Tax Type
BPOL Tax
Description
Gross receipts reported on its federal income tax returns as income.
Topic
Federal Conformity
Local Power to Tax
Pass-Through Entities
Records/Returns/Payments
Taxability of Persons and Transactions
Date Issued
05-09-2012
May 9, 2012
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business, Professional and Occupational License Tax
Dear *****:
This final state determination is issued upon the application for correction filed by you on behalf of the ***** (the "Taxpayer") with the Department of Taxation. You appeal an assessment of Business, Professional and Occupational License (BPOL) taxes issued to the Taxpayer by the ***** (the "County") for the 2007 tax year.
The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, i.e., 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 summarized below. The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.
FACTS
The Taxpayer is a country club located in the County. The Taxpayer has three separate pro shops where members can purchase merchandise. The purchases are billed on the members' monthly dues statements and payment is collected by the Taxpayer and remitted to the pro shops. Members are also encouraged to join certain golf organizations that are unrelated to the Taxpayer. The Taxpayer bills the members for these fees and remits them to the organizations. In addition, the Taxpayer maintains an employee appreciation fund. Members are encouraged to donate one month's dues, which are collected by the Taxpayer and distributed to its employees as bonuses.
The County audited the Taxpayer and determined that the payments collected from the members for the pro shop purchases, golf association fees and employee appreciation fund were gross receipts subject to the BPOL tax and issued an assessment for the 2007 tax year. The Taxpayer appealed the assessment to the County. In its final local determination, the County held that the payments were gross receipts because the Taxpayer reported such receipts on its federal income tax returns as income.
The Taxpayer appeals the County's final determination to the Tax Commissioner, contending the gross receipts from the pro shop purchases are not subject to the license tax because the pro shops are separately licensed businesses. It also argues that it is merely a conduit for the payments to the golf associations and the employee benefits funds. The Taxpayer asserts that it recorded all member payments for the pro shops, golf associations and employee benefit fund as liabilities on its books and these receipts were not reported on its federal return.
ANALYSIS
The BPOL tax is a gross receipts based tax imposed upon business, trades, professions, occupations and callings and the persons engaged therein for the privilege of conducting business in a local jurisdiction. Virginia Code § 58.1-3700.1 defines "gross receipts" as the "whole, entire, total receipts, without deduction." However, there are specific exemptions, deductions and exclusions that are either provided by statute or affirmed through Supreme Court decisions, opinions of the Attorney General and rulings by the Department. One such area is that of agency relationships. See 19861987 Op. Va. Att'y Gen. General 282 and Public Document (P.D.) 01-38 (4/12/2001).
The definition of "agency relationship" has been created through case law and affirmed through both opinions of the Attorney General and rulings by the Department. In City of Alexandria v Morrison-Williams Associates, Inc., 223 Va. 349, 288 S.E.2d 432 (1982), the Virginia Supreme Court established three criteria that must be met if a taxpayer is to establish it has an agency relationship with its clients. These criteria are: (1) contractual relationships exist between the taxpayer and both the client and the contracted third party, and there is a stated relationship between the client and the contracted third party; (2) the taxpayer does not commingle its "agency" funds with other sources; rather it must have a separate accounting system or a fiduciary account where the pass through receipts from its clients are recorded and; (3) the taxpayer does not report these "pass through costs" on its federal income tax returns. See P.D. 01-38 and P.D. 06-94 (9/28/2006).
Contractual Relationships
The Taxpayer contends it had an oral agreement with the pro shops to allow members to have their purchases charged to their membership accounts. The Taxpayer states that the members and pro shops were aware of, and honored this arrangement. It further asserts that it had a contractual relationship with the golf associations and its members with regard to joining the golf associations.
While oral contracts can be binding between the parties, the burden is on a Taxpayer to provide enough evidence to substantiate its claim. The Taxpayer has provided no cogent evidence of the contractual relationships with the pro shops and golf associations. Further, while the members benefited from the Taxpayer's arrangement with the pro shops and the golf associations, there does not appear to be any contractual requirement that would prevent a member from entering into a transaction with a pro shop or golf association without going through the Taxpayer.
The Taxpayer has not asserted that a contractual relationship exists with regards to the holiday bonus fund. The information suggests that the funds were voluntarily donated by the members for the benefit of the employees.
Commingling of Funds
The evidence indicates that the Taxpayer kept separate accounts for the pass-through transactions involving the club members and the pro shops, golf associations and holiday bonus fund.
Pass through Cost Reporting
The Taxpayer states the member payments for the pro shops, golf associations, and holiday bonus funds were reported as liabilities, not as revenues for operational purposes. The County counters that these transactions were reported on the Taxpayer's federal income tax return.
The Department requested that the Taxpayer provide its federal income tax return and a reconciliation to the gross income reported on its return for the 2007 tax year. The Taxpayer has not provided sufficient evidence to show that the pass through costs were excluded from gross receipts reported on its federal income tax returns.
Virginia Code § 58.1-3703.1 A 9 requires taxpayers to keep sufficient records to enable the local taxing authority to verify the correctness of the tax paid for the license years assessable and determine the correct amount of tax assessable. When the evidence provided by a taxpayer is inconclusive, it is reasonable for the local assessing officer to request a reconciliation of such gross receipts to a taxpayer's total gross receipts reported on its financial statements or tax returns. Further, when such information is not provided, a local assessing authority must use the information available to determine gross receipts sitused within its jurisdiction.
DETERMINATION
Based on evidence provided, the Taxpayer has failed to show there was a contractual relationship between the Taxpayer and both the client (the members) and the contracted third party (the pro shops, golf associations, and holiday bonus fund). Further, the Taxpayer has not responded to the Department's request for a reconciliation of the gross receipts reported on the BPOL tax return and those reported on the federal income tax return. Because the Taxpayer has not met all three of the criteria set forth by the Virginia Supreme Court, the County's assessment for the 2007 tax year is upheld.
If you have any questions concerning this determination, you may contact ***** in the Office of Tax Policy, Appeal and Rulings, at *****.
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- Sincerely,
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- Craig M. Burns
Tax Commissioner
- Craig M. Burns
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AR/1-4946672865.B
Rulings of the Tax Commissioner