February 19, 2015
Re: Appeal of Final Local Determination
Locality: *****
Taxpayer: *****
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 by you on behalf of ***** (the "Taxpayer"), with the Department of Taxation. The Taxpayer appeals a final local determination upholding a BPOL tax assessment for the 2009 through 2012 tax years issued by the ***** (the "City"). The Taxpayer also appeals an assessment of BTPP tax for the 2013 tax year. I apologize for the delay in responding to your appeal.
The local license tax and fee 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 local 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, regulations, 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 provided engineering and other services for construction projects. Most of the services were performed at the clients' respective places of business. Occasionally, some services were performed at an employee's home.
The Taxpayer had an office in the City from 2006 until December 2012. Beginning in April 2007, the Taxpayer also rented a residential property in ***** (the "County"), which the Taxpayer's principal officer purchased in 2010.
Under audit, the City determined that the Taxpayer's office in the City was its only definite place of business during the 2009 through 2012 tax years and sitused all of the Taxpayer's gross receipts to this location for BPOL tax purposes. The Taxpayer appealed, contending that the gross receipts should have been sitused to the residence in the County because it was the definite place of business from which the Taxpayer's business operations were directed and controlled.
The City issued a final determination upholding the assessment, on the basis that the Taxpayer had at least one definite place of business in the City and the evidence failed to show that the residence in the County had been a definite place of business.
The Taxpayer filed an appeal with the Department. The Taxpayer contends that none of its gross receipts should have been sitused to the office in the City because none of its business operations were initiated, directed or controlled from that location. The Taxpayer also asserts that it should have been classified as a contractor rather than a provider of professional services before it hired a licensed engineer in 2011. The Taxpayer claims it is entitled to refunds for the 2004 through 2007 tax years because it should have been paying the lower contractor rate. In addition, the Taxpayer contests the City's assessment of BTPP tax on a vehicle for the 2013 tax year.
ANALYSIS
Limitations on Appeals of Local Tax Assessments
Virginia Code § 58.1-3980 provides that any person aggrieved by an assessment of local taxes:
may, within three years from the last day of the tax year for which such assessment is made, or within one year from the date of the assessment, whichever is later, apply to the commissioner of the revenue or such other official who made the assessment for a correction thereof. [Emphasis added.]
The term "tax year" generally applies to the calendar year for which local taxes are assessed under Virginia law. See Public Document (P.D.) 08-136 (7/30/2008). The Taxpayer asserts that it is entitled to partial refunds for BPOL taxes paid for the 2004 through 2007 tax years because it should have paid tax at the lower rate applicable to contractors. It does not appear, however, that the Taxpayer previously filed any claims for refunds with the City for these tax years, nor were the refund claims included in the assessment now under appeal. As such, the Taxpayer's refund claim for the 2004 through 2007 tax years is barred by the statute of limitations. Accordingly, the Department's determination will be limited solely to the tax years for which the City issued assessments.
Classification
The BPOL tax is imposed on businesses and professionals for the privilege of doing business in a locality. The tax is imposed at different rates according to the classification of an enterprise. See Va. Code § 58.1-3706 A. These classifications are regulated under Title 23 VAC 10-500-10 et seq. Classification of a specific business must be determined based on consideration of all the facts and circumstances. Some of the factors to be considered include:
- What is the nature of the enterprise's business?
- How does the enterprise generate gross receipts?
- Where does the enterprise conduct its business?
- Who are the enterprise's customers?
- How does the enterprise hold itself out to the public?
- What is the enterprise's North American Industry Classification System (NAICS) code?
Contractors
Virginia Code §§ 58.1-3714 D 1-6 include the following definitions for the term "contractor:"
- Accepting or offering to accept orders or contracts for doing any work on or in any building or structure, requiring the use of paint, stone, brick, mortar, wood, cement, structural iron or steel, sheet iron, galvanized iron, metallic piping, tin, lead, or other metal or any other building material;
- Accepting or offering to accept contracts to do any paving, curbing or other work on sidewalks, streets, alleys, or highways, or public or private property, using asphalt, brick, stone, cement, concrete, wood or any compositions;
- Accepting or offering to accept an order for or contract to excavate earth, rock or other material for foundation or any other purpose or for cutting, trimming or maintaining rights of way;
- Accepting or offering to accept an order or contract to construct any sewer of stone, brick, terra cotta or other material;
- Accepting or offering to accept orders or contracts for doing any work on or in any building or premises involving the erecting, installing, altering, repairing, servicing, or maintaining electric wiring, devices or appliances permanently connected to such wiring, or the erecting, repairing or maintaining of lines for the transmission or distribution of electric light or power; or
- Engaging in the business of plumbing and steam fitting.
The City assessed BPOL taxes at the professional services rate. The Taxpayer, however, contends that it was a contractor rather than a provider of professional services until it hired a licensed engineer in 2011. The Taxpayer seems to believe it should have been classified as a contractor because it received federal Form 1099s from clients for income tax reporting purposes.
For BPOL tax purposes, a taxpayer must perform one or more of the activities listed in Va. Code §§ 58.1-3714 D 1-6 to be classified as a contractor. The mere fact that the Taxpayer received Form 1099s from clients has no bearing on the classification issue. In addition, the fact that a taxpayer has contracts to perform services is not by itself sufficient to classify the taxpayer as a contractor for BPOL tax purposes.
In this case, the Taxpayer provided engineering, project management and other services for construction projects. In one sample contract, the Taxpayer was required to furnish plans, diagrams, designs and system applications and to provide project management services for an electrical utility installation project. Based on this contract, it appears that the Taxpayer did not itself erect, install, alter, repair, service or maintain electric wiring or erect, repair or maintain lines for the transmission or distribution of electric light or power. As such, although the Taxpayer's contract involved electrical systems, it appears that the Taxpayer did not perform any of the activities specifically listed in Va. Code § 58.1-3714 D 5.
Professional Services and Business Services
Although the fact that the Taxpayer offered engineering services suggests that the Taxpayer was providing professional services, the Taxpayer provided other services as well. As such, additional questions have arisen as to the extent the Taxpayer should have been classified as a professional services provider.
There are two separate classifications of services for purposes of the BPOL tax: "financial, real estate and professional services," and "repair, personal, business and other services." Those businesses classified as providers of professional services are specifically enumerated in Title 23 of the Virginia Administrative Code (VAC) 10-500-450. A business may not be classified as professional unless it is offering professional services to the public for compensation. See Title 23 VAC 10-500-470. All other business services not clearly identified as financial, real estate or professional services fall under the classification of "repair, personal, business and other services." See Title 23 VAC 10-500-500.
Engineers are included in the professional services classification under Title 23 VAC 10-500-450. The information provided indicates that the Taxpayer did not employ a licensed engineer until 2011. As such, the Taxpayer should have been classified as a business service provider for tax years prior to 2011, regardless of whether the Taxpayer used the term "engineering" to describe some of its services.
In addition, the mere fact that the Taxpayer employed an engineer is not sufficient by itself to establish a professional services classification for the entire business. This is because the BPOL tax applies to the rendering of professional services for a fee and does not apply to professional classifications, per se. See Title 23 VAC 10-500-440. In addition, certification as a professional by itself is not sufficient to establish liability for local license taxation because many individuals maintain their professional certification even though they are not practicing their profession. As indicated above, the business may not be classified as professional unless it is offering professional services to the public for compensation. See Title 23 VAC 10-500-470.
Based on the information available, it is unclear to what extent the Taxpayer may have provided professional engineering services for compensation beginning in 2011. Even if the Taxpayer began providing such services, other aspects of the Taxpayer's business, such as audits, compliance reviews, and project management suggest that the Taxpayer also continued to provide business services.
Multiple Businesses
Virginia Code § 58.1-3703.1 A 1 provides that a separate license shall be required for each definite place of business and for each business a taxpayer is operating. Local tax officials are responsible for making the determination as to whether a taxpayer is engaged in a single business or in two businesses, each of which could operate independently of the other. In order to make this determination, the local tax official must be provided with documentation demonstrating the substantiality of each business. See 1994 Op. Va. Att'y Gen. 99.
If the Taxpayer were in fact engaged in both professional and business service activities, it would be necessary to determine whether the Taxpayer had multiple businesses. The information provided, however, is not detailed enough for the Department to make this determination. If the Taxpayer's business activities were not separated, but were so integrated as to comprise a single business, then the Taxpayer would properly be taxed at a single rate based on whichever activity constituted the "substantial" activity, and not its ancillary activities. See P.D. 04-114 (9/14/2004).
Definite Place of Business
Virginia Code § 58.1-3700.1 defines a "definite place of business" as an office or a location at which occurs a regular and continuous course of dealing for 30 consecutive days or more.
"Continuous" for purposes of this definition is analyzed in terms of whether the business has established a location for the exercise of the licensable privilege. The time spent actually conducting business at this location is not important so long as the business is availing itself to the public and conducting its activities at that particular location. Regularly conducting business refers to a periodic pattern of instances in which a business is "open for business." A regularly conducted business may operate daily, weekly, monthly or for some other set time period. See P.D. 97-75 (2/18/1997).
Some characteristics that may help determine whether the location is a definite place of business include, but are not limited to, the following onsite activities: (1) a continuous presence; (2) having an office or phone; (3) the reception of mail; (4) having employees; (5) record keeping; (6) and advertising or otherwise holding oneself out as engaging in business at the particular location. See P.D. 97-201 (4/25/1997). Although these activities are indicative of a definite place of business, all facts and circumstances concerning the nature of a taxpayer's operations must be considered.
In this case, the Taxpayer indicates that its office in the City served mostly as a collection point for mail and only administrative tasks were performed there. The Taxpayer does not dispute that the office was a definite place of business. The Taxpayer contends that no gross receipts should have been sitused to the office in the City because the Taxpayer had another definite place of business in the County from which the Taxpayer's business operations were directed and controlled.
The information provided indicates that the Taxpayer leased a residential property in the County from April 2007. The lease agreement, however, pertains only to residential use of the premises and contains no provisions related to business or commercial use. The principal officer states that he and his spouse, the Taxpayer's president, worked daily from this location during this period but apparently still spent most nights at their home in the City.
The principal officer and his spouse purchased the residence in their individual capacities in 2010. At that time, they constructed an addition to the residence that served as new office space and sleeping quarters. Since then, he states that their home in the City has mostly remained vacant and that they have spent approximately five nights per week at the residence in the County, directing and controlling the business from there.
In January 2011, they obtained a zoning variance from the County for certain business activities at the residence, namely accounting, project management, employment documentation, file storage, and other miscellaneous activities including payroll. In 2011, the Taxpayer also began using a post office box in the County as a business address. As evidence, the principal officer presented a letter from February 2011 sent to the Taxpayer at the post office box. He also listed the post office box as the Taxpayer's address on a federal tax document filed in January 2011. Although the Taxpayer used a post office box address and not the address of the County residence, the fact that the post office box was in the same locality as the residence supports the principal officer's assertion that business activities were being conducted at the County residence during this time. In addition, the records of Virginia's State Corporation Commission listed the County residence as the Taxpayer's principal office as of November 2011. The County residence was also listed as the Taxpayer's principal office in an annual corporate report filed with another state in January 2014.
Situs — Gross Receipts
In determining the situs of gross receipts from services, Va. Code §§ 58.1-3703.1 A 3 a 4 and 58.1-3703.1 A 3 b state that the receipts are to be taxed based on (in order): (i) the definite place of business at which the service is performed, or if not performed at any definite place of business, (ii) the definite place of business from which the service is directed or controlled; or as a last resort (iii) when it is impossible or impractical to determine the definite place of business where the service is performed or from where the service is directed or controlled, by payroll apportionment between definite places of business. Virginia Code § 58.1-3703.1 A 3 b also states that gross receipts may not be apportioned to a definite place of business unless some business activities occurred at, or were controlled from, such definite place of business.
The evidence provided is insufficient to show that the residence in the County was a definite place of business prior to 2011. It appears, therefore, that the Taxpayer's office in the City was the Taxpayer's only definite place of business during the 2009 and 2010 tax years.
For the 2011 and 2012 tax years, however, the Taxpayer had a definite place of business in the City and the County. It does not appear, however, that any services were performed at either of these locations. Rather, the Taxpayer states that services were performed at its clients' locations and occasionally at an employee's home. The Taxpayer's gross receipts, therefore, must be divided between the two definite places of business based on where the services were directed and controlled.
During the period at issue, the Taxpayer was a small business, the management of which the principal officer admitted required his time and attention every day. The Taxpayer's principal officer and president each state that they directed and controlled the company operations exclusively from the residence in the County. The information provided, however, indicates that they still resided part-time at their residence in the City during the 2011 and 2012 tax years. The residence in the County was within a reasonable driving distance of the City office where the principal officer and president continued to maintain separate office space. In addition, the principal officer also served the City as an elected official, which required attendance at meetings and functions within City limits. Based on the facts presented, it appears doubtful the services provided by the Taxpayer were directed and controlled exclusively in the County.
Out-of-State Deduction
Under Va. Code § 58.1-3732 B 2 a deduction from gross receipts or gross purchases is permitted for “[a]ny receipts attributable to business conducted in another state or foreign country in which the taxpayer . . . is liable for an income or other tax based upon income." The regulations further explain that the taxpayer must be liable for an income or an income-like tax in the other state and file a return in that state to take advantage of the deduction. See Title 23 VAC 10-500-80 A 2. The Taxpayer has provided no income tax returns in other states or foreign countries for any of the tax years at issue.
Business Tangible Personal Property
The Taxpayer also contests the City's assessment of BTPP tax on a vehicle for the 2013 tax year. Administrative appeals of local business taxes to the Tax Commissioner may be made only after a Taxpayer's appeal has been denied in whole or in part by the local assessing officer. See Va. Code § 58.1-3983.1 D 1. In this case, the Taxpayer's local appeal involved the City's assessment of BPOL taxes for the 2009 through 2012 tax years. The BTPP tax issue, however, involves a different tax type and tax year and was never subject to the local appeals process. Accordingly, the Department lacks the authority to address the BTPP tax assessment.
DETERMINATION
Based on the evidence presented, the Taxpayer was not a contractor for BPOL tax classification purposes. In addition, because the Taxpayer did not employ any licensed professionals until the 2011 tax year, the Taxpayer should have been classified as a business service provider for the 2009 and 2010 tax years. I also do not find sufficient evidence to show that the Taxpayer's residence in the County was a definite place of business prior to the 2011 tax year. Because the Taxpayer's only definite place of business was in the City during the 2009 and 2010 tax years, the Taxpayer's entire gross receipts were property sitused to the City for those years.
For the 2011 and 2012 tax years, however, it is unclear to what extent the Taxpayer provided professional services for compensation because the Taxpayer continued to provide business services. As a result, the Taxpayer may have had multiple businesses for BPOL tax purposes. For those tax years, the Department also finds that both the County residence and the office in the City were definite places of business and the Taxpayer's services were directed and controlled from both localities.
Finally, the Taxpayer was not entitled to a deduction from gross receipts under Va. Code § 58.1-3983.1 D 1 because it did not file any income tax returns in other states or foreign countries for any of the tax years at issue.
Based on this determination, I am remanding this case to the City with the instructions to: (1) issue a refund based on the Taxpayer's classification as a business service provider for the 2009 and 2010 tax years; and (2) review any evidence the Taxpayer can provide concerning the remaining classification and situs issues for the 2011 and 2012 tax years. The Taxpayer must provide the City with documentation in order for the City to determine the extent the Taxpayer provided professional services for compensation beginning in the 2011 tax year, if at all. Provided that the Taxpayer did, in fact, provide both professional and business services, the Taxpayer must also provide the City with documentation demonstrating the substantiality of each business so the City can determine if the Taxpayer was operating multiple businesses.
In addition, for those services not performed at either definite place of business, the Taxpayer's gross receipts for the 2011 and 2012 tax years must be divided between the City office and the County residence, based on where the services were directed and controlled. Documentation, therefore, must be provided to the City to show from which definite place of business these receipts were directed and controlled during the 2011 and 2012 tax years.
All documentation must be submitted within 30 days of the date of this letter unless the City and the Taxpayer agree to another deadline. If the documentation is not received within the time provided, the City's assessment as to the 2011 and 2012 tax years will be considered correct.
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5714394838.M