Court Opinion

ID: 2767477
Source: CourtListenerOpinion
Date Created: 2015-01-08 15:15:42.248157+00
Date Added: 2024-06-11T11:26:22.780189
License: Public Domain

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,

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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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