Tax Type
BPOL Tax
Description
City may not impose a license fee or license tax on the physicians.
Topic
Local Power to Tax
Local Taxes Discussion
Persons Subject to Tax
Date Issued
08-15-2001
August 15, 2001
Re: Taxpayer: *****
Locality Assessing Tax: *****
Final State Determination
Business, Professional and Occupational License (BPOL) Tax
Dear *****
This final state determination is issued upon an application for correction of BPOL taxes filed by you on behalf of ***** (the "Taxpayer"). The contested assessment was made by the Commissioner of the Revenue for the ***** (the "City").
The BPOL tax and fee are imposed and administered by local officials. Code of Virginia § 58.1-3707.1(A)(5) authorizes the department to issue determinations on taxpayer appeals of certain BPOL assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, i.e., it stands unless the taxpayer proves it is incorrect.
The following determination is based on the facts presented by the Taxpayer and the City as summarized below. Copies of cited sources are enclosed.
FACTS
The Taxpayer is a non-stock, nonprofit corporation that has been found by the Internal Revenue Service (IRS) to qualify as a tax-exempt corporation under § 501(c)(3) of the Internal Revenue Code (IRC). The Taxpayer's mission is to "serve the community with respect to providing health care services and health care education." It operates several charitable hospitals, medical transport facilities, home health care services, and health care clinics, all of which are tax-exempt. The Taxpayer's parent holding company has two subsidiaries that are for-profit companies.
In pursing an expansion of its charitable purpose to "provide high-quality outpatient medical care services to individuals without regard to race, creed, sex, national origin, handicap or age," the Taxpayer hired several physicians who had been operating independently within the City's jurisdiction. These physicians are now employees of the Taxpayer, and as such, are currently included in the Taxpayer's Employer Identification Number (EIN) for federal income tax purposes.
At the City's request, the Taxpayer supplied copies of the IRS grant of exemption pursuant to IRC § 501(c)(3), copies of federal income tax returns, including forms 990, copies of physicians' contracts with the Taxpayer as well as a standard physician's handbook, and an independent analysis of the Taxpayer's and its subsidiaries' financial statements.
The City denied the Taxpayer's refund request for BPOL taxes paid for tax year 1997 and issued an assessment on September 26, 2000 for tax years 1998, 1999 and 2000. The Taxpayer filed an "Application for Review" with the City on October 27, 2000. The City responded on December 5, 2000, stating that it did not regard the previous year's requests for documents as being made in conjunction with an audit, and that the Taxpayer had failed to file zero-liability returns in 1998, 1999, and 2000. The City did not formally write a letter of "final local determination."
The Taxpayer paid the BPOL tax due for license years 1998, 1999 and 2000, but appealed the City's findings. The Taxpayer has submitted an appeal to the department based on its belief that the assessments issued by the City are the result of an audit.
The City insists that it did not perform an audit, but rather, issued a "statutory assessment" to the Taxpayer. The City contends that such an assessment cannot be appealed to the Tax Commissioner. Furthermore, the City maintains that the income of the physicians whom had previously been operating as independent entities should be regarded as "unrelated business taxable income" (UBTI) as defined in IRC § 511 et seq.
Issues
There are three issues to be addressed in this appeal. First, did the City's request for information constitute an audit, and was the ensuing assessment appealable to the Tax Commissioner? Second, if the assessment can be appealed to the Tax Commissioner, are the physicians at the clinics in the City licensable as employees of the Taxpayer? Are the Taxpayer's clinics in the City qualified as IRC § 501(c)(3) groups and, therefore, exempt from the BPOL tax?
DETERMINATION
Audit Assessments
The 2000 BPOL Guidelines (the "Guidelines") defines an "audit assessment" for purposes of the local license tax:
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- "Audit" means an examination of records, financial statements, books of accounts and other information to evaluate the correctness of a local license tax ...An audit assessment is not: a statutory assessment, a self-assessment, or an assessment resulting from the correction of mathematical errors. However, if an examination of records or other information takes place in conjunction with the above, the assessment may be appealable as an audit assessment. [Emphasis added.] 2000 BPOL Guidelines § 7.4.
It is clear from the City's request for materials and the detailed nature of the requests and the materials provided that the City engaged in an audit. The resulting assessment did constitute an audit assessment appealable to the Tax Commissioner. The City issued a summons to the Taxpayer on June 4, 1999, for records and documents previously requested, stating that "this information and data is necessary for an audit of your business operations in the City." [Emphasis added.] The City sent the Taxpayer a detailed list of 13 requests for information on March 18, 1999, to which the Taxpayer responded on June 23, 1999. The City sent the Taxpayer a second list of requests on September 13, 1999. The Taxpayer responded on January 4, 2000, indicating the income attributed to each clinic, physicians' salaries, and making note that one subsidiary whose activities the City had questioned was neither tax-exempt nor had it combined with the Taxpayer. In fact, the subsidiary was more directly related to the Taxpayer's parent holding company. This was followed with a letter on February 8, 2000, which contained documentation from the IRS. The Taxpayer continued to respond to the City's requests for documentation.
Because of the dispute, the City did not issue a final local determination as required by the Guidelines. (See §§ 7.6 through 7.8.3 of the Guidelines.) However, based on the above, I find that the assessments at issue resulted from an audit of the Taxpayer's records and may be appealed to the Tax Commissioner.
BPOL and IRC § 501(c)(3)
In order to be exempt as described in IRC § 501(c)(3), an organization must be organized and operated exclusively for one or more of certain exempt purposes; no part of its net earnings may inure to the benefit of private shareholders or individuals; and, it may not devote a substantial part of its endeavors to political or lobbying activities.
Code of Virginia § 58.1-3703(C)(18)(a) provides an exemption from the BPOL tax for the:
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- receipts of a charitable nonprofit organization except to the extent the organization has receipts from an unrelated trade or business the income of which is taxable under Internal Revenue Code § 511 et seq. For the purpose of this subdivision, `charitable nonprofit organization' means an organization which is described in Internal Revenue Code § 501(c)(3) and to which contributions are deductible by the contributor under Internal Revenue Code § 170.
Charitable nonprofit organizations are discussed in Appendix D of the BPOL Guidelines. Whether or not an organization falls under the exemption for BPOL taxation purposes is determined solely by reference to the relevant provisions of the IRC. If an organization meets these requirements, it is exempt from the imposition of a license fee or gross receipts tax unless it has UBTI. Local officials determine whether a charitable nonprofit organization has UBTI pursuant to IRC § 511, et seq. See Public Document 97-192 (4/21/97) for a discussion of UBTI.
The IRS has provided written acknowledgment of the Taxpayer's exempt status, and I find nothing in the facts presented to suggest that this organization is anything other than the charitable nonprofit organization it purports to be. It is clear from the Articles of Incorporation that its purpose is solely for charitable, scientific and educational endeavors, and that its rendering of medical services to the community-at-large, including Medicaid recipients and the indigent, are consistent with these purposes. Accordingly, pursuant to Code of Virginia § 58.1-3703(C)(18)(A), the City may not impose a license fee or levy a license tax on the Taxpayer's receipts except to the extent it has receipts from an unrelated trade or business taxable under Internal Revenue Code § 511 et seq.
Employees of Tax-exempt Organizations
In Public Document 98-50 (March 13, 1998), I issued an opinion on the question of professionals whom are employees of an organization, in which I found that:
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- Employees are hired and work to further the business of the employer who hires them. Employees performing duties within the scope of employment are performing their employer's business. The BPOL statute imposes a license requirement on the business itself, not the employees of the business. Therefore, a license obtained by the employer covers the activities of any employee.
Based on the above, the employees of the Taxpayer are not subject to a license fee or license tax on the receipts generated within the scope of their employment for the Taxpayer.
As previously discussed, the Taxpayer is subject to the BPOL tax to the extent it has receipts that would be subject to federal taxation as UBTI. From the facts presented, it appears that receipts derived from the clinical practices of the physicians in the City are an integral part of the Taxpayer's overall medical services and are not subject to the federal UBTI. It further appears that the entire organization is engaged directly in the staffing of the clinics or indirectly in support of this clinical practice. Based on the foregoing, there appears to be no source of receipts which could give rise to UBTI. However, the final determination regarding UBTI rests with the local official.
CONCLUSION
In this particular case, since the physicians in question have become employees of the Taxpayer, who, in turn, are qualified as tax-exempt under IRC § 501(c)(3), it is my determination that the City may not impose a license fee or license tax on the physicians. In regard to the Taxpayer, the City must make a final determination on the issue of UBTI. Therefore, I am referring this matter back to the City to make a final local determination, which should take into account the policy outlined in this letter and as provided in Public Document 97-192. If the Taxpayer continues to disagree with the City's findings after it issues a final local determination, the Taxpayer may appeal that determination to the department.
If you have any questions about this final determination, please do not hesitate to contact ***** Tax Policy Analyst, in the department's Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/33120H
Rulings of the Tax Commissioner