May 4, 2021
Re: Request for Advisory Opinion
Business, Professional & Occupational License (BPOL) Tax
Business Tangible Personal Property (BTPP) Tax
Local Real Property Tax
Dear *****:
This will reply to your letter in which the city of ***** (the “City”) requests an advisory opinion regarding whether certain not for profit medical service business are exempt from the Business, Professional & Occupational License (BPOL) Tax, Business Tangible Personal Property (BTPP) Tax and the local real property tax.
The local license fee and tax are imposed and administered by local officials. Virginia Code § 58.1-3701 authorizes the Department to issue advisory opinions on local license tax issues. The BTPP tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue advisory opinions on local business tax matters. The following opinion has been made subject to the facts presented to the Department summarized below. Any change in these facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections, regulations and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.
FACTS
A local taxing official has requested an advisory opinion as to whether the exemption from BPOL tax for nonprofit organizations is applicable to facilities and entities providing health care related services and whether such facilities would also be exempt from taxes on BPOL and real property.
OPINION
1) Are non-hospital medical and healthcare services provided by IRC § 501(c)(3) organizations exempt from the local business tax under Virginia Code § 58.1-3703 C 18 a?
The BPOL tax is based on a taxpayer’s gross receipts, which are defined in Virginia Code § 58.1-3700.1 as “the whole entire total receipts, without deduction.” Virginia Code § 58.1-3703 C 18 a, however, prohibits localities from imposing a BPOL tax on a nonprofit organization unless the organization has receipts from an unrelated trade or business. Under the statute, a “nonprofit organization” is:
an organization which is described in Internal Revenue Code § 501(c)(3) and to which contributions are deductible by the contributor under Internal Revenue Code § 170, except that educational institutions shall be limited to schools, colleges and other similar institutions of learning.
IRC § 501(c)(3) defines nonprofit organization as:
Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual . . .
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. City of Richmond, 249 Va. 401, 407, 457 S.E.2d 76, 80 (1995). Under Title 23 of the Virginia Administrative Code (VAC) 10-500-10 and 10-500-¬40 A 11, the determination as to whether or not an organization is eligible for this exemption for BPOL taxation purposes is based solely by reference to the relevant provisions of the IRC. See also Public Document (P.D.) 01-104 (8/15/2001) and P.D. 08-12 (1/11/2008).
If an organization meets these requirements, it is exempt from the imposition of a license fee or gross receipts tax unless it has unrelated business taxable income (UBTI). The exemption, however, does not apply to a for-profit entity that is wholly owned by a nonprofit organization. See Attorney General Opinion 09-43 (2009). Further, an otherwise exempt nonprofit organization may be subject to BPOL tax on receipts resulting from UBTI as determined under IRC § 511, et seq.
Pursuant to IRC § 513, UBTI is gross income derived from any unrelated trade or business. Unrelated trade or business means any trade or business the conduct of which is not substantially related to the exercise or performance by such organization of its charitable, educational or other purpose or function constituting the basis for its exemption under IRC § 501. Unrelated trade or business income does not include any trade or business: i) in which substantially all of the work in conducting such trade or business is carried on for the organization by another person or organization without compensation, ii) where the activity is carried on for the organization's members, or iii) where the activity is the selling of merchandise received by the organization as gifts.
Accordingly, non-hospital medical and healthcare services provided by IRC § 501(c)(3) organizations are exempt from the BPOL tax unless it has UBTI. An otherwise exempt medical and healthcare services provider may be subject to the BPOL tax on receipts resulting from UBTI. See P.D. 97-192 (4/21/1997), P.D. 08-12 and P.D. 13-218 (12/12/2013).
2) Are other facilities operated by a nonprofit hospital’s parent corporation, such as a convalescent or retirement center, exempt under Virginia Code § 58.1-3703 C 18 a?
Virginia Code § 58.1-3703 C 18 a permits an exemption from BPOL taxation for the receipts of a “nonprofit organization” described in IRC § 501(c)(3) or § 501(c)(19). The exemption does not apply to receipts from UBTI. In addition, the exemption would not carryover to the receipts of related entities, whether or not such entities are conducted for profit or not. See P.D. 13-176 (10/3/2013).
Generally, each separate entity must be designated as an exempt entity under in IRC § 501(c)(3) or § 501(c)(19). In this situation, if a convalescent or retirement center is a separate legal entity and can establish that it is an organization described by IRC § 501(c)(3), it will be exempt from the BPOL.
3) With regard to the exemptions from BPOL, can a distinction be made as to whether the facilities are located on-site or off-site of a parent hospital or medical center campus?
If the entities at issue have the IRC § 501(c)(3) status, then the location of their facilities does not matter for purposes of the exemption allowed by Virginia Code § 58.1-3703 C 18 a.
4) Is the determination of whether a nonprofit organization has UBTI made by the local taxation official?
Pursuant to Title 23 VAC 10-500-10, local officials may only determine whether a nonprofit organization has UBTI pursuant to § 511 et seq. of the IRC.
5) Is it reasonable to conclude that activities conducted by IRC § 501(c)(3) entities for consideration, which are similar to activities conducted for consideration by for-profit businesses are not related to the basis for their exemption under IRC § 501(c)(3)? To what extent can a local tax official look behind the IRC § 501(c)(3) status?
In Shelor Motor Co. v. Miller, 261 Va. 473, 479, 544 S.E.2d 345, 348 (2001), the Court stated, “It is well settled that when the language of a statute is plain and unambiguous, we are bound by the plain meaning of that language.” The plain language of Virginia Code § 58.1-3703 C 18 a clearly prohibits localities from imposing a BPOL tax on a nonprofit organization unless the organization has receipts from an unrelated trade or business. The fact that it receives receipts from performing the same activities as for-profit entities does not allow a local tax official to circumvent the statute. As such, a local tax official cannot “look behind” an entity’s IRC § 501(c)(3) status.
6) How are the BPOL, real, and personal property tax applied to the following nonprofit businesses that conduct activities for consideration similar to activities conducted for consideration by for-profit businesses and compete for the same customers?
- Wellness centers and fitness gyms, affiliated with a nonprofit hospital or medical center, offering memberships and classes to the general public;
- Outpatient physical therapy centers, to which patients are usually but not always referred by a physician;
- Home health agencies, offering products for sale and certain in-home services;
- Outpatient laboratories which collect samples, which then may be sent to another facility for testing. The results are sent to the patients physician for diagnosis;
- Outpatient diagnostic centers which may conduct a variety of tests, the results of which are usually sent to the patient’s physician for diagnosis. Some diagnostic centers may also provide treatments or procedures.
BPOL Tax
Virginia Code § 58.1-3703 C 18 a, prohibits localities from imposing a BPOL tax on a nonprofit organization unless the organization has receipts that are UBTI. If the nonprofits listed above meet the definition of a nonprofit organization, then their receipts are exempt from the BPOL tax with the exception of those receipts that are UBTI regardless as to whether their activities are the same as for-profit businesses.
BTPP and Real Property Taxes
Article X, § 4 of the Constitution of Virginia provides that all real and tangible personal property shall be segregated for local taxation in such a manner as the General Assembly provides by law. Article X, § 6 of the Constitution of Virginia exempts certain types of property from state and local taxation. Such exemptions must be provided for by classification or designation and subject to such restrictions and conditions as provided by general 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).
As authorized by the Constitution of Virginia, the General Assembly established a number of exemptions by classification and designation from real and personal property taxes. Although the Department does not have authority to issue opinions on local real property tax matters, it appears that the exemption statutes would apply to both the real and tangible personal property of the entities at issue. See P.D. 15-17 (2/4/2015).
Prior to January 1, 2003, the Constitution authorized the General Assembly to exempt from local taxation real and personal property owned by certain nonprofit organizations and used for religious, charitable, patriotic, benevolent, cultural or public park or playground purposes by classification or by designation by a three-fourths vote in each house. Virginia Code §§ 58.1-3600 through 3650.1 list the organizations that may claim an exemption from real and personal property tax by either classification or designation, prior to January 1, 2003.
The constitutional amendment that took effect on January 1, 2003 allows local governing bodies to grant by ordinance exemptions from local property taxation, subject to restrictions and conditions provided by general law enacted by the General Assembly. Although the constitutional amendment eliminated the General Assembly’s authority to exempt such property, it allows the General Assembly to impose by general law restrictions and conditions on the localities’ authority to exempt such property.
As such, Virginia Code § 58.1-3651 was passed during the 2003 session of the General Assembly. Virginia Code § 58.1-3651 A provides that:
Pursuant to subsection 6 (a)(6) of Article X of the Constitution of Virginia, on and after January 1, 2003, any county, city, or town may by designation or classification exempt from real or personal property taxes, or both, by ordinance adopted by the local governing body, the real or personal property, or both, owned by a nonprofit organization that uses such property for religious, charitable, patriotic, historical, benevolent, cultural, or public park and playground purposes.
Accordingly, if any of the health care entities listed by the City fall within the classification as exempt or designated as exempt from the local and real property taxes, prior to January 1, 2003, then their personal and real property is exempt from the BTPP and real property taxes provided any other statutory requirements are met. In addition, if the City has exempted the property of any of the listed health care organizations from local and real property taxation by ordinance on or after January 1, 2003, then such personal property is exempt from the BTPP and real taxation. See P.D. 18-138 (7/12/2018).
If you have any questions regarding this opinion, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3580.B