June 9, 2017
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Business, Professional and Occupational License (BPOL) 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) tax issued to the Taxpayer by the ***** (the “County”) for the 2015 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 Laws, Rules and Decisions section of the Department's web site.
FACTS
The Taxpayer began doing business in the County in 2014 and ceased doing business there in 2016. Pursuant to local ordinance, the Taxpayer was required to estimate its gross receipts for the 2015 tax year when it filed its 2015 BPOL tax return because it had not yet completed a full tax year. The Taxpayer's actual gross receipts for the 2015 tax year, however, were greater than the estimate. As a result, the County issued an assessment for additional BPOL tax due for the 2015 tax year. At the same time, the County also assessed the Taxpayer for BPOL tax for the 2016 tax year based on its 2015 gross receipts.
The Taxpayer appealed the assessment to the County. In its final determination, the County concluded that its assessment of BPOL tax for the 2015 tax year using the Taxpayer's actual gross receipts was correct. The Taxpayer appealed to the Department. The Taxpayer contends that use of the same gross receipts tax base for both the 2015 and 2016 tax years constitutes double taxation.
ANALYSIS
Beginning Business
A business that is subject to license taxation on its gross receipts calculates its tax liability for the license year using its base year gross receipts. Virginia Code § 58.13700.1 defines “license year” as the calendar year for which a license is issued for the privilege of engaging in business.
The calculation for the license tax is based upon the “base year,” which is the “calendar year preceding the license year . . . unless the local ordinance provides for a different period for measuring the gross receipts of a business, such as for beginning businesses.” See Va. Code § 58.1-3700.1.
Under the County's ordinance, in its first year, a business pays BPOL tax based on an estimate of its gross receipts for that year. If the first year was a partial year, the business also pays BPOL tax for its second year based on an estimate as well. In either case, if the business underestimates its gross receipts, the County adjusts the BPOL tax liability to reflect actual gross receipts. See Public Document (P.D.) 99-210 (7/28/1999), P.D. 99-229 (8/10/1999), P.D. 07-209 (12/5/2007) and P.D. 10-36 (4/8/2010) for a further discussion of this issue.
This method of determining the basis of license taxes is supported by Virginia case law. In Cliff Weil, Incorporated v City of Richmond, 211 Va. 575, 179 S.E.2d 515 (1971), the Virginia Supreme Court specifically upheld a locality's method of imposing BPOL tax on beginning businesses in a manner similar to that at issue in the Taxpayer's case.
The following examples illustrate the method used by the County. The dates and figures are used for illustration only. A taxpayer should consult its local jurisdiction regarding details such as filing thresholds and due dates, which may vary depending on the jurisdiction.
Example 1: A taxpayer begins business in City A in August 2016. When it obtains its business license for the partial 2016 tax year, it estimates its gross receipts and pays any BPOL tax due. Upon the completion of the 2016 tax year, the gross receipts are subject to adjustment based on actual 2016 gross receipts, and City A assesses the taxpayer for additional BPOL tax due or issues a refund, as appropriate.
Example 2: Assume the same facts as example 1, except the Taxpayer remains in business in the 2017 tax year. Because 2016 was not a complete tax year, the taxpayer estimates its 2017 gross receipts when it renews its license for the 2017 tax year. At the end of that year, City A will issue an assessment or refund as warranted based on actual receipts for 2017.
Example 3: Assume the taxpayer in these examples remains in business indefinitely. In that case, its BPOL tax liability for 2016 and 2017 would have originally been based on estimates and adjusted to match actual gross receipts. Its liability for 2018 would have been based on 2017 actual gross receipts, and its liability for 2019 would have been based on 2018 actual gross receipts. This pattern would continue indefinitely as long as the taxpayer remains in business.
Double Taxation
The Taxpayer argues using gross receipts in the manner described above means gross receipts for the first full year a business is in operation are subject to double taxation. It is true that once a taxpayer has operated for a full tax year, the above method will result in that tax year's gross receipts being used twice to compute the taxpayer's BPOL tax liability. The liability for the first full tax year would be based on actual receipts for that year, as a correction of whatever estimated gross receipts the taxpayer initially provided. Then, its liability for the following year would also be based on the first full tax year's gross receipts. At that point, the first full base year would be established and the liability for each succeeding tax year would be based on the prior year's gross receipts.
“Double taxation” is generally defined as “the imposition of two taxes on the same property during the same period and for the same taxing purposes.” See Black's Law Dictionary 1500 (Eighth Edition 2004). Because the use of the same gross receipts tax base occurs over different tax periods, true double taxation does not occur under the BPOL tax regime.
The Taxpayer argues, however, that the method can lead to distortions in a taxpayer's BPOL tax liability because of this “lagging” effect in how the tax is computed. For example, in the year when a business ceases operations, it would pay BPOL tax based on its prior year's gross receipts, which may have been greater than the actual gross receipts of its final year. Under this regime, unless the business is permitted to adjust the final year's gross receipts in a manner similar to the beginning years, the lagging effect may result in a BPOL tax liability that is not perfectly aligned with the business's actual gross receipts.
The Code of Virginia has certain provisions regarding the end of a taxpayer's business operations that are designed to lessen the impact of the lagging effect. For example, Va. Code § 58.1-3710 A requires a locality to issue a prorated refund of BPOL tax paid for a business's final year, based on the proportion of time the taxpayer actually remained in business that year. In addition, the General Assembly amended Va. Code § 58.1-3710 in 2015 to enable taxpayers to elect to estimate their final year's gross receipts, subject to adjustment when its business accounts are settled. See Chapter 250, Acts of Assembly (2015). Virginia Code § 58.1-3710 B permits a taxpayer to inform a locality that it intends to cease business that tax year and it may pay BPOL tax for that year using an estimate of gross receipts. When it settles its business accounts in the following year, the estimate is subject to adjustment based on the final year's actual gross receipts. The following example illustrates the effect of these statutory provisions:
Example 4: Assume the same facts as examples 1 and 2 above, except the Taxpayer remains in business in the 2018 tax year. Because 2017 is the taxpayer's first full completed tax year, that becomes the taxpayer's first base year. Thus, the taxpayer's liability for BPOL tax for the 2018 tax year would be based on 2017's actual gross receipts. Should the taxpayer cease business in 2018, City A would subsequently refund a portion of the BPOL tax paid based on the proportion of time the taxpayer actually remained in business in 2018, unless City A had been notified under Va. Code § 58.1-3710 B that the taxpayer anticipated ceasing business and wished to pay BPOL tax based on a gross receipts estimate. Such estimate would be subject to adjustment based on the taxpayer's actual gross receipts once its business accounts were settled. Should the taxpayer in this example choose to estimate its final year gross receipts using the Va. Code § 58.1-3710 B method, its BPOL tax liability for all three years would be based on actual gross receipts.
According to the facts provided, the Taxpayer did not inform the County of its intention to cease business in 2016 and settle existing business accounts the following year. Therefore, the County properly assessed BPOL tax for the 2016 taxable year using the Taxpayer's 2015 gross receipts as the tax base. When the County learned that the Taxpayer had ceased operations in the County in July 2016, it refunded the prorated portion of BPOL tax the Taxpayer had paid, pursuant to Va. Code § 58.1-3710 A.
DETERMINATION
In accordance with the analysis above, the Department finds that the County properly assessed BPOL tax for the 2015 and 2016 tax years based on the Taxpayer's actual 2015 gross receipts. The information provided indicates the assessment has been paid, so no further action is required.
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/1057.M