September 25, 2024
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business, Professional and Occupational License Tax
Dear *****:
This final state determination is issued upon the administrative appeal filed on behalf of ***** (Business A), and ***** (Business B), (collectively, the “Taxpayers”), with the Department of Taxation. You appeal assessments of the Business, Professional, and Occupational License (BPOL) tax issued to the Taxpayers by ***** (the “City”) for the 2021 through 2023 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 and regulations cited are available online at law.lis.virginia.gov.
FACTS
The Taxpayers were separate legal entities with their principal offices in the City. Business A, organized in January 2021, provided third-party administration for qualified retirement plans. Business B, organized in January 2022, was a public accounting firm that provided tax and bookkeeping services. The Taxpayers were owned by the same individual that owned ***** (Business C), a registered investment advisor that operated in the City prior to the formation of the Taxpayers.
The Taxpayers consulted with representatives from the City regarding their business license obligations and were advised that they qualified for a special licensing provision for new businesses by which they would only be charged a $50 license fee for each of the businesses’ first two years and otherwise be exempt from the BPOL tax for those years. Based on this information, the Taxpayers filed business license applications with the City as new businesses for each of their first two tax years.
Under review, the City determined that the Taxpayers did not qualify for the BPOL tax relief for new businesses and issued assessments. The Taxpayers appealed to the City. In its final determination, the City concluded that the Taxpayers were not qualified because they were affiliated with Business C, an existing business, and conducted similar activities as Business C. As a result, the assessments were upheld. The Taxpayers appealed to the Department, contending that they were qualified businesses because they performed activities unrelated to the business of Business C.
ANALYSIS
Virginia Code § 58.1-3703 authorizes localities to enact an ordinance levying a local license tax or a fee, or both, for issuing a license. This tax or fee is imposed on businesses and professionals for the privilege of doing business in a locality.
Virginia Code § 58.1-3703 D provides that localities may establish incentive programs for qualifying businesses. A qualifying business is defined as “a business that locates for the first time in the locality . . . . A business shall not be deemed to locate in such locality for the first time based on merger, acquisition, similar business combination, name change, or a change in business form.” [Emphasis added.]
The City has adopted an incentive program that provides for a $50 license fee for the first two years in which a qualifying business locates within the City. Otherwise, the business is exempt from BPOL tax for those years. See Chapter 18, Article I, § 18-3(e)(4) of the Code of Ordinances, City of Chesapeake, Virginia (the “City of Chesapeake Code”). City of Chesapeake Code § 18-2 defines a change in business form for purposes of a qualified business to mean a change in the organization of an existing business, including:
[A] new business entity that meets the definition of “affiliated group,” . . . and such business conducts activities that are similar to one or more of the affiliated businesses. However, a new business entity that meets the definition of “affiliated group” but undertakes a business that conducts substantially different business activities shall not be treated as a change in business form.
Businesses A, B, and C were members of an affiliated group because they were each owned by the same individual. The determination as to Business A’s and Business B’s statuses as qualifying businesses thus turns on whether they conducted similar or substantially different business activities from other members of the affiliated group. In its final determination, the City held that they provided similar services, namely financial services, and thus were not qualified businesses for purposes of the BPOL tax relief for new businesses. On the other hand, the Taxpayers believe that they each provided substantially different services from each other and from those provided by Business C.
The terms “similar” and “substantially different” are not defined for purposes of determining whether a business is a qualifying business. The Department believes it is appropriate, therefore, to consult other provisions of the BPOL statutory framework which address the classification of businesses.
The BPOL 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 a consideration of all the facts and circumstances. There are two separate classifications of services: “financial, real estate, and professional services,” and “repair, personal, business and other services.” All 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 10-500-480.
Virginia Code § 58.1-3700.1 defines “financial services” as “the buying, selling, handling, managing, investing, and providing of advice regarding money, credit, securities, or other investments.” Business C is a financial services business because it bought and sold stocks on a commission basis and was regulated by the Securities and Exchange Commission.
Business B, on the other hand, was a public accounting firm. Certified public accountants are expressly included in the definition of “professional services” in Virginia Code § 58.1-3700.1.
Third-party plan administrators, such as Business A, are not included in either list. Business A provided a broad range of services, including plan design and document preparation and daily and annual administration services. Importantly, Business A did not provide any investment advice or accounting services. Absent any evidence to the contrary, Business A would be classified as a provider of “repair, personal, business and other services.”
DETERMINATION
For the reasons discussed above, each of the Taxpayers and Business C would be classified as different types of service providers under the BPOL statutes and regulations. This fact is strong evidence that they were providing substantially different services. Accordingly, in the Department’s opinion, the Taxpayers were qualifying businesses for purposes of the City’s BPOL tax relief for new businesses.
Taxpayers and localities should be aware that in making this determination, the Department is not using BPOL tax classifications to create a “bright-line” test to determine whether or not a business is similar or substantially different for purposes of determining if it was a qualified business. A law firm and a physician’s office, for example, both provide professional services, but they clearly provide substantially different services. Ultimately, all relevant facts and circumstances must be considered in any given case in order to make such determination.
We are remanding the case back to the City to abate the BPOL tax assessments issued to Business A for the 2021 and 2022 tax years and Business B for the 2022 and 2023 tax years, consistent with their status as new businesses under City of Chesapeake Code § 18-3(e)(1).
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at (804) *****.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/4807.X