Tax Type
BPOL Tax
BTPP Tax
Description
Taxpayer is engaged in a licensable business at a definite place of business
Topic
Exemptions
Local Power to Tax
Records/Returns/Payments
Date Issued
10-03-2013
October 3, 2013
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business, Professional and Occupational License (BPOL) Tax
Business Tangible Personal Property (BTPP) 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 assessments of Business, Professional and Occupational License (BPOL) and Business Tangible Personal Property (BTPP) taxes issued to the Taxpayer by the ***** (the "City") for the 2009 through 2011 tax years.
The local license tax and business tangible personal property tax are imposed and administered by local officials. Virginia Code §§ 58.1-3703.1 A 5 and 58.1-3983.1 D 1 authorize the Department to issue determinations on taxpayer appeals of certain BPOL and BTPP tax assessments, respectively. On appeal, a tax assessment by a local assessing officer 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, regulations, and public documents cited are available on-line in the Laws, Rules and Decisions section of the Department of Taxation's web site, located at www.tax.virginia.gov.
FACTS
The Taxpayer, a nonstock cooperative formed by a group of nonprofit hospitals, operates a laundry facility within the City. The laundry business provides services to its member owners and other public and private nonprofit entities within the City.
Under audit, the City issued assessments to the Taxpayer for the 2009 through 2011 tax years for BPOL and BTPP taxes. The Taxpayer acknowledges that it does provide services to some entities that are not members of the cooperative and paid the BPOL tax based on the gross receipts attributed to the nonmembers, but appealed the assessments to the City. The Taxpayer asserted it was not subject to BPOL or BTPP tax because it generates no income, and all of its members are nonprofit entities. Further, the Taxpayer contended all its personal business property was used to conduct the nonprofit organizations' mission.
In its final determination, the City concluded that the Taxpayer did not qualify for the nonprofit exemption because it was not a charitable nonprofit organization. In addition, the City found that the Taxpayer was not a member of an affiliated group and, therefore, did not qualify for the exemption for intercompany receipts. The Taxpayer has filed an appeal to the Department, contending it is organized as a nonprofit entity and the imposition of the BPOL and BTPP taxes amounts to a tax on its nonprofit owners, which is prohibited by Virginia law.
ANALYSIS
BPOL Tax
The BPOL tax is a tax on the privilege of doing business within a locality. A local government body, by ordinance, may levy and provide for the assessment and collection of BPOL taxes on businesses, trades, professions, occupations and callings and upon persons, firms, and corporations engaged in business within the locality. See Va. Code § 58.1-3703. A business is defined in Va. Code § 58.1-3700.1 as a course of dealing which requires the time, attention and labor of the person so engaged for the purpose of earning a livelihood or profit. It implies a continuous and regular course of dealing, rather than an irregular or isolated transaction.
The Taxpayer is not eligible for the exemption for nonprofit organizations permitted under Va. Code § 58.1-3703 C 18 because it does not satisfy the statutory criteria. The Taxpayer takes issue, however, with the City's position that it has authority to levy taxes without regard to the facts and circumstances. The Taxpayer argues that the City cannot impose the BPOL tax simply because the Taxpayer does not meet a statutory exemption.
Virginia follows the Dillon Rule of strict construction, which provides that "municipal corporations have only those powers expressly granted, those necessarily or fairly implied therefrom, and those that are essential and indispensable." See Board of Sup'rs of Fairfax County v. Home, 216 Va. 113, 117, 215 S.E.2d 453, 455 (1975). Additionally, the powers of local governments "are fixed by statute and are limited to those conferred expressly or by necessary implication." See Sup'rs of Nottoway County v. Powell, 95 Va. 635, 635, 29 S.E. 682, 683, (1898). The Virginia Supreme Court has also ruled that the power to tax may be denied by implication, as well as by specific constitutional or statutory exemptions. See City of Richmond v. Valentine, 203 Va. 642, 125 SE2d 854 (1962). Thus, a locality can only impose BPOL tax on an enterprise conducting a licensable business within its jurisdiction.
Nonprofit Organizations
The Taxpayer contends that to impose the BPOL tax on it is to impose the BPOL tax on its nonprofit members. Virginia Code § 58.1-3703 C 18 limits a locality's authority to impose the BPOL tax on nonprofit organizations. The Taxpayer, however, admits that it is not a nonprofit organization as defined under Internal Revenue Code (IRC) § 501. Instead, the Taxpayer believes that the gross receipts in question may be excluded from license taxation because the Taxpayer and its nonprofit members are one and the same. The Taxpayer has cited no legal precedent to support this claim.
Although all of its owners are nonprofit organizations, the Taxpayer is organized as a separate legal entity under Virginia law. In addition, the Taxpayer operated as a separate entity from its owners, had its own employees and management and was engaged in a different line of business. While its owners are medical service facilities, the Taxpayer provides laundry services.
The Taxpayer has also argued that it did not earn a profit from the laundry operations. In The Commonwealth v. Wytheville Knitting Mills Employees Welfare Association, 195 Va. 663, 79 S.E. 2d 621 (1954), the Virginia Supreme Court 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. The Court concluded that the realization of a profit or the intent to obtain a profit is not the only determinant as to whether or not an entity is engaged in business.
The financial statements provided indicate the Taxpayer does earn profits and retains a portion of those profits as retained earnings. Further, the Taxpayer has been operated as cost sharing arrangement between its member hospitals. Under this arrangement, the Taxpayer employs economies of scale to provide laundry services more cost effectively than the members could on their own. Reducing or controlling costs is an aspect of profitability. The statute does not require that a business actually receive the benefit of the profits it earns. In this case, the Taxpayer's activities on behalf of its members resulted in an economic benefit to its owners.
In addition, the definition of a business for BPOL tax purposes is not limited to those enterprises earning a profit. Even if the enterprise is not earning a profit, it can be subject to BPOL tax if it is engaged in business for the purpose of earning a livelihood. See Title 23 of the Virginia Administrative Code (VAC) 10-500-10, definition of "Business." The term "livelihood" is defined as a "means of supporting one's existence." See Black's Law Dictionary (Eighth Edition, 2004, p. 953). The Taxpayer charges its members for the services performed, thereby supporting its continuing existence.
Further, the General Assembly contemplated situations under which a nonprofit organization may be required to register and file BPOL taxes. Under Va. Code § 58.1-3703 C 18 b, activities conducted by a nonprofit organization for consideration that are similar to activities conducted by a for-profit business are presumed to be activities of business subject to the BPOL tax. Typically, laundry service businesses are subject to BPOL taxation.
Federal Returns
The Taxpayer argues that the returns it filed for income tax purposes should not create the presumption that it is a for profit business. Virginia Code § 58.1-3109 6 grants local assessing officers the authority to require records and other information necessary to verify the accuracy of a taxpayer's BPOL tax returns. In addition, Va. 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. A taxpayer's records would include the federal income tax return. While not creating a presumption, the federal income tax filings can assist an assessing officer in evaluating whether or not a business enterprise is subject to BPOL tax.
Previous Rulings
The Taxpayer has brought up the fact that the City's previous Commissioner of the Revenue issued a ruling that it was not subject to BPOL tax because it operated as a cooperative, served only tax exempt member hospitals, and derived all of its revenues from those member hospitals. As a result of the ruling issued in 1976, the Taxpayer has provided laundry services to its members for 35 years without being required to obtain a business license from the City.
By reason of their character as legislative grants, statutes relating to exemptions allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See DKM Richmond Associates, L.P. v. Richmond, 249 Va. 401, 407, 457 S.E.2d 76, 80 (1995). The fact that a prior local assessing officer had refrained from or declined to assess a particular enterprise does not create a presumption that such enterprise is, in fact, exempt from the tax.
Virginia Code § 58.1-3703 authorizes localities to enact an ordinance levying a BPOL tax or a fee, or both for issuing a license within set the rates, thresholds, classifications and exemptions. The statute is also permissive in that it allows localities through their local ordinances to establish subclassifications within the statutory classifications and allow exemptions for such subclassifications. See Title 23 VAC 10-500-20 D. As such, a locality may exempt any group or subgroup of taxpayers not already exempt from the tax if such exemption is based upon a reasonable distinction in municipal policy. A review of the City's ordinances revealed no exemption for a business formed as a cooperative providing laundry services to member hospitals exempt from taxation under IRC § 501(C)(3).
Business Tangible Personal Property Tax
The Taxpayer contends that it is not subject to the City's BTPP tax because it operates as a cooperative under a not-for-profit business model.
Article X, § 4 of the Constitution of Virginia provides that all tangible personal property shall be segregated for local taxation in such a manner as the General Assembly provides by law. Article X, § 6 (7)(f) of the Constitution of Virginia states that exemptions of property from taxation as authorized under § 6 must be strictly construed. This provision has been consistently enforced in Virginia Supreme Court decisions. See, for example, Department of Taxation v. Wellmore Coal Corp. 228 Va. 149, 320 S.E.2d 509 (1984).
In addition, as authorized by the Constitution of Virginia, the General Assembly established a number of exemptions from the BTPP tax. See Chapter 36 of the Code of Virginia. Within Chapter 36, the General Assembly established a process for localities to grant exemptions from real or personal property taxes for property owned by nonprofit organizations and used for religious, charitable, patriotic, benevolent, cultural or public park or playground purposes. Specifically, Va. Code § 58.1-3651 B sets forth a list criteria for consideration by local governing bodies when determining whether to pass an ordinance granting an exemption request. Furthermore, a determination of property tax exemption based on use is a question of fact and, therefore, is reserved for the local commissioner of the revenue or other appropriate taxing official. See Op. A'tty Gen. 02-088 (11/19/2002) and P.D. 07-65 (5/10/2007).
The Taxpayer has provided no evidence that its property was exempt pursuant the Constitution of Virginia or Virginia statute. Likewise, the City has not enacted a local ordinance exempting the Taxpayer's property from BTPP taxation.
DETERMINATION
The Taxpayer is organized as a nonstock cooperative and is a separate legal entity from its members. The Taxpayer is not a nonprofit organization exempt from BPOL tax. Further, I am not aware of any provision of Virginia law that would authorize the exclusion for the gross receipts of a business simply on the basis that they are received from a nonprofit entity. In addition, the City has not granted the Taxpayer an exemption from the BPOL tax. As such, the evidence indicates the Taxpayer is engaged in a licensable business at a definite place of business in the City for the 2009 through 2011 tax years.
With regard to the BTPP tax, the Taxpayer has failed to show its property was exempt under any of the provisions of Chapter 36 of the Code of Virginia or that the City has enacted an ordinance exempting such property. Absent any exemption, I must conclude the Taxpayer's property is subject to BTPP tax for the tax years at issue.
In accordance with this determination, the City's assessments of BPOL tax and BTPP tax for the 2009 through 2011 tax years are upheld.
If you have any questions about this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5365573529.D
Rulings of the Tax Commissioner