February 24, 2017
Re: Appeal of Final Determination
Locality: *****
Taxpayer: *****
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 “Taxpayer”) with the Department of Taxation. You appeal an assessment of Business, Professional and Occupational License (BPOL) taxes issued to the Taxpayer by ***** (the “County”).
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. 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 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 purchases real estate for the purpose of rehabilitation and resale for profit. All repairs and maintenance are performed by a general contractor who has no business interest with the Taxpayer. The realty is listed with a realtor for sale. If the Taxpayer is unable to sell the property immediately, the Taxpayer may rent the property for a period of time. The County classified the Taxpayer as a contractor for BPOL purposes. The Taxpayer appealed to the County, which upheld its ruling in its final
determination. The Taxpayer appeals to the Tax Commissioner, contending it should be classified as a real estate investment company.
ANALYSIS
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. The classifications are explained under Title 23 of the Virginia Administrative Code (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 the enterprise generates gross receipts.
- Where the enterprise conducts its business.
- Who are the enterprise's customers?
- How the enterprise holds itself out to the public.
- The enterprise's NAICS code.
The Taxpayer contends that its primary business is the purchase, repair and resale of real estate. The Taxpayer contends that it is not a contractor because it does not fit the definition prescribed in Virginia statutes. The Taxpayer believes it should be classified as a real estate investment company for BPOL tax purposes.
Real Estate Services
Under Title 23 VAC 10-500-420, real estate services are defined as the rendering of services for compensation as a lessor, a buyer, seller, agent or broker, unless the service is specifically provided for under another section of the BPOL Regulations (Title 23 VAC 10-500). Title 23 VAC 10-500-430 specifies real estate services occupations to include: appraiser, escrow agents and fiduciaries of real estate; lessors of real property, real estate agents, brokers, and managers, selling agents and rental managers. Title 23 VAC 10-500-370 prescribes the maximum rate for local license tax imposed on a person engaged in financial real estate or professional services is .58 cents per $100 of gross receipts.
Based on the activity description provided on the original business application, the County originally classified the Taxpayer as a real estate agent. Real estate services typically include professions or occupations that serve those that own real estate. As such, real estate service businesses do not generally own the property for which they are providing services. The Taxpayer
owns the real property for which the services are performed. Further, it used licensed contractors to make repairs and perform maintenance on properties purchased for the purpose of resale. Thus, the Taxpayer is correct in arguing it was not a real estate agent.
Contractors
The Taxpayer asserts that it does not meet the definition of a contractor because it does not perform any of the repairs, remodeling or improvements itself. Instead, it hires licensed contractors to perform the construction activities. A taxpayer's classification for BPOL purposes, however, is based on a totality of the facts and circumstances, not merely on a taxpayer's affirmations or assertions.
Under Va. Code § 58.1-3706, the same rate for the BPOL tax has been set for contractors and businesses “constructing for their own account for sale.” Under Title 23 VAC 10-500-240 A, a-contractor is a person who accepts contracts to perform, or regularly performs, or engages others to perform any of the work listed in Va. Code § 58.1-3714. Under Va. Code § 58.1-3714 D, activities of contractors include offering contracts for building or repair activities associated with real estate. Thus, Title 23 VAC 10-500-240 B provides that contractors include “persons who subdivide and improve real estate, and speculative builders who build houses or other buildings with the intention to offer the subdivided lots or completed buildings for sale.” Accordingly, a business does not have to actually perform the construction or rehabilitation work itself in order to be subject to the contractor tax rate under Va. Code § 58.1-3706. See Public Document (P.D.) 97-423 (10/17/1997), P.D. 04-83 (8/25/2004), P.D. 13-76 (5/23/2013) and P.D. 13-221 (12/13/2013).
Multiple Businesses
The Taxpayer also indicates that when a property is ready for sale but not sold within a reasonable time, it may be rented until sold. 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. The gross receipts generated under each license are subject to tax in accordance to the rates provided for each business classification. See Va. Code § 58.1-3706 A.
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.
In order to obtain multiple licenses, a business must be engaged in clearly identifiable separate business activities and not merely activities ancillary to the primary business. In P.D. 97-257 (6/11/1997), the Department concluded that the term “ancillary” refers to business activities that are subordinate, subservient, auxiliary, or in aid of the business' principal business activity. Distinguishing between an ancillary activity and an activity that rises to the level of a separate business can often be accomplished by determining if the activity under scrutiny exists independently of the principal business. In general, an activity for which no separate charge is made will be presumed to be ancillary to the activity for which a charge is made, but separately stating charges for different activities will not create a presumption that each such activity is a separate business. See Title 23 VAC 10-500-110 B.
The facts suggest the Taxpayer may have been operating multiple businesses. The Taxpayer may be engaged in both the sale and rental of rehabilitated real estate.
Real Estate Rental
In general, businesses that rent or manage real estate are considered to be providing real estate services. However, Va. Code § 58.1-3703 C 7 provides an exemption to a real property owner engaging in the renting certain real property. Hotels, motels, motor lodges, auto courts, tourist courts, travel trailer parks, lodging houses, rooming houses and boardinghouses are specifically excluded from the exemption. Further, localities that impose a license tax on January 1, 1974 are grandfathered out of the provisions of this exemption.
According to the Taxpayer, it will rent property that is not sold after being rehabilitated. It is not clear if the Taxpayer only rents property if it is not been able to sell it within a reasonable amount of time or until a suitable buyer is found, or if it specifically rehabilitates real estate for rental. If the Taxpayer is only temporarily renting the property until a sale can be consummated or renting with the sale option, the receipts are likely ancillary to the main business of rehabilitating real estate for sale. Further, the information does not indicate what type of properties the Taxpayer is rehabilitating. If it is converting houses into boardinghouses, it may be engaged in a taxable business of renting real property.
DETERMINATION
While the Taxpayer contends that it should not be classified as a contractor, it offers no alternative as to how its business activities would be classified. It claims it was formed for the purpose of investing in real estate for which it admits it is in the business of rehabilitating and selling real property. Based on the Taxpayer's statements and the facts presented, the Department concludes the Taxpayer was engaged in the activity of purchasing and
rehabilitating real property and was subject to tax at the same rate as a contractor. Therefore, the County's classification of the Taxpayer as a contractor is upheld.
The Taxpayer has, however, given some indication that it may be engaged in multiple businesses. Therefore, I am remanding this case to the County with the instruction to consider whether the Taxpayer may be engaged in the business of renting real property in addition to its licensable activity as a contractor. If the Taxpayer can provide sufficient evidence to the County that in also engages in the rental of its own real property, the County must adjust its classification and assessments accordingly.
If you have any questions regarding this determination, you may call ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/841.D