October 24, 2018
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business, Professional and Occupational License Tax
Dear *****:
This final state determination is issued upon the application for correction filed by you on behalf of your client, ***** (the “Taxpayer”), with the Department of Taxation. You appeal assessments of the Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by the ***** (the “City”) for the 2013 through 2016 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, regulations and public document 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 sold monitored security system services and installed the system components as an authorized provider for a national security monitoring company (“Company A”). When prospective customers were interested in purchasing the monitored security system service, they contacted one of the Taxpayer’s call centers which were not located in Virginia. Installation fees were collected over the phone, and the installations were referred to local offices throughout the United States, one of which was located in the City. Employees working out of the local offices conducted on-site security reviews of the customers’ homes or businesses, recommended additional property or services that customers could purchase and then performed the installations. When the installations were complete, the installers obtained signed contracts from the customers. The contracts contained the terms and conditions on which the customers purchased monitoring services and typically required monthly payments to Company A for a period of three years, subject to automatic renewal. The contracts were collected by a local manager and forwarded to the Taxpayer’s headquarters in ***** (“State A”) for processing and submission to Company A.
The City audited the Taxpayer for the 2013 through 2016 tax years. As a result of the audit, the City concluded the Taxpayer should not have been classified as a contractor and separated the Taxpayer’s gross receipts into three license categories: retail, wholesale and miscellaneous business/professional services. In addition, the City sitused all of the Taxpayer’s gross receipts to the City that were attributable to sales of the contracts received from, and sales of tangible personal property made to, customers whose installations were performed by employees working from the Taxpayer’s office in the City. As a result, assessments were issued.
The Taxpayer appealed to the City, contending that it was correctly classified as a contractor and that the sales of the contracts should be sitused to the Taxpayer’s headquarters in State A, as the definite place of business where the services were performed to prepare the contracts. The City denied the Taxpayer’s appeal and upheld the assessments. The Taxpayer appealed to the Department for relief.
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 Virginia Code § 58.1-3706. These classifications are regulated 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.
Contractors
In this case, the Taxpayer asserts that it should have been classified as a contractor. Virginia Code § 58.1-3714 D 1-6 includes 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.
It appears that the only way the Taxpayer could have been classified as a contractor is if it was “installing, altering, repairing, servicing or maintaining . . . devices or appliances permanently connected to [electric] wiring.” If installation of the device or appliance merely uses existing openings and connections, contractor activities do not occur. See Title 23 VAC 10-500-260. If, however, the installation requires making openings in a wall or running wires or any other work described in Virginia Code § 58.1-3714 D, then the installation work may be contracting. The difficulty involved in making the installation should be considered. Other factors to consider include:
- whether the installation was merely ancillary to the retail sales of a merchant, as opposed to constituting a substantial portion of what was sold in the transaction;
- did the merchant hold himself out as able to perform contractor's activities; and
- did the merchant install his own merchandise only, or did he also install the goods of others.
But ultimately, the question of whether contracting activities took place depends on an analysis of all of the facts and circumstances of the case. See Title 23 VAC 10-500-260.
The Taxpayer challenges the City’s change of classification from contractor to business service provider, retailer and wholesaler. The Taxpayer’s appeal, however, does not provide facts and arguments in support of why the contractor license should be reinstated pursuant to the statutory and regulatory standards.
Repair, Personal, Business and Other Services
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 VAC 10-500-450. All other 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.
The Taxpayer’s unique business model presents challenges in attempting to classify the Taxpayer for BPOL purposes. After a careful review of all of the information provided, it appears that the Taxpayer was fundamentally a seller of monitored security services on behalf of Company A. The basic products that were installed were provided at little to no cost to the customer and the installation fee was nominal when compared to the entire revenue derived from the customer over the term of the contract. The Taxpayer received a fee from Company A for every monitoring contract that Company A accepted plus a percentage of the monthly monitoring fees paid to Company A. It appears to the Department, therefore, that the Taxpayer was essentially being paid a sales commission for each security monitoring service customer it found and serviced on Company A’s behalf. Performing the one-time installations was ancillary to the sale of the ongoing service, which, based on the basic terms of the contracts, provided revenue streams for both the Taxpayer and Company A for at least three years.
The Taxpayer’s appeal asserts that the “services” it performed were the drafting of the contracts, the use of intellectual property, customer acquisition costs, advertising, mailing expenses, and credit checks. Thus, the Taxpayer seems to suggest its primary business activity was the sale of contracts to Company A. The argument that the Taxpayer’s services involved sales of the contract is not consistent with the argument that the Taxpayer was a contractor. Contracting requires the performance of specific activities as set forth above, none of which include the sale of contracts, an intangible asset. Regardless, the sale of such contracts was merely how the Taxpayer monetized the actual services it performed on Company A’s behalf, selling monitored security services that would ultimately be performed by Company A. Thus, the Taxpayer was Company A’s dealer of such services. It was not a dealer of contracts.
Multiple Businesses
Virginia Code § 58.1-3703.1 A 1 provides that a separate license will 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.
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 Public Document (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.
It is unclear why the City divided the Taxpayer’s gross receipts into three separate classifications. It is not sufficient that the Taxpayer merely had gross receipts attributable to different business activities for there to have been separately licensable business activities. Localities must analyze what the Taxpayer’s primary business was and whether different business activities were ancillary to the Taxpayer’s primary business. A separately stated sale of tangible personal property sometimes occurred in connection with the sale of the monitoring services. These sales were in addition to the basic system installations and sometimes resulted in increased monthly monitoring fees. It does not appear that such sales truly existed independently from the Taxpayer’s primary business, the sale of monthly monitoring services.
Situs
In determining the situs of gross receipts, Virginia Code §§ 58.1-3703.1 A 3 a 4 and 58.1-3703.1 A 3 b state that receipts from services 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. With one exception not relevant to this determination, the situsing rules for a contractor are the same as a service provider. See Virginia Code § 58.1-3703.1 A 3 a 1.
The Taxpayer contends that its gross receipts were attributable to the sale of service contracts to Company A and that its “services” were performed at its State A office, namely contract drafting, use of intellectual property, customer acquisition costs, advertising, mailing expenses and credit checks. As stated above, the Taxpayer was in the business of selling a monitored security service, not contracts. Therefore, the proper question in determining the situs of the Taxpayer’s gross receipts is where was the proper situs of the sale of the monitored security service, not where was the proper situs of the sale of the contract.
When the Taxpayer’s business is considered as a whole, it seems unreasonable to situs the Taxpayer’s gross receipts to either its call centers or headquarters. The local offices received the referrals from the call centers, and it is from these offices that employees were responsible for reviewing the premises where the installations would occur and attempting further to sell products and services customized to the customers’ needs. It was also from the local offices that the employees provided the equipment and performed all of the ancillary installations and necessary follow-up. In addition, the local employees received the signed contracts back from the customers, thus completing the sale of the monitoring services. As such, in the Department’s opinion, it is more reasonable to conclude based on the unique facts of this case that the sales of the monitoring services, which include the ancillary functions of providing the necessary equipment, installation and follow-up, were directed and controlled from the local offices.
DETERMINATION
The Taxpayer sold monitored security services on behalf of Company A. Such an activity should have been classified as a business service. Because activities such as equipment sales and installation were ancillary to such services, all of the gross receipts at issue are subject to the business service classification.
Although the Taxpayer’s call centers fielded the initial sales calls, under the unique facts of this case, the Department concludes that the service of selling security monitoring services on behalf of Company A was functionally directed and controlled from the Taxpayer’s local offices. Therefore, it was proper to situs any gross receipts to the City that were attributable to the sale of contracts to Company A that were entered into with customers serviced out of the City office.
Therefore, the City is instructed to classify the Taxpayer’s gross receipts in accordance with this determination, and issue an additional assessment or refund as appropriate.
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/1506.M