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Virginia Supreme Court Reverses Decision on Out-of-State Deduction for BPOL Tax Purposes

The Virginia Supreme Court has reversed and remanded a decision by the Arlington County Circuit Court in Nielsen vs. County Board of Arlington, which dealt with the apportioned out-of-state deduction for business, professional and occupational license (BPOL) tax purposes.

The dispute in the case was over the correct methodology for calculating tax deductions for gross receipts earned in other states. The circuit court had held that a business provider was not entitled to an apportioned deduction from gross receipts for receipts attributable to business conducted outside of Virginia. The Virginia court overturned the lower court’s ruling and remanded the case back to the circuit court for further proceedings.

Virginia localities are authorized to impose a BPOL tax, generally based on the business’s gross receipts for the privilege of conducting business. Generally, taxable gross receipts include only those receipts attributed to a definite place of business within a jurisdiction, based on the place where services are performed or from where they are directed or controlled.

In calculating BPOL tax liability, businesses are permitted to deduct from total gross receipts business conducted in another state or country in which the taxpayer is liable for income tax or other tax based on income. During the 2007 tax year, the business in question apportioned its gross receipts based on payroll, using the same factor for purposes of its out-of-state deduction. In 2010, Arlington County audited the taxpayer and issued an additional tax assessment based on the county’s adjustment to the subtraction for the gross receipts attributed to states in which the business filed income tax returns.

Upon appeal, the county upheld the audit adjustment, and the business successfully appealed to the Virginia Department of Taxation (TAX). The county then appealed to the circuit court, which overturned TAX’s position and stated that the business was responsible for the county’s initial assessment, claiming that TAX’s methodology was erroneous and contrary to law and precedent.

The business then appealed to the Supreme Court, claiming that:

  • The circuit court misinterpreted the out-of-state deduction statute
  • The circuit court should have deferred to TAX’s interpretation of said statute
  • The circuit court erroneously placed the burden of proof on the taxpayer

The Supreme Court endorsed TAX’s approach, but ruled that the circuit court would make the final determination, stipulating that the case could not be remanded to the county commissioner who initially handled the business’s request.

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