Document Number
04-143
Tax Type
BPOL Tax
BTPP Tax
Description
Gross receipts and other receipts of an independent contractor
Topic
Basis of Tax
Computation of Income
Property Subject to Tax
Date Issued
09-17-2004



September 17, 2004



Re: Appeal of Assessment:
Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Business, Professional and Occupational License (BPOL) Tax
Business Tangible Personal Property (BTPP) Tax

Dear *************:

This final state determination is issued upon the application for correction filed by you (the "Taxpayer") with the Department of Taxation. You appeal a final local determination upholding a BPOL tax assessment and a BTPP tax assessment for tax years 1998, 1999, 2000 and 2001, issued by the ***** (the "City"). I apologize for the delay in the Department's response.

The local license tax and fee and the local personal property taxes are imposed and administered by local officials. Virginia Code § 58.1-3703.1(A)(5) authorizes the Department to issue determinations on taxpayer appeals of certain BPOL tax assessments. Virginia Code § 58.1-3983.1(D) authorizes the Department to issue determinations on taxpayer appeals of certain BTPP tax assessments. On appeal, BPOL and BTPP tax assessments are deemed prima facie correct, that is, 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 as summarized below. The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.

FACTS

The Taxpayer is a standing trustee in cases filed under Chapter 131 of the Bankruptcy Code (11 U.S.C. § 101 et seq.) within the *****. The Taxpayer is appointed by the Director of the Executive Office for United States Trustees (the "Agency"), which is within the U.S. Department of Justice. As such, the Taxpayer is charged with administering bankruptcy estates for bankruptcy cases filed in the Eastern District of Virginia Division of the U.S. Bankruptcy Court.

The role of the standing trustee is explained in a document issued by the Department of Justice:
  • The standing trustee has a fiduciary responsibility to the debtor and all classes of creditors in each case. The standing trustee is more than a mere disbursing agent. The standing trustee must be personally involved in carrying out the statutory duties and other fiduciary responsibilities of the standing trustee operation.2

Standing trustees are paid a percentage fee for each bankruptcy case they supervise. The percentage fee is determined by the budget that the standing trustee (the Taxpayer) prepares annually for the Agency's approval. This fee includes a set salary determined by the Agency and monies for the operation of the Office of the Standing Trustee (the "Office"). The budget and corresponding percentage fee may be adjusted during the fiscal year as circumstances warrant, subject to the Agency's approval. The standing trustee's salary is fixed, however. As a standing trustee, the Taxpayer "has no authority to negotiate compensation or a percentage fee other than that fixed by the order of the Director. Op. Cit. p. 1-4.

When a case is assigned to the Taxpayer, the Taxpayer sets up a "pre-confirmed" account for the debtor that is used to deposit funds from the debtor prior to court confirmation of the Chapter 13 plan that has been agreed upon by the debtor and its creditors. Once the federal court has approved the plan, the monies are transferred to a confirmed account into which all monies due to the creditors are deposited.3 As a standing trustee, the Taxpayer is also directed to establish an "operating expense trust account" into which the percentage fee (as set by the Agency), interest income, court ordered awards and any receipts not allocable to a specific case are deposited. This procedure is mandated in the Handbook for Chapter 13 Standing Trustees. These monies are to be used to "pay all actual and necessary expenses approved by the United States Trustee, standing trustee's compensation/benefits and payments to the United States Trustee System Fund." Any expenses not related to the duties of the administration of the standing trustee's fund may not be paid out of this account. When there is an excess of more than 17 percent over budget in this account, it is deposited into the United States Trustee Fund.

The Taxpayer's supervisor, who is an employee of the Agency, closely monitors the Taxpayer's work, budget and expenditures. The only monies that belong to the Taxpayer are those in the expense trust account dedicated to the Taxpayer's compensation, which the Taxpayer may withdraw in 12 monthly payments. All other monies in the expense account stay with the Office. Such funds are not subject to state or federal income tax and are not declared on the Taxpayer's income tax returns. All tangible personal property in the Office, as well as the lease of the Office space, belongs to the Office and not the individual who has been appointed to the Office. If the current standing trustee were to vacate the Office, the staff of the Office would remain employed, and the Taxpayer's supervisor from the Agency would assume the role of standing trustee until such time as a new person is appointed.

The City maintains that the Office is a separate and distinct business and as such is subject to the BPOL tax. It compares the Office to the role of the commissioner of accounts4. Furthermore, the City maintains that as a business, the tangible personal property in the Office is subject to the BTPP tax. The City assessed both the BPOL and the BTPP tax to the Taxpayer.

The Taxpayer contends that only his income as a standing trustee is taxable for purposes of the BPOL tax. He regards the monies in the operating expense trust account as belonging to a "pass-through account" that is regulated by the United States Trustee. The Taxpayer takes exception to the assessment of the BTPP tax issued to him as an individual, stating that because property subject to taxation belongs to the Office, the tax should be imposed on the Office and not the Taxpayer.
ANALYSIS

BPOL Tax

The BPOL tax is a privilege tax imposed on businesses, trades, professions, occupations and callings and upon the persons, firms and corporations operating therein. Virginia Code § 58.1-3700.1 defines "business" as:
  • a course of dealing which requires the time, attention and labor of the person so engaged for the purpose of earning a livelihood or profit. It implies a continuous and regular course of dealing, rather than an irregular or isolated transaction. A person may be engaged in more than one business. The following acts shall create a rebuttable presumption that a person is engaged in a business: (i) advertising or otherwise holding oneself out to the public as being engaged in a particular business or (ii) filing tax returns, schedules and documents that are required only of persons engaged in a trade or business.

As a standing trustee operating an office, the Taxpayer is engaged in a business. The Office is a separate, ongoing enterprise. Should the Taxpayer vacate his position, the work of the Office continues under the supervision of the Agency. Essentially, for purposes of the BPOL tax, the Taxpayer and the Office are two separate entities. The Taxpayer may be engaged in other businesses while administering the Office, but any income attributed to such business may not be commingled with the funds in the Office's operating expense trust account.

The BPOL tax is based upon gross receipts, which are defined as "the whole, entire, total receipts, without deduction." See Va. Code § 58.1-3700.1. There are certain exclusions and exemptions that have been provided for directly in the law. Opinions of the Attorney General and the Rulings of the Tax Commissioner have interpreted the meaning of these exclusions and exemptions. One such exclusion involves fiduciary funds. In a 1986 opinion, the Attorney General opined, "Gross receipts do not arise because the taxpayer merely handles funds in certain transactions." 1986-1987 Report of the Attorney General, 282. In Public Document (P.D.) 01-140, (09/21/01), the Tax Commissioner stated:
  • There are circumstances that allow a taxpayer to exclude from taxable gross receipts certain monies when acting as a fiduciary or agent for another, i.e., the taxpayer receives and disburses monies on behalf of a person or entity other than the taxpayer. See, for example, Public Document (P.D.) 01-038, (April 12, 2001), P.D. 98-135 (September 15, 1998), and Op. Va. Att'y Gen: 1998 at 110; 1986-87 at 285; 1985-1986 at 281.) As noted in these opinions, "gross receipts are not subject to a local gross receipts tax when the taxpayer acts as the agent or fiduciary for another in receiving and disbursing money on behalf of a person or entity other than the taxpayer."

Following this logic, the Taxpayer contends that the monies deposited into the Office's operating expense trust account should be regarded as fiduciary funds deposited by the debtor and held on behalf of the Office for the Agency and, therefore, exempt from the local license tax.

The City disagrees, noting, "The operations of the Chapter 13 Trustee are a separate and distinct business. Its clients are the persons who file for bankruptcy and the monies generated from the percentage fee the debtors are assessed are used to fund the office." In support of its position, the City cites a portion of the Handbook for Chapter 13 Standing Trustees that states that with regard to the Office, the standing trustee is "required to file all appropriate tax reports with local, state and federal agencies and pay any amounts due. Included in these reports are such items as the employees' W-2 forms, the annual federal unemployment tax report, quarterly federal and state payroll tax reports, quarterly state unemployment tax reports and 1099s as required by law."

The Taxpayer files withholding taxes for the Office's employees and files the appropriate tax returns to reflect this. The Taxpayer does not, however, file income tax returns reflecting the activities of the Office because the activities are performed on behalf of the Agency, and all monies with the exception of the Taxpayer's compensation are expended under the direct supervision of the Agency. Excess monies are returned to the Agency for application towards the following year's budget. The gross receipts in question are the percentage fees deposited into the operating expense trust account that the standing trustee administers in a fiduciary capacity. These monies are not the Taxpayer's to spend; they are funds directly under the control of the Agency. Finally, even if the monies were not kept in a fiduciary capacity, to impose a local tax on the Office would be the same as imposing a direct tax on the Agency.

Intergovernmental Tax Immunity

If the City were to impose a BPOL tax on the Office, it would be imposing a direct tax on an instrumentality of the Federal government, which would be in violation of the principle of intergovernmental tax immunity. In South Carolina v. Baker III, Secretary of State 485 US 505 (1988), the Court restated the current doctrine of intergovernmental immunity:
  • In sum, then, under current intergovernmental tax immunity doctrine the States can never tax the United States directly but can tax any private parties with whom it does business, even though the financial burden falls on the United States, as long as the tax does not discriminate against the United States or those with whom it deals. See Washington, supra, at 540; County of Fresno, supra, at 460-463; City of Detroit, supra, at 473; Oklahoma Tax Comm'n, supra, at 359-364. A tax is considered to be directly on the Federal Government only "when the levy falls on the United States itself, or on an agency or instrumentality so closely connected to the Government that the two cannot realistically be viewed as separate entities." New Mexico, supra, at 7355. [Emphasis added.]

In referring to the operations of the Office, the Handbook requires the standing trustee to "file all appropriate tax reports with local, state and federal agencies and pay any amounts due." It is my opinion that these taxes refer to the withholding and other taxes that are specified in the Handbook. State and local taxes cannot be imposed upon an agency of the government. As an independent contractor, however, the Taxpayer is liable for local taxes imposed on his salary and on his personal property. (See Graves v. New York ex rel. O'Keefe, 306 U.S. 376 (1939.)

BTPP Tax

Article X, § 1 of the Constitution of Virginia provides that "all property, except as hereinafter provided, shall be taxed." Tangible personal property used in a business is subject to the local BTPP tax and is valued in accordance with Va. Code § 58.1-3503(17) that requires "[a]II tangible personal property employed in a trade or business ... [to] be valued by means of a percentage or percentages of original cost." Virginia Code §§ 58.1­3501 and 58.1-3502 provide that property leased to or leased from a federal agency is subject to the tangible personal property tax. In this case, the lessors of any property of the Office would be those outside companies with whom the Taxpayer contracts on behalf of the Office. There is no reference in the Code to an exception from intergovernmental tax immunity for property belonging to the federal government. I know of no statutory authority that would permit the levy of a tangible personal property tax on an agency of the federal government.

The tangible personal property of the Office belongs to the Agency, and is not subject to local taxation. The Taxpayer is responsible, however, for assuring that the BTPP taxes on his own tangible personal property are paid in a timely manner.
DETERMINATION

The Taxpayer acts as a fiduciary for the operating expense trust account, which is ultimately an account belonging to the Office of the U.S. Trustee. As such, it is not subject to local license taxation. The Taxpayer's compensation, however, is separate and distinct from the other monies in the operating expense trust account, and the Taxpayer is responsible for a local license tax based on his compensation. Additionally, if the Taxpayer has receipts from an enterprise that is not related to his duties as standing trustee, these receipts would also be subject to the local license tax. Likewise, the Taxpayer is liable for a BTPP tax on any property that belongs to him. The property of the Office, as an agency of the federal government, is immune from the tax.

Accordingly, the City must correct its BPOL assessment to reflect only those gross receipts attributed to the Taxpayer's salary and other receipts he may earn as an independent contractor. The BTPP assessment must be corrected to include only the business tangible personal property that belongs to the Taxpayer.

If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
                  • Sincerely,


                  • Kenneth W. Thorson
                    Tax Commissioner


AR/44359H

1Chapter 13, often called wage-earner bankruptcy, is used primarily by individual consumers to reorganize their financial affairs under a repayment plan that must be completed within three or five years. To be eligible for Chapter 13 relief, a consumer must have regular income and may not have more than a certain amount of debt, as set forth in the Bankruptcy Code. A "standing trustee" appointed by the United States Trustee under 28 U.S.C. § 586(b) typically serves as the trustee of the debtor's estate pending fulfillment of the debtor's repayment obligations under a plan confirmed by the U.S. Bankruptcy Court where the case was filed.
2 Handbook for Chapter 13 Standing Trustees, Department of Justice, p. 3-1 December 1, 1998.
3All debtor payments are to be made to the “Office of the Standing Trustee.” Op. Cit. p. 9-13.
4. Commissioners of account are appointed by circuit court judges. They are charged with the responsibility of "general supervision of all fiduciaries admitted to qualify in such court or before the clerk thereof and make all ex parte settlements of their accounts. The person appointed as a commissioner of accounts shall be a discreet and competent attorney-at-law." See Va. Code § 26-8
5Cases cited: Washington v. United States, 460 U.S. 536 (1983); United States v. County of Fresno, 429 U.S. 452 (1977); United States v. City of Detroit, 355 U.S. 466; Oklahoma Tax Comm'n v. Texas Co., 336 U.S.342 (1949); and United States v. New Mexico, 455 U.S. 720 (1982).

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46