extensions). In particular, service businesses—i.e., businesses that provide services benefiting their customers both inside and outside of the BPOL district—may want to consider a refund claim.


For more information, contact a KPMG State and Local Tax professional:

Duane Dobson | +1 (703) 286-8637 |

Sarika Bakshi | +1 (703) 286-8467 |

Diana Smith | +1 (703) 286-8214 |

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