July 6, 2023
Re: Appeal of Final Local Determination
Dear *****:
This final state determination is issued upon the application for correction filed by ***** (the “Taxpayer”) on behalf of ***** (the “Company”) with the Department of Taxation. The Taxpayer appeals assessments of the Business, Professional and Occupational License (BPOL) tax issued to the Company by the County of ***** (the “County”) for the 2015 through 2021 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 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
During the tax years at issue, the Taxpayer provided services to a single corporate client (the “Client”) pursuant to a consulting agreement (the “Agreement”). The Taxpayer incurred travel expenses in the course of performing such services. Pursuant to the Agreement, the Client reimbursed the Taxpayer for travel expenses. The Client provided the Taxpayer with a federal Form 1099 each year reporting total nonemployee compensation that included the amount of travel reimbursements. The Taxpayer reported these amounts as gross receipts on his federal Schedule C used to report the income and expenses of the Company, the business of which the Taxpayer was sole proprietor. The Taxpayer also reported the travel expenses as a business expense deduction in determining taxable net income on the Schedule C.
The County audited the Company and determined that the Company was subject to BPOL tax and should have reported taxable gross receipts to the County. As a result, assessments were issued. Although the Taxpayer acknowledged his liability for the BPOL tax generally, he appealed to the County, claiming that the travel reimbursements should not be included in gross receipts. In its final determination, the County concluded that the reimbursements were properly included in the Company’s gross receipts. The Taxpayer appealed to the Department, contending that the travel expenses should not be considered gross receipts for BPOL tax purposes.
ANALYSIS
Gross Receipts
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.”
This gross receipts tax is in contrast to a net income tax such as is imposed annually by the federal government and the Commonwealth. For income tax purposes, ordinary and necessary expenses incurred in the course of business are generally deductible from gross income. Business expenses that are not specifically allowed as a deduction under the Commonwealth’s BPOL tax statutes and regulations may not be subtracted from gross receipts for BPOL tax purposes. See, for example, Public Document (P.D.) 97-52 (2/10/1997) and P.D. 97-231 (5/19/1997).
In particular, in P.D. 97-231, the Department held that a service provider that paid for its employees’ travel expenses but was reimbursed for those expenses by its customer was not entitled to exclude the reimbursed expenses when determining gross receipts for BPOL tax purposes. The Department determined that the amounts received were not reimbursements for expenses advanced on behalf of its client. Rather, the reimbursements received were for amounts expended by the service provider on its own behalf in furtherance of the fulfillment of its contractual obligations with its client.
The Taxpayer argues that this same reasoning should not apply to an individual with no employees who reports income on federal Schedule C. The BPDL statutes and regulations, however, do not provide a different definition of gross receipts for sole proprietorships than for other types of business entities. For example, in P.D. 98-138 (10/2/1998), the Department opined that a dentist who was a sole proprietor and reported his dental practice income on federal Schedule C could not exclude from gross receipts rent and other expense reimbursement payments received from another dentist with whom he shared office space.
The Taxpayer also reasons that expense reimbursements “should not be included as income for gross receipts” because they have been deemed non-income for tax purposes by the federal government and the state of Virginia.” The Taxpayer’s argument, however, comingles principles from two taxing regimes, which are separate and distinct. How such reimbursements are treated for federal and Virginia income tax purposes has no bearing on whether and to what extent they may be taxable for BPOL purposes.
The relevant questions in this case are 1) whether the reimbursements come within the definition of gross receipts for BPOL purposes; and 2) if so, does the BPOL tax regime permit a deduction for such receipts for purposes of computing the tax. The reimbursements were made pursuant to the Agreement, and the Agreement specifically included the reimbursements as consideration for services rendered. Because the reimbursements were received for the performance of services, the reimbursements come within the definition of gross receipts for BPOL purposes. Further, as discussed above, the BPOL statutes and regulations do not provide a deduction for such
reimbursements.
Double Taxation
In addition, the Taxpayer contends that applying the BPOL tax to the reimbursements results in double taxation. He states that when he pays out of his own pocket for the expenses, he is using money that has already been taxed. Under this rational, he believes that taxing the reimbursement when it is received would be tantamount to taxing the same amount twice.
With this argument, it appears the Taxpayer is again commingling principles from the separate income and BPDL tax regimes. With respect to the BPOL tax at least, the taxable base of gross receipts is established each tax year, and taxable gross receipts attributable to reimbursements received during a particular tax year would be subject to BPOL in that year only.
The Taxpayer argues further that there has been no net increase in wealth. The BPDL tax, however, applies to all receipts, not simply those that result in net income or an increase in wealth. Taxing all receipts no matter the source, with very few exceptions, is precisely what distinguishes BPOL tax from a net income tax.
A few examples may help demonstrate the application of these principles:
1. Taxpayer A negotiated a consulting agreement that provided for a consultant fee of $100. Taxpayer A incurred $10 of unreimbursed expenses. Taxpayer A would pay BPOL tax based on $100 of gross receipts. Taxpayer A had a $90 net income or increase in wealth.
2. Taxpayer B negotiated a consulting agreement that provided for a consulting fee of $110. Taxpayer B negotiated this price because they correctly anticipated incurring $10 of unreimbursed expenses. Taxpayer B would pay BPOL tax based on $110 of gross receipts. Taxpayer B had a $100 net income or increase in wealth.
3. Taxpayer C negotiated a consulting agreement that provided for a consulting fee of $100 plus reimbursement of expenses. Taxpayer C incurred $10 of expenses which were reimbursed by the client. Taxpayer C pays BPOL tax based on $110 of gross receipts. Taxpayer C had a $100 net income or increase in wealth.
In each of the above cases, the taxpayers’ taxable gross receipts exceeded their net increase in wealth. In particular, in examples 2 and 3, both taxpayers have the same BPOL gross receipts and have the same increase in net wealth. Applying the Taxpayer’s reasoning, however, would result in Taxpayer B paying BPOL tax on $110 of gross receipts while Taxpayer C would be taxed on only $100 of gross receipts, even though each had identical increases in wealth.
DETERMINATION
Based on the facts presented, the Company was not entitled to exclude from gross receipts subject to BPOL tax amounts received as reimbursements for travel expenses incurred in providing services under the Agreement. Therefore, the assessments are upheld.
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
AR/4427.X