Document Number
04-112
Tax Type
BPOL Tax
Description
Exemption from BPOL tax for transactions between affiliated entities
Topic
Exemptions
Local Power to Tax
Taxpayers' Remedies
Date Issued
09-14-2004


September 14, 2004


Re: Appeal of Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Business, Professional and Occupational License (BPOL) Tax

Dear *****:

This final state determination is issued upon-the application for correction filed by you on behalf of ***** (the "Taxpayer") with the Department of Taxation. You appeal a final local determination concerning a request for refund of BPOL taxes paid in tax years 2001 and 2002 to the ***** (the "Town"). I apologize for the delay in this response.

The local license tax and fee are imposed and administered by local officials. Virginia Code § 58.1-3703.1(A)(5) authorizes the Department to issue determinations on taxpayer appeals of certain BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, that is, the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department as summarized below. The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.
FACTS

The Taxpayer is part of a chain of corporations with a common parent corporation. The relationship between the members of this chain of corporations has been described by the Taxpayer as follows:

· The common parent corporation (Corporation A) wholly owns three subsidiaries: corporations B, C and D.
· Corporations B, C and D collectively own 80 percent of the voting power of all classes of stock and 80 percent of all classes of stock (including nonvoting) in Corporation E.
· Corporation E owns 66.67 percent of the voting power of all classes of Corporation's G's stock.
· Corporations B, C and D own 25 percent of Corporation G's voting stock. Collectively, corporations B, C, D and E own 91.67 percent of the voting power of all of Corporation G's stock. Additionally, corporations B, C and D own 80 percent of Corporation G's nonvoting stock.
· Corporation G wholly owns the Taxpayer.
· 100 percent of the Taxpayer's gross receipts are attributable to its business with Corporation F, which is also wholly owned by Corporation E.
· With the single exception of the relationship between corporations B, C, D, E and G, the relationship of the voting power of stock and the nonvoting stock between entities is identical. (Please see Attachment 1 for a graphic depiction of the relationship between the various entities.)

In tax years 2001 and 2002, the Taxpayer paid the BPOL tax to the ***** based on the gross receipts it received from Corporation F, which is a member of the affiliated group that includes both Corporation A and Corporation F. The tax was paid at the business services rate of .21 per $100. The Taxpayer requested a refund of the BPOL taxes paid, claiming that it is entitled to the special "affiliated group" exemption from the tax for transactions between affiliated entities, as provided for in Va. Code § 58.1-3703(C)(10). The Town denied the Taxpayer's refund request.

The Town disagrees with the Taxpayer's contention that it is a member of an affiliated group, finding that because "each of the corporations subject to inclusion (B, C and D) do not own stock in each other they do not meet the test for to [sic] inclusion as an affiliated group." Further, the Town finds that because corporations A, B, C and D "do not meet the test of affiliation, we cannot assume that the parent corporation derives the benefit of its stock ownership in these corporations for purposes of establishing an affiliation with other corporations." The Town notes that if it excludes Corporation A and only looks at the relationship between corporations E, G and the Taxpayer, the "stock owner relationship does not meet the test (80 percent of the stock is owned by one or more of the other corporations) for inclusion."
ANALYSIS

The BPOL tax is a gross receipts based privilege tax imposed on businesses, trades, professions, occupations and callings and upon the persons, firms and corporations engaged in such activities. Even though Va. Code § 58.1-3700.1 defines gross receipts as meaning "the whole, entire, total receipts, without deduction," Va. Code § 58.1-3703(C) provides certain exclusions from the tax. Included among these is the exclusion for those receipts generated through intercorporation transactions between members of an affiliated group. Specifically, localities may not impose a license tax:
    • On or measured by receipts or purchases by an entity which is a member of an affiliated group of entities from other members of the same affiliated group. This exclusion shall not exempt affiliated entities from such license or other tax measured by receipts or purchases from outside the affiliated group1. Va. Code § 58.1-3703 (C)(10).

At issue in this case is the definition of "affiliated group" and whether the Taxpayer qualifies as a member of an affiliated group. There are two kinds of affiliated groups defined in the statute: parent-subsidiary groups and brother-sister groups. The Taxpayer identifies itself as a member of parent-subsidiary affiliated group. Section 58.1-3700.1(1) of the Code of Virginia defines such a group as:
    • One or more chains of corporations subject to inclusion connected through stock ownership with a common parent corporation which is a corporation subject to inclusion if:
    • a. Stock possessing at least eighty percent of the voting power of all classes of stock and at least eighty percent of each class of the nonvoting stock of each of the corporations subject to inclusion, except the common parent corporation, is owned directly by one or more of the other corporations subject to inclusion; and
    • b. The common parent corporation directly owns stock possessing at least eighty percent of the voting power of all classes of stock and at least eighty percent of each class of the nonvoting stock of at least one of the other subject to inclusion corporations. As used in this subdivision, the term "stock" does not include nonvoting stock which is limited and preferred as to dividends; the phrase "corporation subject to inclusion" means any corporation within the affiliated group irrespective of the state or country of its incorporation; and the term "receipts" includes gross receipts and gross income 2.

For purposes of the BPOL tax, a parent-subsidiary affiliated group consists of one or more chains of corporations in which the parent corporation is the controlling entity. In summary, to be considered an affiliated group for purposes of the BPOL tax, the parent-subsidiary group must meet each of the four criteria outlined in Va. Code § 58.1-3700.1(1), which are:
    • 1. At least 80 percent of the voting power of all classes of stock of each corporation subject to inclusion is owned directly by one or more of the other corporations subject to inclusion;
      2. At least 80 percent of the each class of the nonvoting stock of each corporation subject to inclusion is owned directly by one or more of the other corporations subject to inclusion;
      3. The parent corporation directly owns at least 80 percent of the voting power of at least one of the other corporations subject to inclusion; and
      4. The parent corporation directly owns at least 80 percent of each class of the nonvoting stock of at least one of the other corporations subject to inclusion.

The question is whether the Taxpayer may be included in the parent-subsidiary group consisting of corporations A, B, C, D, E, F and G. Does the chain of corporations meet all four requirements, and if so, is the Taxpayer correct in its claim to be a part of the affiliated group for purposes of the BPOL tax?

1. Eighty percent of the voting power of all classes of stock of each corporation subject to inclusion is owned directly by one or more of the other corporations subject to inclusion.

In this case, it is clear that corporations A, B, C, D, E and F meet this requirement. Corporation A wholly owns the voting stock in corporations B, C and D, which, in turn, collectively directly own 80 percent of the voting stock in Corporation E. Corporation E owns 100 percent of the voting stock in Corporation F. The fact that corporations B, C and D do not own stock in each other is not relevant. The fact that Corporation A owns at least 80 percent of the voting power of corporations B, C and D satisfies the requirement that at least 80 percent of the voting power of their respective stock is owned by one or more of the other corporations subject to inclusion. It is not necessary for corporations B, C and D to own stock in one another. Furthermore, the fact that they, as wholly owned subsidiaries, collectively own 80 percent of the voting stock in Corporation E is relevant to establishing the relationship between corporations A, B, C, D and E as members of an affiliated group. Corporation F is also subject to inclusion by virtue of the fact that it is wholly owned by Corporation E.

Moreover, it is clear that the chain of affiliated corporations includes the Taxpayer for purposes of satisfying this criterion. Corporation E owns 66.67 percent of the voting stock in Corporation G. Another 25 percent of Corporation G's voting stock is collectively owned by corporations B, C, and D. Therefore, at least 80 percent (actually 91.67 percent) of the voting stock in Corporation G is collectively owned by corporations in the affiliated group comprised of corporations A, B, C, D, E and F. This, in turn, makes Corporation G subject to inclusion in the affiliated group for purposes of the BPOL tax. Finally, because the voting power of all classes of the Taxpayer's stock is 100 percent owned by Corporation G, the Taxpayer meets the first requirement of being subject to inclusion in the affiliated group for purposes of the BPOL tax.

2. Eighty percent of the each class of the nonvoting stock of each corporation subject to inclusion is owned directly by one or more of the other corporations subject to inclusion.

With the single exception of the relationship between corporations B, C, D E and Corporation G, the percentage of ownership of the nonvoting stock of each of the entities involved in the group the relationship of the voting power of stock and the nonvoting stock between entities is identical. Collectively, however, corporations B, C, D and E own 80 percent of the nonvoting stock of Corporation G. As members of a chain of affiliated corporations, this satisfies the requirement that the "nonvoting stock of each corporation subject to inclusion is owned directly by one or more of the other corporations subject to inclusion."

3. The parent corporation directly owns at least 80 percent of the voting power of at least one of the other corporations subject to inclusion.

This condition is satisfied. In this situation, the parent corporation owns 100 percent of the voting power of three of the corporations: B, C and D.

4. The parent corporation directly owns at least 80, percent of the nonvoting stock of at least one of the other corporations subject to inclusion.

This condition is satisfied. In this situation, the parent corporation wholly owns three of the corporations: B, C and D. Ownership includes nonvoting stock.
DETERMINATION

It is clear from the evidence presented and the above analysis that all four statutory requirements set forth in the definition of "affiliated group" in Va. Code § 58.1-3700.1(1) are satisfied and corporations A, B, C, D, E, F, G and the Taxpayer are members of the same affiliated group for purposes of the BPOL tax. Therefore, any receipts the Taxpayer earns from transactions with members of the affiliated group, including Corporation F, are not subject to the BPOL tax. Sales made to nonaffiliated entities are subject to the tax.

The result in this case is further supported by the graphic illustration found in Appendix A of the 2000 BPOL Guidelines. In this illustration (see footnote 4), Corporation B owns 80 percent of corporations C and D. Corporation D owns 30 percent of Corporation F, and Corporation C owns 50 percent of Corporation F. Collectively, corporations C and D own 80 percent of Corporation F. Corporation B is the common parent of the B, C, D and F affiliated group. While the instant case involves more entities, the pattern is the same. In this case, it has been clearly demonstrated that Corporation A is the common parent of the B, C, D, E, F, G, and Taxpayer affiliated group.

The Taxpayer has requested a refund for BPOL taxes paid in tax years 2001 and 2002 on gross receipts earned through transactions with another member of the affiliated group. Such receipts are not subject to the BPOL tax pursuant to Va. Code § 58.1-3703(C)(10), and the tax paid on these receipts must be refunded to the Taxpayer. Any receipts attributed to sales to a nonaffiliated entity, however, are subject to the BPOL tax. This is a question for the local commissioner of the revenue to determine.

If you have any questions regarding this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

                • Sincerely,

                • Kenneth W. Thorson
                    • Tax Commissioner


AR/46795H
1This exclusion does not preclude a locality from levying a wholesale merchants license tax on an affiliated entity on those sales by the affiliated entity to a nonaffiliated entity, notwithstanding the fact that the wholesale merchant's license tax would be based upon purchases from an affiliated entity. See Va. Code § 58.1-3703(C)(10) for treatment of wholesale sales on purchases to nonaffiliated entities.
2The percentages of stock refer to the voting power of all classes of stock and each class of nonvoting stock subject to inclusion. Further, when any of the members of the affiliated group, including the parent corporation, is a nonstock corporation, "stock" refers to nonstock corporation membership or membership voting rights, as is appropriate to the context. See Va. Code § 58.1-3700.1 and 2000 BPOL Guidelines, Appendix A.


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46