Tax Type
BPOL Tax
Local Taxes
Description
Financial services
Topic
Local Power to Tax
Date Issued
04-23-1999
April 23, 1999
Re: BPOL
Dear***********
This advisory opinion is issued in response to your facsimile transmitted on August 24, 1998 requesting guidance concerning the license taxation of certain financial service providers. I apologize for the delay in responding to your request.
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, § 58.1-3703.1(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. Code of Virginia § 58.1-3701. The following opinion has been made subject to the facts presented to the department as summarized below. Any change in these facts or the introduction of facts by another party may lead to a different result.
While addressing the questions raised in your letter, this response is intended to provide advisory guidance only, and does not constitute a formal or binding ruling. I have enclosed copies of cited material for your review.
FACTS
You request guidance regarding the license taxation of businesses which provide financial services, including the origination, servicing and sale of loans. These lenders maintain definite places of business in your locality.
OPINION
Subject to limits set forth in Code of Virginia § 58.1-3703(C), localities may charge a fee for issuing BPOL licenses or may levy a license tax on a business for the privilege of engaging in business at a definite place within the locality. Code of Virginia §§ 58.1-3700 and 58.1-3703(A). Business means "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.' Code of Virginia § 58.1-3700.1. A definite place of business means "an office or a location at which occurs a regular and continuous course of dealing where one holds one's self out or avails one's self to the public for thirty consecutive days or more, exclusive of holidays and weekends.' 1997 BPOL Guidelines § 1.
License Taxation of Banking Institutions and Insurance Companies
Banks and trust companies subject to the state franchise tax are exempt from local license taxation, except as to sales of tangible personal property. Code of Virginia §§58.1-3703(C)(12) and 58.1-1202. Savings institutions and state chartered credit unions are also exempt from local license taxation, other than in the locality in which their main office is located, and the license tax which may be imposed in that locality is limited to $50.00. Code of Virginia § 58.1-3730. Federal credit unions are exempt from local license taxation under the Federal Credit Union Act. Guidelines § 8.2.4. Insurance companies and their agents are also exempt from local license taxation. Code of Virginia § 58.1-3703(C)(11).
Where an exempt entity has created a separate legal entity to provide financial services and the separate entity is not a bank, trust company, savings institution, credit union or insurance company, the separate entity is subject to the local license tax. The separate entity would be classified as a "financial service provider' for local license tax purposes. Public Document 97-310.
The following discussion does not apply lenders which are exempted or enjoy a limited exemption from local license taxation as banks, trust companies, savings institutions, credit unions or insurance companies, as those terms are defined in the Code of Virginia § 58.1-3700, et seq., and the Guidelines.
Taxation of Pass-Through Costs
You state that the lenders collect funds from borrowers to pay for services provided by third parties necessary to process loans, such as credit reports, appraisals, flood certifications and home inspections. You ask whether or not these funds should be included in the lenders' gross receipts for license tax purposes.
Gross receipts are defined to be "the whole, entire, total receipts, without deduction.' Code of Virginia § 58.1-3700.1. Guidelines § 1 expands on the statutory definition to clarify that gross receipts are:
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- the whole, entire, total receipts, of money or other consideration received by the taxpayer as a result of transactions with others besides himself and which are derived from the exercise of a licensed privilege to engage in a business . . . , without deduction or exclusion except as provided by law.
- the whole, entire, total receipts, of money or other consideration received by the taxpayer as a result of transactions with others besides himself and which are derived from the exercise of a licensed privilege to engage in a business . . . , without deduction or exclusion except as provided by law.
The lawfulness of a BPOL tax on costs passed through to consumers is discussed in Public Document 97-52. In that opinion, a funeral home, as part of the services it provided, contracted with others to provide goods and services to its customers such as casket sprays, opening and closing graves and placing obituaries in the newspaper. The funeral home, not the customer, contracted for these services and paid for the services. The funeral home passed on the costs of these services, without markup, to the consumer. Paying for these services "up front' was determined to be a cost of doing business or an expense of the ultimate service provided by the funeral home. Because these services were a necessary expense of doing business as a funeral home, the receipts from such activities were derived from the exercise of a licensed privilege to do business and were included in the funeral home's gross receipts.1 A gross receipts tax is based upon receipts, not net income. Id.
Certain monies received by an agent for reimbursement of costs incurred on behalf of a principal are not included in the agent's gross receipts. 1985-1986 Op. Att'y Gen. 281. However, a business which is not the legal agent of its customer may not exclude from its BPOL taxable gross receipts monies it receives from its customer as payment for costs incurred by the business with others who have no contractual relationship with the customer. Alexandria v. Morrison-Williams Associates. Inc. 223 Va. 349 (1982).
Unless the lenders in question are acting as agents for their customers in this capacity and a contractual relationship exists between the customer and the third party, I am not aware of any legal authority for the exclusion of these funds from taxable gross receipts. If such lenders report the fees they receive for credit reports, appraisals, flood certifications and home inspections as taxable income, a strong presumption arises that such fees are taxable BPOL receipts. I have not been provided with sufficient information to determine whether or not these conditions are present.
Attribution of Gross Receipts
You also request guidance concerning the attribution of the gross receipts of a business of this type between its different definite places of business. You present four hypothetical scenarios. In each scenario, the business maintains a definite place of business in your locality.
Scenario A: In your locality, the business accepts applications from prospective borrowers and then immediately sends all paperwork to an office of the business located in another locality or state for further inquiry, acceptance and processing, as well as loan servicing and possible sale.
Scenario B: In your locality, the business purchases installment loan contracts from businesses which originate the loans and then immediately send the loans to its main office located in another locality or state for further inquiry and processing, as well as loan servicing and possible sale.
Scenario C: In your locality, the business originates loans and forwards all responsibility for loan servicing, customer relations and possible sale to an office of the business located in another locality or state.
Scenario D: In your locality, the business originates loans and then jointly shares responsibility for loan servicing, customer relations and possible sale with an office of the business located in another locality or state.
The 1996 BPOL amendments set forth situs rules for the attribution of gross receipts. These rules are effective for license years beginning on and after January 1, 1997:
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- Gross receipts from the performance of services shall be attributed to the definite place of business at which the services are performed or, if not performed at any definite place of business, then to the definite place of business from which the services are directed or controlled.
- Gross receipts from the performance of services shall be attributed to the definite place of business at which the services are performed or, if not performed at any definite place of business, then to the definite place of business from which the services are directed or controlled.
The four scenarios do not present sufficient facts to determine the definite place of business to which the receipts should be attributed. In order to make this determination, you must ascertain the nature of the business activities conducted at the different places of business and the extent to which these activities contribute to the different types of receipts. However, as the receipts noted in the scenarios appear to be derived from activities conducted at definite places of business both within and without your jurisdiction, it could very well be impractical or impossible for you to determine the definite place of business to which the different receipts should be attributed. Code of Virginia § 58.1-3703.1(A)(3)(b) provides that
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- [i]f the licensee has more than one definite place of business and it is impractical or impossible to determine to which definite place of business gross receipts should be attributed under the general rule, the gross receipts of the business shall be apportioned between the definite places of businesses on the basis of payroll.
- [i]f the licensee has more than one definite place of business and it is impractical or impossible to determine to which definite place of business gross receipts should be attributed under the general rule, the gross receipts of the business shall be apportioned between the definite places of businesses on the basis of payroll.
Gross Receipts Deduction under Code of Virginia § 58.1-3732(B)(2)
Once the locality has determined the total amount of gross receipts which are attributable under the situs rules to a definite place of business within its borders, it must allow a deduction for any gross receipts included in this measure which are also "attributable to business conducted in another state or foreign country in which the business is liable for an income or other tax based upon income.' Code of Virginia § 58.1-3732(B)(2) and Public Document 97-490. A taxpayer is liable for an income or other tax based on income if the taxpayer files a return for such tax in another state or country. 1997 BPOL Guidelines § 3.3.4. Thus, in order to take the deduction, the taxpayer must be required by the laws of another state or foreign country to file an income tax return or other return for a tax based upon income.
I hope that the above information will be of assistance to you. Although I believe this letter conforms with the requirements of the law, it is written only for your guidance. If you have other questions, please do not hesitate to contact * * * * *, Tax Policy Analyst, in my office of Tax Policy at * * * * *******.
Sincerely,
Danny Payne
Tax Commissioner
1 Subsequent to the issuance of Public Document 97-52, Code of Virginia § 58.1-3732.3 was enacted to provide an exclusion from the gross receipts of funeral homes for the reimbursement of certain business expenses.
Rulings of the Tax Commissioner