Nielsen Co. v. Board of Arlington County

Present: Lemons, C.J, Millette, Mims, McClanahan, and Powell,
JJ., and Russell and Lacy, S.JJ.
THE NIELSEN COMPANY (US), LLC
OPINION BY
v. Record No. 140422 JUSTICE LEROY F. MILLETTE, JR.
January 8, 2015
COUNTY BOARD OF ARLINGTON
COUNTY, ET AL.
FROM THE CIRCUIT COURT OF ARLINGTON COUNTY
Louise DiMatteo Megaree, Judge
In this appeal we consider whether the Tax Commissioner
employed a permissible methodology – a payroll percentage
calculation – to determine the amount of certain receipts that,
pursuant to Code § 58.1-3732(B)(2), may be deducted from the
pool of taxable gross receipts upon which a locality may levy a
business license tax.
I. Facts And Proceedings
The Nielsen Company (US), LLC promotes itself as "a global
information and measurement company that provides clients with
a comprehensive understanding of consumers and consumer
behavior." In the 2007 tax year, Claritas, Inc. was doing
business in Arlington County, Virginia. Claritas was a wholly
owned subsidiary of Nielsen throughout the 2007 tax year, and
continued as an independent entity until Claritas merged into
Nielsen in October 2008. For purposes of this appeal, the
activities of Claritas are attributed to Nielsen.
During the 2007 tax year, Nielsen had offices in 18
states, including Virginia. Nielsen's only Virginia office was
located in Arlington County. Nielsen's Arlington County office
engaged in client relationship and customer support,
statistical and data collection, data development, product
fulfillment, and the solicitation of sales. To engage in these
business activities for the 2007 tax year, Nielsen acquired a
business license from Arlington County as required under the
Code and Arlington County's ordinances.
In 2010, Ingrid Morroy, the Commissioner of Revenue of
Arlington County, audited Nielsen for several of the previous
tax years. After that audit, Commissioner Morroy issued an
additional tax assessment on Nielsen for the 2007 tax year on
the basis that Nielsen failed to pay sufficient tax on its
business license. Nielsen took exception to Commissioner
Morroy's additional assessment, and the dispute over that
assessment has worked its way through multiple levels of
review.
Nielsen first appealed to Commissioner Morroy herself
pursuant to Code § 58.1-3703.1(A)(5)(b). In response,
Commissioner Morroy issued a final determination confirming her
additional assessment, subject to some modifications. Pursuant
to Code § 58.1-3703.1(A)(6)(a), Nielsen then filed an appeal
with the Virginia Tax Commissioner. The Tax Commissioner
2
subsequently issued an opinion in this matter, with the
parties' names redacted, published as a Public Document titled
PD 12-146. The Tax Commissioner held that Commissioner Morroy
used an incorrect methodology in the 2007 tax year assessment,
and instead permitted a payroll percentage methodology to be
used to calculate the Code § 58.1-3732(B)(2) deduction to
Arlington County's tax on Nielsen's business license. The Tax
Commissioner subsequently remanded the case back to the County
so that Commissioner Morroy could adjust the additional
assessment for the 2007 tax year in accordance with the Tax
Commissioner's opinion.
It was then Arlington County's and Commissioner Morroy's
turn to appeal, as they disagreed with the Tax Commissioner's
payroll percentage methodology. Pursuant to Code §§ 58.1-
3703.1(A)(7)(a) and 58.1-3984, Arlington County and
Commissioner Morroy appealed to the Circuit Court of the County
of Arlington to correct the Tax Commissioner's allegedly
erroneous ruling. After a day-long bench trial, a subsequent
hearing for oral arguments, and consideration of the parties'
briefs and several of the Tax Commissioner's prior opinions
issued as Public Documents, the circuit court issued its
opinion in this matter. The court rejected the Tax
Commissioner's methodology for calculating the relevant tax
deduction as erroneous, contrary to law and precedent, and
3
arbitrary and capricious in its application. The court entered
a final order which memorialized that opinion, confirmed
Commissioner Morroy's assessment against Nielsen for the 2007
tax year, and directed Nielsen to pay such assessment.
Nielsen timely filed a petition for appeal with this
Court. We granted three of Nielsen's assignments of error:
1. The trial court erred in reversing the State Tax
Commissioner's decision, and reinstating the County's
assessment, because the trial court misinterpreted and
misapplied Code § 58.1-3732(B)(2).
2. The trial court erred in reversing the State Tax
Commissioner's decision, and reinstating the County's
erroneous assessment, because the trial court should
have deferred to the State Tax Commissioner's
interpretation of Code § 58.1-3732(B)(2).
3. The trial court erred in reversing the State Tax
Commissioner's decision, and reinstating the County's
erroneous assessment, because the trial court
erroneously placed the burden of proof on Nielsen
rather than on the County.
II. Discussion
A. Standard Of Review
Whether tax deductions properly comply with the relevant
statutory provisions is a mixed question of law and fact. See
Ford Motor Credit Co. v. Chesterfield Cnty., 281 Va. 321, 333-
34, 707 S.E.2d 311, 317 (2011). "Therefore, while we give
deference to the trial court's factual findings and view the
facts in the light most favorable to the prevailing party, we
review the trial court's application of the law to those facts
4
de novo." Bailey v. Loudoun County Sheriff's Office, 288 Va.
159, 169, 762 S.E.2d 763, 766 (2014) (internal quotation marks
and citation omitted).
B. Whether The Tax Commissioner's Interpretation Of The
Relevant Statutes Was Due Deference Or Great Weight
Nielsen assigned error to the circuit court's refusal to
defer to the Tax Commissioner's ruling. We address this issue
first because if the circuit court was required to defer to, or
give great weight to, the Tax Commissioner's ruling, then such
deference or weight would also be required on appeal.
1. Courts Do Not Defer To Administrative Agencies When
Interpreting Statutes, And Do Not Give Weight To
Administrative Interpretation Of Unambiguous Statutes
The circuit court refused to defer to the Tax Commissioner
on the basis that the Tax Commissioner's ruling was not
supported by the statutory language of Code § 58.1-3732(B)(2).
The circuit court correctly refused to defer to the Tax
Commissioner, but not for the rationale stated by that court.
We recognize that our decisions have been less than clear
about a distinction in terminology, as we have sometimes
conflated "deference" with "weight." See, e.g., Commonwealth
v. Barker, 275 Va. 529, 536-37, 659 S.E.2d 502, 505 (2008).
Indeed, courts more generally have used these terms
interchangeably. See, e.g., Good Samaritan Hosp. v. Shalala,
508 U.S. 402, 417 (1993). However, a review of our precedent
5
underscores that we have distinguished "deference" from
"weight." 1 "Deference" refers to a court's acquiescence to an
agency's position without stringent, independent evaluation of
the issue. See Alliance to Save the Mattaponi v. Commonwealth,
270 Va. 423, 441-42, 621 S.E.2d 78, 88 (2005). "Weight" refers
to the degree of consideration a court will give an agency's
position in the course of the court's wholly independent
assessment of an issue. See Southern Spring Bed Co. v. State
Corp. Comm'n, 205 Va. 272, 275, 136 S.E.2d 900, 902 (1964).
We have consistently held that courts do not defer to an
agency's construction of a statute because the interpretation
of statutory language always falls within a court's judicial
expertise. Virginia Marine Res. Comm'n v. Chincoteague Inn,
287 Va. 371, 380, 757 S.E.2d 1, 5 (2014). Though a court never
defers to an administrative interpretation, in certain
situations a court may afford greater weight than normal to an
agency's position. When "the statute is obscure or its meaning
doubtful, [a court] will give great weight to and sometimes
1
We are not the only court to have wrestled with this
distinction. See, e.g., Public Water Supply Co. v. DiPasquale,
735 A.2d 378, 382 (Del. 1999) ("We view the standard of
judicial review of agency determinations of issues of statutory
construction articulated in [a previous Delaware opinion] as
overly deferential and confusing. Accordingly, it is
overruled. Statutory interpretation is ultimately the
responsibility of the courts. A reviewing court may accord due
weight, but not defer, to an agency interpretation of a statute
administered by it.").
6
follow the interpretation which those whose duty it has been to
administer it have placed upon it." Superior Steel Corp. v.
Commonwealth, 147 Va. 202, 206, 136 S.E. 666, 667 (1927). But
even when great weight is afforded to an administrative
interpretation of a statute, such an interpretation does not
bind a court in deciding the statutory issue. Webster Brick
Co. v. Department of Taxation, 219 Va. 81, 84-85 & n.4, 245
S.E.2d 252, 255 & n.4 (1978). In any event, absent ambiguity,
the plain language controls and the agency's interpretation is
afforded no weight beyond that of a typical litigant. See
Davenport v. Little-Bowser, 269 Va. 546, 555, 611 S.E.2d 366,
371 (2005).
The Department of Taxation and the Tax Commissioner
administer and enforce the Commonwealth's tax laws. Code
§ 58.1-202; LZM, Inc. v. Virginia Dep't of Taxation, 269 Va.
105, 109, 606 S.E.2d 797, 799 (2005); Commonwealth of Virginia
v. Lucky Stores, Inc., 217 Va. 121, 127, 225 S.E.2d 870, 874
(1976). Thus, their "interpretation of a tax statute is
entitled to great weight" – if, of course, the statute is
ambiguous. LZM, Inc., 269 Va. at 109, 606 S.E.2d at 799; see
also Davenport, 269 Va. at 555, 611 S.E.2d at 371; Department
of Taxation v. Delta Air Lines, Inc., 257 Va. 419, 426-27, 513
S.E.2d 130, 133-34 (1999) (rejecting the Department of
Taxation's interpretation of an unambiguous tax statute).
7
Applying these principles to this case, the circuit court
did not err in refusing to defer to the Tax Commissioner's
interpretation of Code § 58.1-3732(B)(2). A court never defers
to the Tax Commissioner's interpretation of a statute.
Moreover, Code § 58.1-3732(B)(2) is unambiguous. Thus, the Tax
Commissioner's interpretation of that statute is not entitled
to great weight.
2. Courts Do Not Defer To Or Give Great Weight To An
Administrative Agency's Prior Rulings
The circuit court refused to defer to the Tax Commissioner
on the basis that the Tax Commissioner's ruling did not conform
to the Tax Commissioner's prior rulings previously issued as
Public Documents. Once again, the circuit court was right to
refuse to defer to the Tax Commissioner, but not for the
particular rationale stated by that court.
For purposes of giving weight to the positions of
administrative agencies, it does not matter whether an agency
has been consistent in its rulings. This is because an
agency's "prior rulings and policies themselves are not
entitled to great weight, unless expressed in regulations."
Chesapeake Hosp. Auth. v. Commonwealth, 262 Va. 551, 560, 554
S.E.2d 55, 59 (2001). Indeed, the Tax Commissioner's
"[r]ulings issued in conformity with [Code] § 58.1-203" are
only required to be "accorded judicial notice," and "nothing
8
more." Code § 58.1-205(3); Chesapeake Hosp., 262 Va. at 560,
554 S.E.2d at 59. Chesapeake Hospital is particularly on
point, because in that case we specifically rejected the
Department of Taxation's claim that its prior rulings in Public
Documents, which encompassed "the Department's long-standing
administrative interpretation," were to be afforded great
weight when deciding an issue addressed by those prior rulings.
Id. at 556-57, 560, 554 S.E.2d at 57, 59. Thus, the
consistency or inconsistency of the Tax Commissioner's prior
rulings is irrelevant, because the prior rulings themselves are
not afforded great weight unless and until they are expressed
in regulations. And if prior rulings are not entitled to great
weight, then a court certainly shall not defer to such rulings.
Applying these principles to this case, the circuit court
did not err in refusing to defer to the Tax Commissioner's
ruling in this matter simply because the Tax Commissioner had
issued prior rulings pertaining to the issue. These prior
rulings are not expressed in regulations, and are therefore
afforded no deference and entitled to no weight.
C. Levying A BPOL Tax On Gross Receipts
We now turn to the statutory scheme relevant to this
appeal. A "local governing body" may require a license for
certain "businesses, trades, professions, occupations[,] and
callings." Code §§ 58.1-3700; 58.1-3703(A); see also Code
9
§ 58.1-3703.1(A)(1) (setting forth when a license is required).
These licenses are referred to as Business, Professional, and
Occupational Licenses ("BPOL"). If such a license is required
by a local governing body, it is "unlawful to engage in such
business, employment[,] or profession without first obtaining
the required license." Code § 58.1-3700. "The governing body
of any county, city[,] or town may . . . . levy and provide for
the assessment and collection of . . . license taxes . . . upon
the persons, firms[,] and corporations engaged [in the licensed
business, trade, profession, occupation, or calling] within the
county, city[,] or town," subject to various statutory
limitations. Code § 58.1-3703(A). These license taxes are
referred to as BPOL Taxes.
1. Establishing The Pool Of Taxable Gross Receipts
The local governing body's ability to levy, assess, and
collect BPOL Taxes is limited solely to the authority set forth
in Chapter 37 of Title 58.1 of the Code. Code § 58.1-3702.
Moreover, a locality's ordinances providing for the levying of
a BPOL Tax must be "substantially similar" to the Code
provisions governing the levying of a BPOL Tax. Code § 58.1-
3703.1(A). As Code § 58.1-3703.1 sets forth the authority for
a local governing body to levy a BPOL Tax, its statutory
provisions are "to be construed most strongly against the
government and are not to be extended beyond the clear import
10
of the language used." Commonwealth v. Carter, 198 Va. 141,
147, 92 S.E.2d 369, 373 (1956); see also, e.g., Ford Motor
Credit Co., 281 Va. at 334-42, 707 S.E.2d at 318-23 (addressing
Code §§ 58.1-3703.1(A)(3)(a)(4) and 58.1-3703.1(A)(3)(b)); City
of Lynchburg v. English Construction Co., 277 Va. 574, 583-84,
675 S.E.2d 197, 201-02 (2009) (addressing Code § 58.1-
3703.1(A)(3)(a)(1)).
A BPOL Tax may be levied on the licensed business's gross
receipts. See Code § 58.1-3705. The General Assembly set
forth the following "[g]eneral rule" for determining what
constitutes the pool of a business's taxable gross receipts
upon which the BPOL Tax may be levied:
Whenever the [BPOL Tax is] imposed [and] measured by
gross receipts, the gross receipts included in the
taxable measure shall be only those gross receipts
attributed to the exercise of a privilege subject to
licensure at a definite place of business within this
jurisdiction. In the case of activities conducted
outside of a definite place of business, such as
during a visit to a customer location, the gross
receipts shall be attributed to the definite place of
business from which such activities are initiated,
directed, or controlled.
Code § 58.1-3703.1(A)(3)(a). 2
2
This provision goes on to specify how certain types of
businesses – contractors, retailers, wholesalers, renters of
tangible personal property, and performers of services – shall
have their "situs of gross receipts . . . attributed to one or
more definite places of business or offices." Code § 58.1-
3703.1(A)(3)(a)(1)-(4). This portion of the Code does not
apply in this appeal because Nielsen is not engaged in any of
these types of businesses.
11
This general rule specifies that the pool of taxable gross
receipts originates from two sources. First, the taxable gross
receipts include all gross receipts that accrue at the licensed
definite place of business within the licensing jurisdiction
which can be attributed to the licensed business. Second, the
taxable gross receipts include the gross receipts that accrue
outside of the licensed definite place of business, both within
and beyond the licensing jurisdiction, which can be attributed
to activities that are initiated, directed, or controlled by
the licensed definite place of business.
An alternative to this general rule exists. If "the
licensee has more than one definite place of business and it is
impractical or impossible to determine to which definite place
of business gross receipts should be attributed under the
general rule," the General Assembly has provided for an
alternative method, apportionment, to calculate the taxable
gross receipts. Code § 58.1-3703.1(A)(3)(b). Specifically,
"the gross receipts of the business shall be apportioned
between the definite places of businesses on the basis of
payroll," so long as "some activities under the applicable
general rule occurred at, or were controlled from, such
definite place[s] of business." Id. Under this alternative,
the business's total gross receipts among all of its definite
places of business contributing to the licensed business must
12
be apportioned between those definite places of business on the
basis of each respective definite place of business's
percentage of the company's total payroll. Thus, under this
methodology, the pool of taxable gross receipts for the
definite place of business within the licensing jurisdiction
will be equal to that particular definite place of business's
percentage of the company's total payroll.
The facts of this case illustrate how this scheme works.
Nielsen applied for a license to engage in its business within
Arlington County because Nielsen "has a definite place of
business in [that] jurisdiction." Code § 58.1-3703.1(A)(1). 3
During the 2007 tax year, Nielsen had a definite place of
business in 18 different states with its total domestic gross
receipts at $100,516,732. The parties agreed that it was
impractical or impossible to determine to which definite places
of business these total gross receipts could be attributed
under the general rule of Code § 58.1-3703.1(A)(3)(a). Under
the apportionment alternative, the taxable gross receipts for
Nielsen's definite place of business in Arlington County for
the 2007 tax year is equal to that definite place of business's
percentage of Nielsen's total payroll during the same time
3
A "definite place of business" is "an office or a
location at which occurs a regular and continuous course of
dealing for thirty consecutive days or more." Code § 58.1-
3700.1.
13
period. Code § 58.1-3703.1(A)(3)(b). For the 2007 tax year,
the payroll for Nielsen's definite place of business in
Arlington County was 23.8668 per cent of Nielsen's total
payroll. Thus, the pool of taxable gross receipts subject to
the BPOL Tax for the 2007 tax year was 23.8668 per cent of
$100,516,732, or $23,990,127.39.
2. Deducting Receipts From The Pool Of Taxable Gross Receipts
Once the pool of taxable gross receipts is created,
certain receipts "shall be deducted" from that pool even though
they "would otherwise be taxable." Code § 58.1-3732(B). These
"deduction provisions are strictly construed against the
taxpayer." City of Lynchburg, 277 Va. at 583, 675 S.E.2d at
201. Relevant to this appeal, the General Assembly has
provided that the following receipts are subject to deduction:
Any receipts attributable to business conducted in
another state or foreign country in which the
taxpayer (or its shareholders, partners[,] or members
in lieu of the taxpayer) is liable for an income or
other tax based upon income.
Code § 58.1-3732(B)(2). This provision backs out of the pool
of taxable gross receipts – which included receipts both within
and outside the licensing jurisdiction that were attributable
to the definite place of business's licensed activities under
either Code § 58.1-3703.1(A)(3)(a) or (b) – all receipts that
accrued from business in non-Virginia jurisdictions in which
the taxpayer is subject to an income-based tax liability.
14
The question implicated by this appeal is what methodology
can be used to make this deduction calculation. That is, the
parties dispute how a taxpayer can make a showing that gross
receipts falling under the terms of Code § 58.1-3732(B)(2), and
thus subject to a deduction, were captured in the pool of
taxable gross receipts calculated under Code § 58.1-
3703.1(A)(3)(a) or (b).
Nielsen argues that, when a taxpayer uses the payroll
percentage apportionment alternative of Code § 58.1-
3703.1(A)(3)(b) to calculate the pool of taxable gross
receipts, that payroll percentage must also be used to
determine what portion of the out of state receipts captured in
that pool is attributable to business in another state.
Nielsen would apply the Virginia-located definite place of
business's payroll percentage to the gross receipts accrued in
all foreign jurisdictions where the taxpayer is subject to an
income-based tax liability, whereby the sum of which would
constitute the Code § 58.1-3732(B)(2) deduction.
Conversely, Arlington County and Commissioner Morroy argue
that, regardless of how the pool of taxable gross receipts was
calculated under Code § 58.1-3703.1(A)(3), determining the
deduction under Code § 58.1-3732(B)(2) requires the taxpayer to
prove by manual accounting that the receipts attributable to
business in a foreign jurisdiction where the taxpayer is
15
subject to an income-based tax liability were actually captured
in the pool of taxable gross receipts.
We reject both positions because the Code does not require
or preclude any particular methodology to calculate the
deduction pursuant to Code § 58.1-3732(B)(2). This conclusion
is compelled by applying familiar principles. We "construe
statutes to ascertain and give effect to the intention of the
General Assembly." Sheppard v. Junes, 287 Va. 397, 403, 756
S.E.2d 409, 411 (2014) (internal quotation marks omitted).
Because "the General Assembly's intent is usually self-evident
from the statutory language" itself, and because Code § 58.1-
3732(B)(2) is neither ambiguous nor absurd, we only "appl[y]
the plain meaning of the words used in the statute." Id.
The dispositive term in Code § 58.1-3732(B)(2) pertaining
to methodology is "attributable." We give this undefined term
"its ordinary meaning, in light of the context in which it is
used." Bailey, 288 Va. at 175, 762 S.E.2d at 770 (internal
quotation marks, alterations, and citation omitted).
"Attribute," when used as a verb, has the ordinary meaning of
"to explain as caused or brought about by" and "regard as
occurring in consequence of or on account of." Webster's Third
New International Dictionary 142 (1993). Thus, "attributable"
as used in Code § 58.1-3732(B)(2) speaks only to cause and
consequence: that receipts are subject to deduction only if
16
they are created by business in a foreign jurisdiction in which
the taxpayer is subject to an income-based tax liability. That
is, "attributable" does not mandate or prohibit any particular
methodology to determine which receipts captured in the pool of
taxable gross receipts are subject to deduction.
D. The Tax Commissioner's Ruling On The Code § 58.1-
3732(B)(2) Deduction
The Tax Commissioner held that the following analysis
determines whether the Code § 58.1-3732(B)(2) deduction may be
taken by a taxpayer, and, if so, how to determine what receipts
are backed out from the pool of taxable gross receipts:
1. Ascertain whether any employees at the Virginia
definite place of business participated in interstate
transactions by, for example, shipping goods to
customers in other states, participating with
employees in other offices in transactions, etc. If
there has been no participation in interstate
transactions, then there is no deduction. If there
has been participation, then;
2. Ascertain whether any of the interstate
participation can be tied to specific receipts. If
so, then those receipts are deducted; however, if
payroll apportionment had to be used to assign
receipts to the definite place of business, then it is
very unlikely that any of those apportioned receipts
can be specifically []linked to interstate
transactions. If not, or if only some of the
participation can be tied to specific receipts, then;
3. The payroll factor used for the Virginia definite
place of business would be applied to the gross
receipts assigned to definite places of business in
states in which the taxpayer filed an income tax
return. Note that payroll apportionment would
probably be needed to assign receipts to definite
places of business in other states.
17
This three step analysis for the Code § 58.1-3732(B)(2)
deduction strikes a balance between the competing interests of
the licensing jurisdiction and the taxpayer. The first step
serves a gatekeeping function, limiting deductions to definite
places of business in Virginia where employees actually
participated in some interstate transactions. The second and
third steps provide for alternative methodologies to calculate
the deduction depending upon whether manual accounting is
possible for purposes of the deduction, despite whether manual
accounting or the payroll percentage apportionment method was
used to create the pool of taxable gross receipts under Code
§ 58.1-3701.1(A)(3)(a) or (b).
The circuit court reversed the Tax Commissioner's ruling
on the basis that it was contrary to law and that it was
arbitrary and capricious in application. We now address
Nielsen's assigned error to the circuit court's reversal.
1. The Tax Commissioner's Ruling Is Not Contrary To Law
The circuit court reversed the Tax Commissioner's ruling
in part because it was contrary to law, as it did not accord
with the statutory language of Code § 58.1-3732(B)(2).
However, Code § 58.1-3732(B)(2) leaves unresolved the
permissible methodology for calculating the deduction. Thus,
the plain and unambiguous statutory language allows for the
administrative agency whose duty it is to administer and
18
enforce the tax laws – that is, the Department of Taxation and
the Tax Commissioner – to decide how such a deduction may be
calculated. See Elizabeth River Crossings OpCo, LLC v. Meeks,
286 Va. 286, 311, 749 S.E.2d 176, 188 (2013) ("Government could
not be efficiently carried on if something could not be left to
the judgment and discretion of administrative officers to
accomplish in detail what is authorized or required by law in
general terms." (internal quotation marks, alterations, and
citation omitted)). The Tax Commissioner's ruling to require
manual accounting, or payroll apportionment in the event that
manual accounting is impossible to calculate the deduction,
falls within the scope of accounting methodologies permitted by
Code § 58.1-3732(B)(2). The circuit court erred when it held
to the contrary.
2. The Tax Commissioner's Ruling Is Not Arbitrary And
Capricious In Application
The circuit court reversed the Tax Commissioner's ruling
in part because it was arbitrary and capricious in application.
The court believed that the arbitrary and capricious nature of
the Tax Commissioner's ruling arose from the fact that
"globally applying" the payroll percentage methodology removes
the "burden to prove the deduction" from the taxpayer, and
fails to "provide accuracy and avoids even the semblance of
scrutiny or truth." The circuit court also expressed concern
19
about the fact that "this methodology [does not] adequately
account for the [amount of hours] spent in Virginia to earn
out-of-state revenues."
The Tax Commissioner's ruling specified that the payroll
percentage methodology may be used only if it is impossible to
apply the manual accounting methodology to determine the Code
§ 58.1-3732(B)(2) deduction. The payroll percentage
methodology, then, is not automatically applied in the
deduction context so as to be applied "without [a] determining
principle" or "without consideration of or regard for [the]
facts[ and] circumstances." Virginia Commonwealth Univ. v.
Zhuo Cheng Su, 283 Va. 446, 453, 722 S.E.2d 561, 564 (2012);
Black's Law Dictionary 125 (14th ed. 2014) (defining
"arbitrary").
Further, such a binary scheme in the deduction context,
permitted but not required by the plain language of the Code,
follows the structure of the scheme expressly set forth by the
General Assembly when creating the pool of taxable gross
receipts under Code § 58.1-3703.1(A)(3). The use of an
estimate methodology when determining a deduction, but only
when it is impossible to determine the exact figures to
calculate such a deduction, is neither "contrary to . . .
established rules of law" nor a mechanism permitting an
assessment to be "founded on prejudice or preference rather
20
than on reason or fact" when that very same methodology is used
to determine the initial tax to be imposed, but only when it is
impractical or impossible to determine the exact figures to
calculate such a tax. Black's Law Dictionary 125 (defining
"arbitrary"); id. at 254 (defining "capricious"); see also
Virginia Commonwealth Univ., 283 Va. at 453, 722 S.E.2d at 564.
The circuit court erred when it held to the contrary.
E. Proceedings On Remand
Because the circuit court erred in reversing the Tax
Commissioner's ruling, it erred in affirming Commissioner
Morroy's assessment against Nielsen for the 2007 tax year which
was to be reassessed pursuant to the Tax Commissioner's ruling.
We shall therefore remand this case back to the circuit court.
We note that the statutory scheme permitting appeals from
the Tax Commissioner to a circuit court does not allow remand
back to the Tax Commissioner or the local official who
originally assessed the tax. See Code § 58.1-3703.1(A)(7).
Thus, "[w]hen [this] statutory procedure is invoked, the
determination of the correctness of [the] challenged
assessment, as well as any grant of appropriate relief, become
matters exclusively of judicial concern." Smith v. Board of
Supervisors of Fairfax Cnty., 234 Va. 250, 255, 361 S.E.2d 351,
353 (1987). On remand to the circuit court, that court must
grant the appropriate relief based upon the evidence before it,
21
and it may not remand the case back to the Tax Commissioner or
Commissioner Morroy for such a determination. Id. Of course,
the court "can exercise its discretion to determine whether
additional evidence is necessary in order to make a proper
determination" as to the appropriate relief. Bailey, 288 Va.
at 182, 762 S.E.2d at 774 (internal quotation marks omitted).
Finally, it is important to address Nielsen's third
assignment of error, as it "probably will arise upon remand."
Velocity Express Mid-Atlantic, Inc. v. Hugen, 266 Va. 188, 203,
585 S.E.2d 557, 566 (2003). Nielsen assigned error to the
court placing the burden of proof to claim the deduction upon
the taxpayer, claiming that such a decision contravenes the
statutory burden allocated by the General Assembly.
When a tax determination is appealed from the Tax
Commissioner to a circuit court, the General Assembly has
placed "the burden . . . on the party challenging the
determination of the Tax Commissioner, or any part thereof, to
show that the ruling of the Tax Commissioner is erroneous with
respect to the part challenged." Code § 58.1-3703.1(A)(7)(a).
This operates so that the party challenging the Tax
Commissioner's ruling has the burden before the circuit court
of showing why that ruling was erroneous. Arlington County and
Commissioner Morroy, appealing the Tax Commissioner's ruling to
the circuit court on the basis that the Tax Commissioner's
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payroll percentage methodology was erroneous, bore this burden.
And for the reasons we set forth in this opinion, Arlington
County and Commissioner Morroy failed to satisfy that burden.
However, the Tax Commissioner's ruling did not alter the
"familiar rule that an income tax deduction is a matter of
legislative grace and that the burden of clearly showing the
right to the claimed deduction is on the taxpayer." INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 (1992) (internal
quotation marks omitted). Thus, in appealing to the circuit
court to challenge the Tax Commissioner's decision, Code
§ 58.1-3703.1(A)(7)(a) does not shift the burden to Arlington
County and Commissioner Morroy to disprove the availability or
amount of the deduction Nielsen seeks under Code § 58.1-
3732(B)(2). Instead, under the Tax Commissioner's three step
analysis, Nielsen continues to bear the burden before the
circuit court to show that it can satisfy each step of the Tax
Commissioner's analysis in order to take and correctly
calculate the deduction under Code § 58.1-3732(B)(2).
III. Conclusion
For the aforementioned reasons, we reverse the circuit
court's judgment that the Tax Commissioner's ruling was
erroneous, contrary to law and precedent, and arbitrary and
capricious in its application. We reverse the circuit court's
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reversal of the Tax Commissioner's ruling in this matter and
remand for further proceedings consistent with this opinion.
Reversed and remanded.
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