Tax Type
BPOL Tax
Description
Taxpayer provides management and administrative services to seven operating entities
Topic
Local Power to Tax
Date Issued
08-15-2013
August 15, 2013
Re: Appeal of Final Local Determination
Locality: *****
Taxpayer: *****
Business, Professional and Occupational License Tax
Dear *****:
This final state determination is issued upon the application for correction filed on behalf of ***** (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 2009 through 2012 tax years.
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, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.
FACTS
The Taxpayer, an S corporation wholly owned by four shareholders, the ***** (Shareholder A), ***** (Shareholder B), ***** (Shareholder C) and the ***** (Shareholder D) (collectively, the "Shareholders"), has a definite place of business in the County.
The Taxpayer provides management and administrative services to seven operating entities in Virginia. These operating entities included:
***** (VALP1)
***** (VARLP2)
***** (VALP3)
***** (VALP4)
***** (VALP5)
***** (VALP6)
***** (VALP7)
All four shareholders of the Taxpayer also owned partnership interests in VALP1, VALP2, and VALP6. Three of the shareholders were partners in VALP7. Two of the shareholders held interests in VALP3 and VALP4. A partnership interest in VALP5 was held by only one of the shareholders of the Taxpayer.
The Shareholders also collectively wholly own the ***** (ASC), an S corporation that also had a definite place of business in the County. It provides management and administrative services to nine operating entities located in ***** (State A). These operating entities include:
***** (ALP1)
***** (ALP2)
***** (ALP3)
***** (ALP4)
***** (ALP5)
***** (ALP6)
***** (ALP7)
***** (ALP8)
***** (ALP9)
All four shareholders of ASC also owned partnership interests in ALP1, ALP2, ALP5, ALP6, ALP7, ALP8, and ALP9. Only two of the shareholders held interests in ALP3 and ALP4. The State A entities paid fees to ASC for these services. ASC then remitted most of these fees to the Taxpayer. The Taxpayer did not include fees remitted by ASC as gross receipts when it filed its BPOL tax returns for the tax years at issue.
Under audit, the County made an adjustment to include intercompany receipts from all of the entities. The Taxpayer appealed the assessments to the County. In its final local determination, the County held that the intercompany payments from the Virginia and State A entities were not exempt because the Taxpayer, ASC, the Virginia entities and the State A entities were not an affiliated group. The Taxpayer appeals the County's final determination to the Tax Commissioner, contending that both the Virginia entities and the State A entities are affiliated with the Taxpayer under the brother-sister test.
ANALYSIS
Under the provisions of Va. Code § 58.1-3703 C 10, receipts or purchases made by members of an affiliated group of entities from other members of the same affiliated group are exempt from the BPOL tax. There are two tests, the parent-subsidiary test and the brother-sister test, that a group of entities can satisfy in order to be considered an affiliated group. In applying the statutory definition of "affiliated" under Va. Code § 58.1-3700.1 to pass-through entities, the tests are applied "as if they were corporations and the ownership interests therein were stock."
Because the entities at issue do not share a common parent corporation, the parent-subsidiary test would not apply in this case. Under Title 23 of the Virginia Administrative Code (VAC) 10-500-50, two or more entities may meet the brother-sister test if five or fewer owners that are individuals, estates, or trusts (the "ownership group") hold stock or other ownership interests that meet both the total membership and common ownership prongs of the test. Entities will meet both prongs of the test if:
- 1. the ownership group owns at least 80% of the total voting power of all classes of ownership interests or the total value of all ownership interests (total membership), and
- 2. the ownership group holds more than 50% of the total voting power of all classes of ownership interests or the total value of all ownership interests to the extent that the ownership interests are identical for each entity (common ownership).
The Taxpayer asserts that it satisfied the brother-sister test with the other Virginia entities, and they are an affiliated group. It also contends that ASC and five of the State A entities met the brother-sister test and make up another affiliated group.
Gross receipts that are "derived from transactions that occur between members of an affiliated group" are exempt from the BPOL tax. See Title 23 VAC 10-500-50 B. Other than management fees paid by the nine State A entities to ASC, the Taxpayer is the only entity generating gross receipts from transactions from related entities. As such, the determination as to whether the exemption applies hinges only on whether the Taxpayer is affiliated with each entity from which intercompany receipts are generated.
The nine State A entities paid a management fee to ASC, not to the Taxpayer. As such, because there was no intercompany transaction between the Taxpayer and any of the State A entities, none of the State A entities would be included in determining whether the Taxpayer is a member of an affiliated group. However, each of the Virginia entities and ASC paid management fees to the Taxpayer. As such, an analysis must be done to determine which of these entities met the brother-sister test with the Taxpayer to determine if the management fees paid to the Taxpayer would be exempt from the BPOL tax.
Title 23 VAC 10-500-50 C 2 b recommends using charts to apply the brother-sister affiliated group test. The ownership group would be listed down a column and entities, which may be affiliated, are listed in a row. Each member of the group's percentage of ownership is placed under its corresponding entity. Each column would be totaled to determine the total membership test (80%) test. An additional column would be added to enter the identical ownership. The lowest percentage each owner held in the entity would be entered into the identical ownership column and then totaled to determine the common ownership (50%) test.
In this case, because only the Taxpayer is receiving gross receipts from ASC, VALP1, VALP2, VALP3, VALP4, VALP5, VALP 6, and VALP7, an separate chart would be required to determine the relationship between the Taxpayer and each of the subject entities. For example, the relationship between the Taxpayer and ASC would be determined using the following chart (ownership interests rounded).
| Taxpayer | ASC | Identical Ownership | |
| Shareholder A | 5% | 5% | 5% |
| Shareholder B | 50% | 50% | 50% |
| Shareholder C | 25% | 25% | 25% |
| Shareholder D | 20% | 20% | 20% |
 | 100% | 100% | 100% |
The Taxpayer and ASC met both prongs because the ownership group owned 100% of both entities and held identical interests in both the Taxpayer and ASC. All four shareholders of the Taxpayer also owned partnership interests in VALP1, VALP2 and VALP6. However, the total interest held by the four shareholders in each of these partnerships totaled less than 80%.
All four of the shareholders, however, did not hold ownership interests in VALP3, VALP4, VALP5 and VALP7. These entities would not be excluded from the exemption, however, merely because they did not share all of the same owners as the Taxpayer. The brother-sister test could still be met if both prongs are met by the ownership interests of three or fewer of the Taxpayer's shareholders.
Shareholder B, Shareholder C, and Shareholder D were partners in VALP7. Collectively, they owned identical interests in the Taxpayer and VALP7 totaling approximately 95%. Under these circumstances, both prongs of the brother-sister test were met.
Shareholder B and Shareholder D held interests in VALP3 and VALP4 and Shareholder D was a partner in VALP5. In examining whether the total ownership prong was met, it was found that that Shareholder B and Shareholder D owned less that 80% of the Taxpayer. In addition, while Shareholder D owned more than 90% of VALP5, it owned less than 80% of the Taxpayer.
DETERMINATION
Based on evidence provided, ASC and VALP7 were affiliated with the Taxpayer. As such, the gross receipts derived from ASC and VALP7 were the intercompany receipts received from an affiliated group by the Taxpayer. Such receipts are exempt from BPOL taxation pursuant to Va. Code § 58.1-3703 C 10. Therefore, I am remanding this case back to the County to adjust the assessments of BPOL tax for the 2009 through 2012 tax years in accordance with this determination.
The enclosed spreadsheet shows the affiliated charts as computed by the Department. 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
AR/1-5241259421.B
Rulings of the Tax Commissioner