Tax Type
BPOL Tax
Local Taxes
Description
Base year; License year
Topic
Local Power to Tax
Date Issued
08-12-1999
August 12, 1999
Re: Locality Assessing Tax: Final State Determination
Appeal of Business, Professional and Occupational License (BPOL) Tax
Dear *****
This is in response to your appeal of a BPOL assessment issued to ***** ***** (the "Business') by the ***** (the "City'). This appeal was filed with the Department of Taxation pursuant to Code of Virginia §58.1-3703.1 (A)(5)(c). You appeal the City's final local determination upholding its assessment of BPOL tax. I apologize for the delay in responding to your application for correction.
The local license fee and tax are imposed and administered by local officials. §58.1-3701 of the Code of Virginia authorizes the department to promulgate guidelines and issue advisory opinions on local license tax issues. Additionally, §58.13703.1(A)(5) authorizes the department to receive taxpayer appeals of certain local license tax assessments and to issue determinations on such appeals. However, in no case is the department required to interpret any local ordinance with the exception of those appeals in which a local ordinance is relevant to the appeal of an assessment. Code of Virginia §58.1-3701. The following determination is based on the facts presented to the department by the Business and the City as summarized below.
Code of Virginia §58.1-3703.1(A)(5)(a) provides that, on appeal, a BPOL tax assessment is deemed prima facie correct. In other words, the local assessment will stand unless the taxpayer proves that it is incorrect.
FACTS
You state that the Business located in the City has suffered inequitable treatment in its BPOL assessment. You contend that because the Code of Virginia provides for localities to assess a yearly license tax measured by the prior year's actual gross receipts or revenues (instead of year-end revenues), this results in a financial disadvantage to those businesses which realize less revenue or suffer a loss in their later years of operations when compared to the beginning years of the business.
This is because such businesses will pay tax on a higher base (the prior year's gross receipts) even though they may earn less revenue or suffer a loss in the year for which the license is issued.
The City has practiced the following procedure for those businesses who report a partial year income for the first year in which the business is engaged in activity. The business is required to report an estimated income for the first year. Additionally, the business is also required to report estimated income for the second year, or first full year in which the business is engaged in a licensable activity. These estimates are reconciled to actual year-end gross receipts, and businesses are either assessed additional tax or issued a refund for the difference between estimates made at the beginning of a year and actual year-end receipts.
The Business was incorporated December 13, 1995 and reported gross receipts of ***** on its 1996 federal corporate income tax return. The owner of the Business states that it actually began operation, or "opened its doors for business,' on January 1, 1996. The Business has provided the department with a bank reconciliation statement which reflects deposits and payments made by the Business in January of 1996.
The City audited the Business in 1999 and calculated 1996 actual year-end gross receipts at ***** and used this amount as the final basis for assessing the 1996 license tax. The City calculated 1997 actual year-end gross receipts at and used this amount as the final basis for assessing the 1997 license tax. This same amount was also used to calculate the 1998 license tax, i.e., the Business paid its 1998 license tax based upon its 1997 calendar year gross receipts, and not actual 1998 gross receipts as was the case in 1997 and 1996.
OPINION
Applicable Law
The City's local tax ordinances follow the Code of Virginia in that they generally measure or calculate the annual license tax by using the gross receipts or gross revenues of the prior calendar year. The City's ordinances, like the Code of Virginia, allow for an exception to this general measure of license tax liability for beginning businesses.
The Assessment for License Year 1998
The 1998 assessment was made using the Business' 1997 calendar year gross receipts as a base. This action was in accord with the Code of Virginia which implicitly directs localities to use, in general, the prior year's gross receipts in calculating license taxes (see the definition of the term "base year' above). This action was also in accord with the City's local tax ordinances. There is no question that the Business was engaged in business for the full twelve months of 1997. As a result, it is my determination that the City's assessment for license year 1998 is correct. I must emphasize that the Business' loss or decline in revenues realized in calendar year 1998 should have been used as the measure for the Business' 1999 license tax.
The Assessment for License Year 1997
In its audit for license year 1997, the City found that the Business owed an additional ***** in tax. The City made this assessment using 1997 actual year-end gross receipts, as opposed to 1996 gross receipts. The City's rationale was that the Business was not engaged in Business for the full twelve months of 1996, and under its local license ordinances, this permitted the City to measure the 1997 license tax using calendar year 1997 gross receipts.
However, the evidence indicates that the Business may have begun operations in December 1995, but no later than January 1996. The Business was incorporated December 13, 1995. The Business states that it actually began operations on January 1, 1996. The Business' bank reconciliation provided to the department shows that the Business made a deposit of ***** on January 30, 1996, and issued checks on January 29 and January 30, 1996 for telephone and other expenses of the Business. As a matter of fact, the Business issued a check on January 30, 1996 to make payment for the City's 1996 local license fee.
Based on these facts, I find that the Business was engaged in Business for all of calendar year 1996, and that the City's 1997 license tax should have been calculated using 1996 calendar year gross receipts, and not 1997 year-end gross receipts.
Conclusion
It is my determination that the City incorrectly assessed tax for license year 1997. By this letter and pursuant to Code of Virginia §58.1-3703.1(A)(5)(c), I direct that the 1997 assessment be recalculated using the Business' gross receipts for calendar year 1996, and that the Business be refunded any excess tax, penalty, or interest it may have previously paid on this erroneous assessment. If you have other questions, please do not hesitate to contact ***** in my Office of Tax Policy, at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/21615
Re: Locality Assessing Tax: Final State Determination
Appeal of Business, Professional and Occupational License (BPOL) Tax
Dear *****
This is in response to your appeal of a BPOL assessment issued to ***** ***** (the "Business') by the ***** (the "City'). This appeal was filed with the Department of Taxation pursuant to Code of Virginia §58.1-3703.1 (A)(5)(c). You appeal the City's final local determination upholding its assessment of BPOL tax. I apologize for the delay in responding to your application for correction.
The local license fee and tax are imposed and administered by local officials. §58.1-3701 of the Code of Virginia authorizes the department to promulgate guidelines and issue advisory opinions on local license tax issues. Additionally, §58.13703.1(A)(5) authorizes the department to receive taxpayer appeals of certain local license tax assessments and to issue determinations on such appeals. However, in no case is the department required to interpret any local ordinance with the exception of those appeals in which a local ordinance is relevant to the appeal of an assessment. Code of Virginia §58.1-3701. The following determination is based on the facts presented to the department by the Business and the City as summarized below.
Code of Virginia §58.1-3703.1(A)(5)(a) provides that, on appeal, a BPOL tax assessment is deemed prima facie correct. In other words, the local assessment will stand unless the taxpayer proves that it is incorrect.
FACTS
You state that the Business located in the City has suffered inequitable treatment in its BPOL assessment. You contend that because the Code of Virginia provides for localities to assess a yearly license tax measured by the prior year's actual gross receipts or revenues (instead of year-end revenues), this results in a financial disadvantage to those businesses which realize less revenue or suffer a loss in their later years of operations when compared to the beginning years of the business.
This is because such businesses will pay tax on a higher base (the prior year's gross receipts) even though they may earn less revenue or suffer a loss in the year for which the license is issued.
The City has practiced the following procedure for those businesses who report a partial year income for the first year in which the business is engaged in activity. The business is required to report an estimated income for the first year. Additionally, the business is also required to report estimated income for the second year, or first full year in which the business is engaged in a licensable activity. These estimates are reconciled to actual year-end gross receipts, and businesses are either assessed additional tax or issued a refund for the difference between estimates made at the beginning of a year and actual year-end receipts.
The Business was incorporated December 13, 1995 and reported gross receipts of ***** on its 1996 federal corporate income tax return. The owner of the Business states that it actually began operation, or "opened its doors for business,' on January 1, 1996. The Business has provided the department with a bank reconciliation statement which reflects deposits and payments made by the Business in January of 1996.
The City audited the Business in 1999 and calculated 1996 actual year-end gross receipts at ***** and used this amount as the final basis for assessing the 1996 license tax. The City calculated 1997 actual year-end gross receipts at and used this amount as the final basis for assessing the 1997 license tax. This same amount was also used to calculate the 1998 license tax, i.e., the Business paid its 1998 license tax based upon its 1997 calendar year gross receipts, and not actual 1998 gross receipts as was the case in 1997 and 1996.
OPINION
Applicable Law
-
"Base year' means 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 or to allow an option to use the same fiscal year as for federal income tax purposes.
"License year' means the calendar year for which a license tax is issued for the privilege of engaging in business. Code of Virginia §58.1-3700.1.
The City's local tax ordinances follow the Code of Virginia in that they generally measure or calculate the annual license tax by using the gross receipts or gross revenues of the prior calendar year. The City's ordinances, like the Code of Virginia, allow for an exception to this general measure of license tax liability for beginning businesses.
-
- Whenever ... it is provided that any person shall pay a license tax based on gross receipts, ... so much of the license tax as is so based shall be measured by the gross for the preceding calendar year ending on the thirty-first day of December; provided, however, that whenever any such person was not engaged in such business ... on which such license tax is imposed for the full preceding calendar year ending on the thirty-first day of December, so much of such license tax as is based on gross shall be measured by the estimated gross that will be made and received from the first day of the then current license year to the last day of such license year ... Whenever any person begins a business ... after the first day of the license year, so much of the license tax imposed ... as is based on gross shall be measured by the estimated gross that will be made and received from the commencement of the business ... to the end of the license year. License Code, City of Virginia Beach, Art. I, Sec.18-10.
- Whenever ... it is provided that any person shall pay a license tax based on gross receipts, ... so much of the license tax as is so based shall be measured by the gross for the preceding calendar year ending on the thirty-first day of December; provided, however, that whenever any such person was not engaged in such business ... on which such license tax is imposed for the full preceding calendar year ending on the thirty-first day of December, so much of such license tax as is based on gross shall be measured by the estimated gross that will be made and received from the first day of the then current license year to the last day of such license year ... Whenever any person begins a business ... after the first day of the license year, so much of the license tax imposed ... as is based on gross shall be measured by the estimated gross that will be made and received from the commencement of the business ... to the end of the license year. License Code, City of Virginia Beach, Art. I, Sec.18-10.
The Assessment for License Year 1998
The 1998 assessment was made using the Business' 1997 calendar year gross receipts as a base. This action was in accord with the Code of Virginia which implicitly directs localities to use, in general, the prior year's gross receipts in calculating license taxes (see the definition of the term "base year' above). This action was also in accord with the City's local tax ordinances. There is no question that the Business was engaged in business for the full twelve months of 1997. As a result, it is my determination that the City's assessment for license year 1998 is correct. I must emphasize that the Business' loss or decline in revenues realized in calendar year 1998 should have been used as the measure for the Business' 1999 license tax.
The Assessment for License Year 1997
In its audit for license year 1997, the City found that the Business owed an additional ***** in tax. The City made this assessment using 1997 actual year-end gross receipts, as opposed to 1996 gross receipts. The City's rationale was that the Business was not engaged in Business for the full twelve months of 1996, and under its local license ordinances, this permitted the City to measure the 1997 license tax using calendar year 1997 gross receipts.
However, the evidence indicates that the Business may have begun operations in December 1995, but no later than January 1996. The Business was incorporated December 13, 1995. The Business states that it actually began operations on January 1, 1996. The Business' bank reconciliation provided to the department shows that the Business made a deposit of ***** on January 30, 1996, and issued checks on January 29 and January 30, 1996 for telephone and other expenses of the Business. As a matter of fact, the Business issued a check on January 30, 1996 to make payment for the City's 1996 local license fee.
Based on these facts, I find that the Business was engaged in Business for all of calendar year 1996, and that the City's 1997 license tax should have been calculated using 1996 calendar year gross receipts, and not 1997 year-end gross receipts.
Conclusion
It is my determination that the City incorrectly assessed tax for license year 1997. By this letter and pursuant to Code of Virginia §58.1-3703.1(A)(5)(c), I direct that the 1997 assessment be recalculated using the Business' gross receipts for calendar year 1996, and that the Business be refunded any excess tax, penalty, or interest it may have previously paid on this erroneous assessment. If you have other questions, please do not hesitate to contact ***** in my Office of Tax Policy, at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/21615
Rulings of the Tax Commissioner