Document Number
Tax Type
BPOL Tax
Description
Taxpayer's brokerage services involved collecting payments from the Shippers and remitting them to the motor carriers
Topic
Definitions
Date Issued
02-27-2017

February 8, 2017

Re:     Appeal of Final Local Determination 
Locality:        *****
Taxpayer:     *****
Business, Professional and Occupational License Tax

Dear *****:

This final state determination is issued upon the application for correction filed by you on behalf of ***** (the “Taxpayer”), with the Department of Taxation.  You appeal an assessment of Business, Professional and Occupational License (BPOL) taxes issued to the Taxpayer by the ***** (the “City”) for the 2015 tax year.

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, regulation and public documents 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 earned commissions and fees for providing freight brokerage services between customers (the “Shippers”) that needed motor carriers to transport freight.  A part of the Taxpayer's brokerage services involved collecting payments from the Shippers and remitting them to the motor carriers.

Under review, the City adjusted the Taxpayer's gross receipts for the 2015 taxable year to include such payments.  The City issued an assessment and the Taxpayer appealed to the City, contending that the payments should not have been included in gross receipts because the Taxpayer was merely acting as an agent in collecting the payments and remitting them to the motor carriers.  In its final determination, the City concluded that the Taxpayer was in the business of providing freight services and had not provided sufficient evidence to show that an agency relationship existed.  The Taxpayer filed an appeal with the Department, contending that it met all of the requirements to be considered an agent.

ANALYSIS

Freight Services

In its final determination, the City acknowledged that the Taxpayer was acting as a freight broker, but asserts that the Taxpayer was nevertheless engaged in providing taxable freight services for which monies paid to the motor carriers represented expenses incurred in the ordinary course of the Taxpayer's business.  The Taxpayer explains that prior to 2015, ***** (the “Company”), provided both motor carrier and freight brokerage services.  In 2014, the Company established the Taxpayer as a separate entity.  The Taxpayer asserts that as of January 1, 2015, it began to perform all of the Company's freight brokerage services.

In P.D. 06-94, the Department considered whether a customs broker would meet the three criteria to establish an agency relationship.  The customs broker represented clients, assisting them in processing the shipment of goods through customs.  It also arranged for shipping and handling of goods on behalf of its clients.  In that case, the customs broker was not considered to be providing the shipping, but only assisting customers in acquiring the services.

Similarly, the Taxpayer received payments from the Shippers that were remitted to the motor carriers.  It was these payments that the City included in the Taxpayer's gross receipts for the 2015 taxable year.  Regardless of how the Company was organized and conducted business previously, the question in this appeal is whether such payments should have been included in the measure of the Taxpayer's gross receipts.

Agency Relationship

The BPOL tax is a gross receipts based tax imposed upon business, trades, professions, occupations and callings and the persons engaged therein for the privilege of conducting business in a local jurisdiction.  Virginia Code § 58.1-3700.1 defines “gross receipts” as the “whole, entire, total receipts, without deduction.”  However, there are specific exemptions, deductions and exclusions that are either provided by statute or affirmed through Supreme Court decisions, opinions of the Attorney General and rulings by the Department.  One such area is that of agency relationships.  See 1986-­1987 Op. Va. Att'y Gen. General 282 and Public Document (P.D.) 01-38 (4/12/2001).

The definition of “agency relationship” has been created through case law and affirmed through both opinions of the Attorney General and rulings by the Department.  In City of Alexandria v. Morrison-Williams Associates, Inc., 223 Va. 349, 288 S.E.2d 432 (1982), the Virginia Supreme Court established three criteria that must be met if a taxpayer is to establish it has an agency relationship with its clients.  These criteria are: (1) contractual relationships exist between the taxpayer and both the client and the contracted third party, and there is a stated relationship between the client and the contracted third party; (2) the taxpayer does not commingle its “agency” funds with other sources; rather it must have a separate accounting system or a fiduciary account where the pass through receipts from its clients are recorded; and (3) the taxpayer does not report these “pass through costs” on its federal income tax returns.  See P.D. 01-38 and P.D. 06-94 (9/28/2006).

The City concedes that the Taxpayer did not report the payments it collected from the Shippers and remitted to the motor carriers as income on its federal income tax return.  The City, however, contends that the Taxpayer has not presented sufficient evidence as to its contractual relationships with the Shippers and the motor carriers and has failed to separately account for such payments.  The Taxpayer contends that it met all the criteria for establishing an agency relationship.

Contractual Relationship

In this case, the Taxpayer has submitted an example of the brokerage agreement it entered into with motor carriers whereby the motor carriers agreed to transport goods and perform ancillary services in accordance with the agreement. The agreement with the motor carriers authorized the Taxpayer to invoice the Shippers for freight charges as agent for and on behalf of the motor carriers.  The contract required the Taxpayer to pay the motor carriers for their services.  The customer's payment to the Taxpayer relieved the customer of liability to the motor carriers for non-payment.  The contract also contemplated the possibility that a motor carrier could contact a customer directly in the event that the entire payment was not made to the Taxpayer.

Although the evidence represents only one brokerage agreement, additional oral or written contractual relationships with the Shippers can be inferred from an examination of all of the facts and circumstances.  Based on the brokerage contract, the Taxpayer effectively had obligations as to both the Shippers and the motor carriers.  When the Shippers paid the Taxpayer for the motor carriers’ transportation services, the Taxpayer was contractually required to remit such funds to the motor carriers on the Shippers’ behalf.  Making such payments also satisfied the Taxpayer’s obligation to pay any such funds to the motor carriers under the contract.  Ultimately, the true test is whether the Taxpayer was acting in a fiduciary capacity as a legal dispersing agent for a person or entity other than the Taxpayer.  See 1985-1986 Report of the Attorney General 282 and 1999 Op. Att'y Gen. Va. 187.

The City contends that the contracts indicate that the Taxpayer was not sufficiently under the direction and control of the motor carriers to be considered an agent.  As stated above, the standard set forth by the Attorney General opinions has focused on whether the purported agent received and disbursed money on behalf of a person or entity other than the taxpayer.  In 1999 Op. Att'y Gen. Va. 187, the Attorney General opined that if clients submitted funds to a travel agency for the agency to disburse to the intended recipients on the clients’ behalf, with the clients paying a separate fee to the travel agency for the services the agency renders the clients, such funds would not be subject to BPOL taxation as gross receipts of the agency.  This case is similar to the facts of that opinion.  The Taxpayer collects funds from the Shippers that must be disbursed to the motor carriers for providing transportation services, and the Taxpayer receives a fee for its service of brokering such arrangements.  It is clear from the contracts that the Taxpayer was acting as an agent with regard to collecting and disbursing the payments to the motor carriers.

The City also argues that the federal definition of broker under 49 USCS § 13102(2) precludes an agent of a motor carrier from being considered a broker.  That section defines broker as:

[A] person, other than a motor carrier or an employee or agent of a motor carrier, that as a principal or agent sells, offers for sale, negotiates for, or holds itself out by solicitation, advertisement, or otherwise as selling, providing, or arranging for, transportation by motor carrier for compensation.

In context, it appears that the statute precludes a motor carrier company itself or its own employee or agent from acting as a principal or agent in providing transportation brokerage services on behalf of other motor carriers unless they have registered as a broker.  The definition ensures that employees or agents of a particular motor carrier, who only sell the services of that motor carrier, will not have to register as brokers.  Nothing in this statute would appear to preclude a motor carrier from being an agent of other motor carriers generally if they have registered as brokers.  In any event, the test for BPOL purposes is not whether the Taxpayer was defined as a broker under federal law, but rather whether it received and disbursed funds as an agent or fiduciary acting on behalf of other persons or entities. 

Commingling of Funds

The City contends that the Taxpayer failed to show that the payments were not being commingled because it did not establish a separate accounting system like the one the taxpayer had in P.D. 04-81 (8/25/2004).  The Taxpayer, however, contends that the system described in P.D. 04-81 is merely one example of a system that does not commingle agency funds.  The Taxpayer asserts that its accounting system satisfies the standard as applied in P.D. 06-94 and P.D. 07-140 (9/5/2007).

In P.D. 04-81, the Taxpayer managed properties on behalf of its clients.  The Taxpayer maintained an imprest bank account in which was segregated the wages, salaries, commissions and bonuses of all of the clients’ employees.  All funds deposited into the account were strictly accounted for and used only for such payroll purposes, clearly satisfying the commingling of funds standard of Morrison-Williams.

P.D. 04-81 cannot, however, be interpreted as establishing the only way to meet the standard.  The court in Morrison-Williams inferred as much by offering the alternatives of separate accounting or fiduciary accounts.  In P.D. 01-38, the Department found that the standard merely requires that a taxpayer have a separate accounting system where the pass through receipts are recorded.  Whatever system a taxpayer chooses to employ, all that is required is that a taxpayer must be able to offer clear proof of a separate accounting of any “pass through funds.”  See P.D. 07-140.

In this case, the Taxpayer used a subsidiary ledger in which the payments were recorded.  Depending on the circumstances, a subsidiary ledger could satisfy the separate accounting standard, provided it is clear exactly what payments were received and passed through by the agent.  Entries in such a subsidiary ledger should be clearly traceable through accounting records to bank reconciliations and statements.

DETERMINATION

Based on the evidence provided, the Taxpayer was acting in a fiduciary capacity as a payment collecting and disbursing agent for motor carriers who were providing transportation services for the Shippers.  The Taxpayer's income tax reporting was also consistent with such relationship.  In addition, the City erred in applying an excessively strict standard in determining whether the Taxpayer had commingled agency funds.  Accordingly, I am remanding the case to the City with instructions to consider any additional evidence the Taxpayer may provide concerning separate accounting of agency funds.  The City must evaluate the Taxpayer's accounting of agency funds in light of the standard expressed in P.D. 01-38, P.D. 07-140 and this determination.  The Taxpayer should provide such additional evidence within 30 days of the date of this determination.

After it reviews the additional evidence, the City must make the appropriate adjustments to the assessment, if any are warranted, and issue a new final local determination.  If the Taxpayer disagrees with the City's new final determination, it may appeal pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-500-720.

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

Rulings of the Tax Commissioner

Last Updated 04/23/2018 10:10