Tax Type
BPOL Tax
Local Taxes
Description
Condominium operator; Agency issue
Topic
Local Power to Tax
Local Taxes Discussion
Date Issued
05-22-2001
May 22, 2001
Re: Taxpayer:
Locality Assessing Tax:
Final State Determination
Appeal of Business, Professional, and Occupational License (BPOL) Tax
Dear ****
This final determination is issued upon an application for correction of BPOL taxes filed by you on behalf of your client **** (the "Taxpayer"). The assessment contested was made by the Commissioner of the Revenue of the City of ***** (the "City"). I apologize for the delay in the department's response.
The assessment was the subject of an earlier appeal to the Department of Taxation. Although the department's findings of law and fact are set forth in Public Document (P.D.) 00-15 (03/13/00), they will be repeated here for clarity.
FACTS
Background
The Taxpayer is a non-stock corporation organized to facilitate the operation of a thirty-nine unit time-share condominium. Its members are the owners of the time-share unit weeks (the "Unit Owners").
Each unit in the condominium may have as many as 51 unit-week owners. Each Unit Owner holds a deeded real estate interest in his unit and the common areas that reflects the nature of the timeshare arrangement.
Although most of the unit weeks are owner-occupied, some of the unit weeks are leased to third parties by their owners. In addition, some of the unit weeks have been acquired by the Taxpayer through foreclosure and are leased to third parties.
The documents that govern the condominium provide that the Unit Owners are ultimately responsible for the costs of operating the condominium. Due to the large number of Unit Owners and the short duration of their occupancy of the units, the governing documents delegate responsibility for the administration of the condominium to the Taxpayer. Although the governing documents anticipate that the Taxpayer may contract with a third party to obtain day to day management services, the Taxpayer has elected to perform these services itself.
As authorized by the governing documents, the Taxpayer collects fees from the Unit Owners to pay the costs of managing, furnishing, cleaning and maintaining the facility, including the individual units and the common areas. These costs include employee salaries and wages, repairs and maintenance, taxes, insurance premiums and utilities. The fees collected by the Taxpayer, and the expenses to which they are applied, amount to several hundred thousand dollars a year.
The Taxpayer also receives income from renting the unit weeks that it owns to third parties. Additionally, the Taxpayer receives income from acting as a rental agent for Unit Owners who rent their unit weeks to third parties. The Taxpayer's 1995 income statement reflects gross rental income of $***, with offsetting rental expenses of $***. The Taxpayer's 1996 income statement reflects gross rental income of with offsetting rental expenses of $***.
The Taxpayer maintains an accounting system that accounts for the receipt and disbursement of funds by source and use. All receipts, however, are deposited in a common bank account and, regardless of source, are available to pay any of the expenses incurred in maintaining the condominium.
The Taxpayer, which is not recognized as a nonprofit organization for income tax purposes, files a Form 1120 U.S. Corporate Income Tax Return.
The Assessment
Historically, the Taxpayer has voluntarily obtained annual business licenses from the City. On its business license applications, the Taxpayer only reports a portion of its total gross receipts. The receipts reported consist primarily of rental commissions. The Taxpayer excludes the remainder of its receipts when reporting its taxable gross receipts. The receipts excluded consist primarily of the fees collected from the Unit Owners to pay the costs of managing, furnishing, cleaning and maintaining the facility.
As a result of an audit, the City disallowed these exclusions and assessed additional license taxes for license years 1995, 1996 and 1997.
Appeal to the City
In an application for correction filed with the City, the Taxpayer contended that the exclusions were appropriate because it was not engaging in business with respect to the excluded income. However, in that appeal and in all subsequent proceedings, the Taxpayer has never disputed that it was engaging in business with respect to the gross receipts it reported on its business license applications.
In its final local determination, the City upheld the assessment. The City noted that the Taxpayer files a Form 1120 U.S. Corporate Income Tax Return. Section 1 of the Guidelines for Business, Professional and Occupational Tax promulgated by the Department of Taxation provides that the filing of tax returns that are required only of persons engaged in a trade or business creates a rebuttable presumption that a person is engaged in business. The City summarized the business activities conducted by the Taxpayer and stated that this level of business activity supported a conclusion that the Taxpayer is engaged in a business. The City also noted that the Taxpayer did not qualify for an exemption as a nonprofit organization.1 Although the City determined that the excluded receipts were taxable, it did allow an exclusion for an amount equal to the Taxpayer's expenditures for real estate taxes and utilities.
First Appeal to the Department
The Taxpayer filed its first appeal with the Department of Taxation when its argument was rejected by the City. In the determination of that appeal, set forth in P.D. 00-15, the department held that the facts presented were not sufficient to make a determination on one issue. The matter was returned to the City for a factual determination on that issue. Otherwise, as the department was not aware of any provision of law that would allow the exclusion of the gross receipts in question, the assessments for license years 1995, 1996, and 1997 were found to be correct.
The issue to be determined by the City was whether the expenses to which the excluded receipts were applied were incurred by the Taxpayer or by the Unit Owners. As explained in P.D. 00-15, the question of liability for the expenses bears directly upon the question of whether or not the Taxpayer acts as an agent of the Unit Owners with respect to the monies it collects from them and applies to the expenses of managing and maintaining the facility. If the Taxpayer is acting as an agent, it is entitled to exclude these fees from its taxable gross receipts. Alexandria v. Morrison- Williams Associates, Inc., 223 Va. 349 (1982). In order for the Taxpayer to be acting as an agent of the Unit Owners, the expenses to which the receipts were applied must have been incurred by the Unit Owners, and not by the Taxpayer.
City's Factual Determination
The determination issued by the City on this issue reaffirmed the assessment. The determination stated that it had requested documentation from the Taxpayer and found no evidence that the expenses had been incurred by the Unit Owners.
Taxpayer's Second Appeal to the Department
In its appeal of the City's factual determination, the Taxpayer raises two issues. One is related to the agency issue, the other relates to transactions between related parties.
ANALYSIS
Agency Issue
The Taxpayer does not present any evidence that contradicts the City's factual determination that the expenses in question were incurred by the Taxpayer rather than the Unit Owners. Instead, the Taxpayer argues that the expenses were incurred by the Unit Owners because the documents which govern the administration of the condominium obligate the Unit Owners to bear the expenses of maintaining the condominium.
I cannot agree with the Taxpayer's position. This obligation is a contractual one between the Taxpayer and the Unit Owners. The Unit Owners satisfy this obligation by paying fees to the Taxpayer. This arrangement does not contradict the City's finding that the expenses in question were incurred with third parties by the Taxpayer and that the Unit Owners have no contractual liability to the third parties. Accordingly, it is my determination that the Taxpayer is not acting as an agent of the Unit Owners.
Transactions Between Related Parties
Additionally, the Taxpayer now contends that the gross receipts in question may be excluded from license taxation, not because the Taxpayer is the agent of the Unit Owners, but rather because the Taxpayer and the Unit Owners are one and the same. The Taxpayer argues that [the Taxpayer], by its board, acts for its members, the Unit Owners. The [Taxpayer], therefore, is the Unit Owners. There is no entity, separate from the Unit Owners, which contracts for any services. "
I disagree with the Taxpayer's conclusion. The Taxpayer is a non-stock corporation, which is a separate legal entity from its members. I am not aware of any provision of law that would authorize the deduction or exclusion of the receipts in question on the basis that they are received from persons who are members of the Taxpayer.
Section 1 of the 2000 BPOL Guidelines defines "gross receipts" to be:
the whole, entire, total receipts, of money or other consideration received by the taxpayer as a result of transactions with others besides himself and which are derived from the exercise of a licensed privilege to engage in a business . . . without deduction or exclusion except as provided by law.
In Commonwealth v. Wytheville Knitting Mills Employees Welfare Association, 195 Va. 663 (1954), the Supreme Court of Virginia held that a canteen operated by an unincorporated employees association was subject to local license taxation even though 1) the canteen's customers were members of the association; 2) the canteen did not price its merchandise to earn a profit, only to recoup its expenses; and 3) all profits were used to fund association activities, the cost of which would have been otherwise borne by the members from their personal funds.
In Public Document 00-168 (September 13, 2000), the Department of Taxation addressed the situation of a professional limited liability company (the "L.L.C.") formed by two medical professional corporations to facilitate their joint operation of a plastic surgery center in the City. The L.L.C. provided the professional corporations with office space, medical equipment, office furniture, fixtures and equipment and a business telephone listing. The professional corporations reimbursed the L.L.C. for its costs. The Department ruled that no local license tax exclusion exists for the expense reimbursements received by the L.L.C. from its members. 2
Scope of Ruling
This ruling is based on the specific facts presented in this case. Not all organizations formed to perform functions similar to those performed by the Taxpayer will experience the same license tax consequences.
CONCLUSION
Code of Virginia § 58.1-3703.1(A)(5) provides that on appeal, a BPOL tax assessment is deemed prima facie correct. In other words, the local assessment will stand unless the taxpayer proves that it is incorrect. The Taxpayer has not presented, nor am I aware of, facts or legal precedent that prove that the City's assessment is incorrect. Therefore, it is my determination that the assessments for license years 1995, 1996 and 1997 are correct.
If you have other questions, 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/30247D
1Code of Virginia § 58.1-3703 (C)(18) affords favorable local license tax treatment to certain nonprofit organizations. As the Taxpayer has not qualified for exemption from federal income taxes under Internal Revenue Code § 501, it is not eligible for the favorable license tax treatment afforded by Code of Virginia § 58.1-3703 (C)(18).
2Code of Virginia § 58.1-3703(C)(10) provides an exclusion from local license taxation for certain transactions between members of an "affiliated group." Prior to July 1, 2000, membership in an affiliated group for purposes of the exclusion was limited to corporations. Code of Virginia § 58.1-3700.1. Legislation enacted by the 2000 General Assembly expanded the affiliated group membership eligibility to limited liability companies and several other entity types. However, as this legislation became effective July 1, 2000, the affiliated group exclusion was not available to the L.L.C. for the years subject to the appeal. As the affiliated group exemption did not apply, the department ruled that no local license tax exclusion exists for the expense reimbursements received by the L.L.C. from its members.
Re: Taxpayer:
Locality Assessing Tax:
Final State Determination
Appeal of Business, Professional, and Occupational License (BPOL) Tax
Dear ****
This final determination is issued upon an application for correction of BPOL taxes filed by you on behalf of your client **** (the "Taxpayer"). The assessment contested was made by the Commissioner of the Revenue of the City of ***** (the "City"). I apologize for the delay in the department's response.
The assessment was the subject of an earlier appeal to the Department of Taxation. Although the department's findings of law and fact are set forth in Public Document (P.D.) 00-15 (03/13/00), they will be repeated here for clarity.
FACTS
Background
The Taxpayer is a non-stock corporation organized to facilitate the operation of a thirty-nine unit time-share condominium. Its members are the owners of the time-share unit weeks (the "Unit Owners").
Each unit in the condominium may have as many as 51 unit-week owners. Each Unit Owner holds a deeded real estate interest in his unit and the common areas that reflects the nature of the timeshare arrangement.
Although most of the unit weeks are owner-occupied, some of the unit weeks are leased to third parties by their owners. In addition, some of the unit weeks have been acquired by the Taxpayer through foreclosure and are leased to third parties.
The documents that govern the condominium provide that the Unit Owners are ultimately responsible for the costs of operating the condominium. Due to the large number of Unit Owners and the short duration of their occupancy of the units, the governing documents delegate responsibility for the administration of the condominium to the Taxpayer. Although the governing documents anticipate that the Taxpayer may contract with a third party to obtain day to day management services, the Taxpayer has elected to perform these services itself.
As authorized by the governing documents, the Taxpayer collects fees from the Unit Owners to pay the costs of managing, furnishing, cleaning and maintaining the facility, including the individual units and the common areas. These costs include employee salaries and wages, repairs and maintenance, taxes, insurance premiums and utilities. The fees collected by the Taxpayer, and the expenses to which they are applied, amount to several hundred thousand dollars a year.
The Taxpayer also receives income from renting the unit weeks that it owns to third parties. Additionally, the Taxpayer receives income from acting as a rental agent for Unit Owners who rent their unit weeks to third parties. The Taxpayer's 1995 income statement reflects gross rental income of $***, with offsetting rental expenses of $***. The Taxpayer's 1996 income statement reflects gross rental income of with offsetting rental expenses of $***.
The Taxpayer maintains an accounting system that accounts for the receipt and disbursement of funds by source and use. All receipts, however, are deposited in a common bank account and, regardless of source, are available to pay any of the expenses incurred in maintaining the condominium.
The Taxpayer, which is not recognized as a nonprofit organization for income tax purposes, files a Form 1120 U.S. Corporate Income Tax Return.
The Assessment
Historically, the Taxpayer has voluntarily obtained annual business licenses from the City. On its business license applications, the Taxpayer only reports a portion of its total gross receipts. The receipts reported consist primarily of rental commissions. The Taxpayer excludes the remainder of its receipts when reporting its taxable gross receipts. The receipts excluded consist primarily of the fees collected from the Unit Owners to pay the costs of managing, furnishing, cleaning and maintaining the facility.
As a result of an audit, the City disallowed these exclusions and assessed additional license taxes for license years 1995, 1996 and 1997.
Appeal to the City
In an application for correction filed with the City, the Taxpayer contended that the exclusions were appropriate because it was not engaging in business with respect to the excluded income. However, in that appeal and in all subsequent proceedings, the Taxpayer has never disputed that it was engaging in business with respect to the gross receipts it reported on its business license applications.
In its final local determination, the City upheld the assessment. The City noted that the Taxpayer files a Form 1120 U.S. Corporate Income Tax Return. Section 1 of the Guidelines for Business, Professional and Occupational Tax promulgated by the Department of Taxation provides that the filing of tax returns that are required only of persons engaged in a trade or business creates a rebuttable presumption that a person is engaged in business. The City summarized the business activities conducted by the Taxpayer and stated that this level of business activity supported a conclusion that the Taxpayer is engaged in a business. The City also noted that the Taxpayer did not qualify for an exemption as a nonprofit organization.1 Although the City determined that the excluded receipts were taxable, it did allow an exclusion for an amount equal to the Taxpayer's expenditures for real estate taxes and utilities.
First Appeal to the Department
The Taxpayer filed its first appeal with the Department of Taxation when its argument was rejected by the City. In the determination of that appeal, set forth in P.D. 00-15, the department held that the facts presented were not sufficient to make a determination on one issue. The matter was returned to the City for a factual determination on that issue. Otherwise, as the department was not aware of any provision of law that would allow the exclusion of the gross receipts in question, the assessments for license years 1995, 1996, and 1997 were found to be correct.
The issue to be determined by the City was whether the expenses to which the excluded receipts were applied were incurred by the Taxpayer or by the Unit Owners. As explained in P.D. 00-15, the question of liability for the expenses bears directly upon the question of whether or not the Taxpayer acts as an agent of the Unit Owners with respect to the monies it collects from them and applies to the expenses of managing and maintaining the facility. If the Taxpayer is acting as an agent, it is entitled to exclude these fees from its taxable gross receipts. Alexandria v. Morrison- Williams Associates, Inc., 223 Va. 349 (1982). In order for the Taxpayer to be acting as an agent of the Unit Owners, the expenses to which the receipts were applied must have been incurred by the Unit Owners, and not by the Taxpayer.
City's Factual Determination
The determination issued by the City on this issue reaffirmed the assessment. The determination stated that it had requested documentation from the Taxpayer and found no evidence that the expenses had been incurred by the Unit Owners.
Taxpayer's Second Appeal to the Department
In its appeal of the City's factual determination, the Taxpayer raises two issues. One is related to the agency issue, the other relates to transactions between related parties.
ANALYSIS
Agency Issue
The Taxpayer does not present any evidence that contradicts the City's factual determination that the expenses in question were incurred by the Taxpayer rather than the Unit Owners. Instead, the Taxpayer argues that the expenses were incurred by the Unit Owners because the documents which govern the administration of the condominium obligate the Unit Owners to bear the expenses of maintaining the condominium.
I cannot agree with the Taxpayer's position. This obligation is a contractual one between the Taxpayer and the Unit Owners. The Unit Owners satisfy this obligation by paying fees to the Taxpayer. This arrangement does not contradict the City's finding that the expenses in question were incurred with third parties by the Taxpayer and that the Unit Owners have no contractual liability to the third parties. Accordingly, it is my determination that the Taxpayer is not acting as an agent of the Unit Owners.
Transactions Between Related Parties
Additionally, the Taxpayer now contends that the gross receipts in question may be excluded from license taxation, not because the Taxpayer is the agent of the Unit Owners, but rather because the Taxpayer and the Unit Owners are one and the same. The Taxpayer argues that [the Taxpayer], by its board, acts for its members, the Unit Owners. The [Taxpayer], therefore, is the Unit Owners. There is no entity, separate from the Unit Owners, which contracts for any services. "
I disagree with the Taxpayer's conclusion. The Taxpayer is a non-stock corporation, which is a separate legal entity from its members. I am not aware of any provision of law that would authorize the deduction or exclusion of the receipts in question on the basis that they are received from persons who are members of the Taxpayer.
Section 1 of the 2000 BPOL Guidelines defines "gross receipts" to be:
the whole, entire, total receipts, of money or other consideration received by the taxpayer as a result of transactions with others besides himself and which are derived from the exercise of a licensed privilege to engage in a business . . . without deduction or exclusion except as provided by law.
In Commonwealth v. Wytheville Knitting Mills Employees Welfare Association, 195 Va. 663 (1954), the Supreme Court of Virginia held that a canteen operated by an unincorporated employees association was subject to local license taxation even though 1) the canteen's customers were members of the association; 2) the canteen did not price its merchandise to earn a profit, only to recoup its expenses; and 3) all profits were used to fund association activities, the cost of which would have been otherwise borne by the members from their personal funds.
In Public Document 00-168 (September 13, 2000), the Department of Taxation addressed the situation of a professional limited liability company (the "L.L.C.") formed by two medical professional corporations to facilitate their joint operation of a plastic surgery center in the City. The L.L.C. provided the professional corporations with office space, medical equipment, office furniture, fixtures and equipment and a business telephone listing. The professional corporations reimbursed the L.L.C. for its costs. The Department ruled that no local license tax exclusion exists for the expense reimbursements received by the L.L.C. from its members. 2
Scope of Ruling
This ruling is based on the specific facts presented in this case. Not all organizations formed to perform functions similar to those performed by the Taxpayer will experience the same license tax consequences.
CONCLUSION
Code of Virginia § 58.1-3703.1(A)(5) provides that on appeal, a BPOL tax assessment is deemed prima facie correct. In other words, the local assessment will stand unless the taxpayer proves that it is incorrect. The Taxpayer has not presented, nor am I aware of, facts or legal precedent that prove that the City's assessment is incorrect. Therefore, it is my determination that the assessments for license years 1995, 1996 and 1997 are correct.
If you have other questions, 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/30247D
1Code of Virginia § 58.1-3703 (C)(18) affords favorable local license tax treatment to certain nonprofit organizations. As the Taxpayer has not qualified for exemption from federal income taxes under Internal Revenue Code § 501, it is not eligible for the favorable license tax treatment afforded by Code of Virginia § 58.1-3703 (C)(18).
2Code of Virginia § 58.1-3703(C)(10) provides an exclusion from local license taxation for certain transactions between members of an "affiliated group." Prior to July 1, 2000, membership in an affiliated group for purposes of the exclusion was limited to corporations. Code of Virginia § 58.1-3700.1. Legislation enacted by the 2000 General Assembly expanded the affiliated group membership eligibility to limited liability companies and several other entity types. However, as this legislation became effective July 1, 2000, the affiliated group exclusion was not available to the L.L.C. for the years subject to the appeal. As the affiliated group exemption did not apply, the department ruled that no local license tax exclusion exists for the expense reimbursements received by the L.L.C. from its members.
Rulings of the Tax Commissioner