The Virginia Business Professional and Occupational License (BPOL) is a local level tax levied on businesses’ gross receipts. Rates typically range from $0.03 to $0.58 per $100 of gross receipts, depending on the locality and industry classification. The tax is calculated based on the previous year’s receipts and filed annually. As a turnover tax, BPOL generally does not allow deductions for business expenses, and exemptions typical for sales and use taxes do not apply. However, there are certain exclusions that reduce the tax base, including receipts from members of the same affiliated group (dividends, interest, and other investment income, and capital asset sales outside the ordinary course of business.
Virginia localities may impose BPOL if a connection, or “nexus” exists between the taxpayer and the locality – usually quantified as a “definite place of business” where regular and continuous dealing occurs for at least 30 consecutive days. Factors that indicate a definite place of business include: (1) a continuous presence; (2) having an office with a phone; (3) receiving of mail; (4) having employees; (5) record keeping; and (6) advertising or otherwise holding oneself out as engaging in business at the particular location.
Receipts that are sourced or attributed to the locality are based on the “situs,” or legal jurisdiction, and are dependent on the business activity itself. For example, services are taxed at the service provider’s office, regardless of the performance location, whereas retail sales are taxed based on where the sales solicitation activities occur. Additional methodologies based on industry and company specific complexities are also available.
Originally a narrow “privilege tax,” BPOL has since expanded, leading to legal challenges. Below are some recent BPOL rulings issued by the Virginia Tax Commissioner and what they mean for taxpayers.
Remote Employees Located Outside the County Excluded from Numerator of Apportionment Formula Va. P.D. 21-131 (Sept. 28, 2021).
This ruling addresses the application of payroll apportionment for taxpayers with remote employees, a method that is used when there is more than one definite place of business, and it is impossible or impractical to determine to which place the receipts should be attributed. When reviewing the assignment of remote employees to a definite place of business, the commissioner affirmatively established that the definite place of business is the locality in which the remote employees’ home office is located. Accordingly, the commissioner ruled that the calculation of the fraction must be such that the numerator cannot include any employees who work remotely outside of the county, regardless of what office the employee reports.
The commissioner found that requiring the payroll of home-based employees to be apportioned on a direction and control basis would “reintroduce the types of factual complexities” the methodology sought to avoid. This ruling suggests that the state of residence is too broad when ascertaining Virginia situs and apportionment. Instead, the exact county location of the employees is necessary in determining the correct application of payroll apportionment. Taxpayers should review their apportionment methodologies to ensure they are not over remitting BPOL in localities where remote employees are not located.
Operational Integration Between Related Entities Creates Nexus Va. P.D. 23-112 (Oct. 19, 2023).
This ruling explains how shared resources and intercompany operations may create an unexpected nexus, particularly in e-commerce and affiliated corporate structures. The taxpayer was a wholly owned subsidiary responsible for parent’s retail sales at brick-and-mortar locations. The parent also owned an affiliate responsible for its online sales (for purposes of billing, fulfillment, and warranty), but these sales were facilitated by taxpayer’s employees at the store’s onsite computers.
The commissioner's decision hinged on interpreting a "definite place of business" in the digital age. The operational integration of taxpayer and affiliate, regardless of the entity that owned the stores and employees, demonstrated that the stores were definite places of business for the affiliate. Additionally, the fact that transfer of title for the goods occurred digitally instead of in a store was irrelevant. Rather, it was the location of the sales solicitation that was deemed determinative of the point of sale.
This ruling reminds us that as operations continue to become increasingly digital and interconnected, tax authorities are adapting their interpretations of a nexus to reflect these new realities. Taxpayers should review organizational structures and intercompany operations, particularly where affiliates or subsidiaries manage online sales or other digital operations and consider the potential for creating a “definite place of business” through digital means. BPOL liability may be addressed through legal entity optimization analyses and restructuring operations.
Virtual Offices May Qualify as Definite Places of Business for Out-of-State Deductions Va. P.D. 23-113 (Oct. 19, 2023).
This ruling provides guidance on out-of-state deductions for taxpayers with remote employees and out-of-state operations. The taxpayer was a data services company with a physical office in Virginia and remote employees both outside the state and internationally. The commissioner's decision focuses on two key issues: (i) the application of payroll apportionment; and (ii) the validity of out-of-state deductions. Taxpayers can deduct gross receipts attributable to services conducted in another state where the taxpayer is liable for an income or other taxes based on income. This deduction is distinct from payroll apportionment and aims to prevent double taxation on income earned outside of Virginia. Although the ruling allows for local ordinances to qualify whether a home office is a “definite place of business,” the commissioner acknowledged that formal agreements and arrangements mirroring the functions of a traditional office are factors that demonstrate the qualification of a definite place of business.
For taxpayers with distributed workforces, this ruling highlights the need for meticulous recordkeeping and a thorough understanding of their operational footprint. Taxpayers that embrace remote-work models could consider entering arrangements that validate virtual offices as definite places of business. Additionally, taxpayers claiming out-of-state deductions must ensure they can substantiate those claims with clear documentation of activities conducted outside Virginia and how those activities relate to revenue in external jurisdictions. Taxpayers should also be able to demonstrate claimed deductions are related to income taxes paid in other states because the commissioner has published regulations disallowing a deduction for non-income related taxes, such as the Texas Margin Tax, Ohio Commercial Activity Tax or Washington Business and Occupation Tax.
Service Classification Prevails for Tech Company Despite Software Licensing Va. P.D. 22-117 (July 21, 2022).
This ruling provides guidance on the classification of technology companies for BPOL purposes. The taxpayer, a technology solutions provider, seeking exclusions for software development and licensing income, argued that these activities constituted sales/licensing of goods rather than services. The commissioner disagreed, noting that the basis of the exclusion involves whether the primary value is the “goods” or the taxpayer’s expertise in implementing, maintaining and adopting the software to meet specific client needs. The commissioner concluded that continuous engagement and emphasis on human capital align more with providing a service than product sales or licensing. In making this determination, the ruling considered customer contracts, marketing materials and client testimonials, which predominantly highlighted the value of the taxpayer’s customization and ongoing support.
For those in the technology sector, this ruling suggests that simply developing or providing access to software may not be sufficient to qualify for sales or licensing classifications under BPOL. Taxpayers should evaluate their entire business model, including how they market their offerings, structure their contracts and interact with clients over time. Technology firms that primarily generate revenue through ongoing support, customization, and client-specific solutions may find themselves classified as service providers, even if software is a key component of their offering.
Additional Commentary
Recent rulings have significantly reshaped the BPOL tax landscape in Virginia, addressing critical issues in the evolving global and digital environment. These decisions highlight the complexities of applying BPOL in the context of remote work, intercompany operations and digital business models. Taxpayers must now navigate a more nuanced tax environment, where traditional definitions of “business presence” and “activity” are being reinterpreted. Additionally, taxpayers must ensure they are correctly classifying their business under BPOL standards.
These rulings provide guidance on the classification of technology companies, particularly when distinguishing between service provision and software licensing. Collectively, these rulings underscore the need for businesses to carefully evaluate their operational structures, employee work policies and service offerings.
Taxpayers with remote workers and/or multi-state operations should consider conducting a review of their BPOL tax strategies and consult with their lawyers to navigate the interplay between affiliate entities, remote work arrangements, payroll apportionment and out-of-state deductions. This proactive approach can help businesses optimize their tax position while ensuring compliance with evolving interpretations of BPOL regulations in the context of modern work arrangements.
Finally, these rulings emphasize the importance of accurately determining the location of remote employees for payroll apportionment, recognizing how shared resources can create an unexpected nexus, and clarifying the treatment of virtual offices for tax purposes.
Miles & Stockbridge tax attorneys continue to monitor updates from the Virginia Tax Commissioner and are available to discuss BPOL implications and strategies.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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