Tax Type
BPOL Tax
Description
Mutual fund and real estate investment trust assets
Topic
Local Power to Tax
Date Issued
06-20-1995
You ask whether the investment assets managed by a mutual fund management company and a mortgage real estate investment trust management company are considered to be the gross receipts of the management companies subject to a local business license tax on those receipts should the management companies ("Adviser')1 relocate to Fairfax County.
You relate that a fund is an investment company under the federal Investment Company Act of 1940 (the "mutual fund') and is organized under the laws of the State of Maryland. The mutual fund is engaged in the business of investing or reinvesting in securities, and qualifies as a regulated investment company under the Internal Revenue Code of 1986, as amended ("I.R.C.'). To the extent earnings from the mutual fund are distributed to owners in accordance with applicable I.R.C. provisions, the owners, and not the mutual fund, are subject to tax on the distributed earnings.
You also relate that a real estate investment trust (the "REIT'), organized and operated to qualify as such under applicable sections of the I.R.C., is organized under the laws of the State of Maryland. The REIT is engaged in the business of investing or reinvesting in real estate mortgages.
Both the mutual fund and the REIT are managed by the Adviser, which is registered as an investment adviser under the Investment Company Act and organized under the laws of the District of Columbia. The Adviser plans to relocate its offices in Fairfax County, thereby changing its business situs to a Virginia location. The Adviser will relocate with its offices the evidences of ownership of the assets of both the mutual fund and the REIT, such as certificates, deeds of trust and other instruments.2 Pursuant to its contracts with the mutual fund and the REIT, the Adviser supervises the overall management of their affairs, providing investment advice and day-to-day management of their portfolios, subject to the authority of each of their boards of directors. The Adviser makes decisions to buy, sell or hold particular securities for the mutual fund and real estate mortgages for the REIT, and maintains records of their transactions in its office. The owners of the mutual fund and the REIT pay a management fee to the Adviser for its professional management of their affairs.
The term "gross receipts' has not been defined by the General Assembly in the context of the local business license. The Supreme Court of Virginia, however, has said that the term means the "`whole, entire, total receipts" of a taxpayer.3 Gross receipts do not arise because a taxpayer merely handles funds in certain transactions.4 Rather, gross receipts arise when sales are made or services are rendered.5
Under the authority of § 58.1-3701 of the Code of Virginia,6 on January 1, 1984, the Department of Taxation developed Guidelines for Local Business, Professional and Occupational License Taxes (the "BPOL Guideline(s)'). The BPOL Guidelines provide that "[a]ny person rendering a service for compensation in the form of a credit agency, an investment company, a broker or dealer in securities and commodities or a security or commodity exchange is providing a financial service.'7 The BPOL Guidelines also provide examples of "[t]hose engaged in rendering financial services,' including factors, security and commodity brokers, and stockbrokers.8 It is well-settled in Virginia that the interpretation given a statute by the administrative agency charged with its administration and enforcement is entitled to great weight.9 The General Assembly is presumed to be cognizant of such an administrative construction of a statute.10 The Department's interpretation is entitled to deference and is an established principle of statutory construction.11
Finally, prior opinions of the Attorney General conclude that a business does not have gross receipts when it (i) receives funds as advance payment from, or as reimbursement for the payment of expenses of, a client, or (ii) receives purchase money from a client to be held in an escrow account.12 The underlying principle is that 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.12
A company serving strictly as an agent for its clients in the management of investments, and receiving management fees or commissions for such services, has gross receipts only to the extent of the fees and commissions it has received. The assets that are managed and invested by the company as an agent or fiduciary for its clients should not constitute gross receipts of the taxpayer entity. Such funds are not funds belonging to the company, but remain the funds of its clients.
Therefore, it is my opinion that the assets of the mutual fund and the REIT may not be subject to gross receipts tax by virtue of the relocation of their agent=the Adviser to Fairfax County. The Adviser may be subject to the local gross receipts tax only on the fees received for services rendered in managing the assets of the mutual fund and the REIT.
1 It is unclear from your request whether a sole Adviser manages the investment assets or whether the assets are managed by different Advisers. Because the facts relative to the management activities of the mutual fund and the real estate investment trust are identical, I shall refer to a single Adviser in this opinion.
2 The evidences of ownership of the assets, which actually represent the assets of the mutual fund and the REIT, are the property of the owners and not the Adviser. Because neither the mutual fund nor the REIT actually provides the management services and receives commissions and fees for such, neither would be subject to a local business license tax.
3 Savage v. Commonwealth, 186 Va. 1012, 1018, 45 S.E.2d 313, 317 (1947).
4 A 1985 opinion has determined that the gross receipts of a "dealer' in securities include the total sales price of the securities. 1984-1985 Op. Va. Att'y Gen. 349, 350. The opinion recognizes the difference between a dealer and a broker, but does not address the characterization of receipts of a broker because the taxpayer in the opinion is determined to be a dealer. Id.
5 1985-1986 Op. Va. Atty. Gen. 281, 282.
6 Section 58.1-3701 provides that "[t]he Department of Taxation shall promulgate guidelines defining and explaining the categories listed in subsection A of § 58.1-3706' concerning license tax rate limitations.
7 BPOL Guideline 3-2, at 17.
8 Id. 3-2.1, at 17-18.
9 Forst v. Rockingham, 222 Va. 270, 276, 279 S.E.2d 400, 403 (1981); Winchester TV Cable v. State Tax Com., 216 Va. 286, 290, 217 S.E.2d 885, 889 (1975); Miller v. Commonwealth, 180 Va. 36, 21 S.E.2d 721 (1942); 1991 Op. Va. Att'y Gen. 161, 167.
10 Miller v. Commonwealth, 180 Va. at 36, 21 S.E.2d at 721.
11 Forst v. Rockingham, 222 Va. at 276, 279 S.E.2d at 403; see also 1989 Op. Va. Att'y Gen. 202, 203.
12 See Op. Va. Atty. Gen.: 1986-1987 at 285, 286; 1985-1986 at 281.
12 1985-1986 Op. Va. Atty. Gen., supra, at 282; see also Alexandria v. Morrison-Williams, 223 Va. 349, 288 S.E.2d 482 (1982) (money handled by agent of principal does not constitute gross receipts of agent).
Attorney General's Opinion