Virginia Businesses: STOP Overpaying Local BPOL Tax Webinar Q&A

In June, Michael L. Colavito, Jr. and Grant Patterson hosted an informative webinar, “Virginia Businesses: STOP Overpaying Local BPOL Tax,” where they guided taxpayers in determining if they are paying too much in Virginia local business license tax, also known as BPOL tax. As a follow-up to this webinar, Michael and Grant have prepared answers to the questions asked by the webinar attendees. To watch the complete webinar, please visit Aprio’s website.

Would government contractors who provide engineering services, logistics or training be taxed under the contractor or retailer BPOL classification?

A government contractor that provides engineering, logistics and training services would not be classified as a contractor for BOPL purposes. It is also unlikely that the taxpayer would be taxed as a retailer.

“Contractors” are defined for BPOL purposes under state law Va. Code Ann. § 58.1-3714(D) and are limited to construction contractors. “Retailers” or “retail” sales are not specifically defined under state law for BPOL purposes. Typically, local ordinances have their own definition. For example, Fairfax County defines a “retail merchant” as a person who sells goods, wares, or merchandise at retail only and not for resale. A business primarily providing services would not be classified as a retailer.

Most government contractors are likely to be classified as providing a “business service” or “specialized occupation.” Keep in mind that the correct classification will vary by locality. When separate service types are provided with respect to a taxpayer’s contracts and the services rise to the level of being separate business activities, then separate licenses may be required for each business. For example, a service provider may have a substantial number of contracts related to procurement services and a number of contracts providing engineering services. In this case, the taxpayer may have to obtain a license under the “professional services” classification for the engineering services, and another license under the “business services” classification for the procurement services.

Are virtual manufacturing businesses exempt from BPOL?

Virginia does not define the term “manufacturer” for purposes of the BPOL exemption. The Supreme Court of Virginia has developed a test involving three essential elements in determining whether a manufacturing activity is being undertaken. These elements are:

1. Original material, referred to as raw material;
2. A process whereby the original material is changed; and
3. A resulting product that is different from the original material.

In Virginia Public Document Ruling No. 99-239, 08/23/1999, the Department of Taxation states that “for BPOL purposes, a manufacturer is one engaged in a processing activity whereby the original materials are transformed into a product that is substantially different in character from the original materials. These three elements are all equally important; if any one of these elements is missing, a business cannot fairly be said to be engaged in manufacturing.”

If a business is designing a product, subcontracting out the building and processing activities, but is still the seller of the product being produced, the manufacturing exemption may still apply. The BPOL guidelines issued by the Department of Taxation that address the scope of the manufacturing exemption concluded that the “manufacturing process consists of work subcontracted out but under the taxpayer’s control at all times, work in the taxpayer’s shop, and work by the taxpayer’s employees at the customer’s location.”

Still, additional facts regarding the activity would be needed to reach a more definite conclusion.

Are rental receipts and other revenue (not normally business income sources) subject to the BPOL tax? 

Per Virginia § 58.1-3703(C)(19), gross receipts from the sale and rental of real estate and buildings are taxable by the locality in which they are located, provided the locality is authorized to tax such businesses. Gross receipts from the rental of real estate are generally exempt from tax, unless the localities tax on the activity is “grandfathered” in because they imposed such a tax on January 1, 1974.

Ultimately, this activity would likely be considered a separate business activity for which an additional license would be needed.

Is revenue from employees who work onsite at government facilities located in DC and MD subject to the BPOL tax? What if the employees report to managers in the Virginia locality?

Government contractors that derive revenue from employees working at government facilities in other jurisdictions, such as DC and MD, should not report their revenue to the VA locality even if the activity is managed from there. These receipts would not be reported to the VA locality based on one of two filing positions.

First, the receipts derived from the employees’ activities in MD and DC would be sitused to those locations because it is considered a “definite place of business” outside of the VA locality. If the employees are working at the facility for at least 30 consecutive days, it would then be correct to situs those receipts. All services performed at the DC and MD locations would only be sitused to the VA locality if the locations where the services are performed are not “definite places of business.”

Second, even if the services are not performed from definite places of business in DC and MD, the out-of-state deduction would still apply. It is assumed that the government contractor is filing income and franchise tax returns in DC and MD. Although the receipts would initially sitused to VA, where the services are being managed and controlled from, the out-of-state deduction can be utilized to reduce these “otherwise” taxable receipts.

Does the deduction for the resale of hardware and software to the government apply if the resale is not performed in the Virginia locality?

This particular deduction is from “otherwise taxable receipts.” If the applicable receipts are sitused to the VA locality under the applied situsing rules, then the deduction would be available. However, depending on the facts, these receipts may not be sitused to the applicable locality to begin with.

In this particular case, no deduction would be needed. For businesses that are reselling hardware and software to the government, it’s possible that the deduction can be performed first and the remaining receipts are sitused accordingly.

My company has no office, but we rent a building in Fairfax County with servers and other hardware to do cloud hosting, software development and consulting services provided by remote employees. What is best way to situs receipts?

Typically, service revenue derived from remote employees should be sitused to the location from where they are managed and controlled. Their residence would only be considered a “definite place of business,” and the receipts can be sitused if the business has absolutely no other office location. This typically occurs only with sole proprietors. Services performed by remote employees should not be sitused to the building being rented in the County because the employee services are not managed and controlled there.

In terms of renting a building to maintain servers and other hardware, it would be difficult to argue that the building is not a “definite place of business” for BPOL purposes. It is extremely likely that no services are being performed from that location. Therefore, no receipts would be sitused to the location for BPOL.

Contact Aprio’s SALT team for more information on this and other topics.