Tax Type
BPOL Tax
Local Taxes
Description
Research and Development Firm
Topic
Exemptions
Local Power to Tax
Local Taxes Discussion
Date Issued
10-19-1984
[Opinion - Virginia Attorney General: 1984 at 351]
REQUEST BY: Honorable Geraldine M. Whiting Commissioner of the Revenue for Arlington County
OPINION BY: Gerald L. Baliles, Attorney General
OPINION:
You have asked three questions concerning a locality's authority to exempt or partially exempt the gross receipts of research and development firms.1 First, you have asked whether a locality has the authority to exempt entirely research and development firms from the local gross receipts license tax. You have also asked whether a locality may exempt from the tax only those revenues of research and development firms which are generated by work performed for the federal government. Your third question asks whether a locality may exempt from the tax revenues generated by work performed for all government agencies, State, local and federal.
A governing body imposing a gross receipts license tax does so by ordinance under the authority of § 58-266.1 of the Code of Virginia. Subsection (B) of that section classifies business enterprises into four categories and establishes a maximum rate for each category. Pursuant to subsection (E) of § 58-266.1, the Department of Taxation has promulgated Guidelines For Business, Professional and Occupational License Taxes ("BPOL Guidelines") (originally issued January 1, 1979, current edition issued January 1, 1984) which define and explain the categories listed in subsection (B). The BPOL Guidelines state on page ii that "[t]he final decision of whether or not to tax a business, profession, or occupation lies with the individual locality unless the tax is prohibited by some provision of law. A locality may impose a lower tax rate and provide for subclassifications within the categories . . . ."
The statutory language of § 58-266.1 does not specifically prohibit or allow the exemption of businesses from the gross receipts tax. The legislatively authorized advisory language in the BPOL Guidelines, however, clearly indicates that localities can establish separate subclassifications for businesses and can tax the subclassifications at different rates. Included within this authority to discriminate by taxing at different rates is the authority to exempt a subclassification from taxation entirely. Langston v. City of Danville, 189 Va. 603, 608, 54 S.E.2d 101, 104 (1949) (quoting Caskey Baking Co. v. Commonwealth, 313 U.S. 117, 121 (1941)).
Although a locality has the legal authority to subclassify and exempt businesses from the gross receipts license tax, such discrimination in favor of a certain class must be arbitrary. Discrimination must be based upon a reasonable distinction in municipal policy. Historically, local governments have been accorded wide latitude in making taxing classifications which in their judgment produce reasonable systems of taxation. Kahn v. Shevin, 416 U.S. 351, 355 (1974); Southern Railway v. Commonwealth, 211 Va. 210, 219, 176 S.E.2d 578, 584 (1970). Determination by a court of whether a classification creates an arbitrary separation requires a case-by-case analysis which depends upon the purpose and subject of the particular ordinance creating the class and the circumstances and conditions surrounding its passage. See Allied Stores v. Bowers, 358 U.S. 522, 528 (1958); Mandell v. Haddon, 202 Va. 979, 989, 121 S.E.2d 516, 524 (1961); Langston v. City of Danville, supra. The governing body must consider the facts and determine that reasonable municipal policy justifies action favoring one subclassification of business over another.
Based on the foregoing, it is my opinion that a locality has the authority to exempt entirely research and development firms from the gross receipts license tax, provided that the local governing body properly has determined that reasonable municipal policy exists to justify the discriminatory action.
Your second and third questions may be answered together, as I find no distinction between State, local and federal agencies for purposes of your inquiry. You asked whether a locality may exempt from the gross receipts license tax revenues of research and development firms which are generated by work performed for governmental agencies. § 58-266.1 does not specifically prohibit or allow ordinances which would permit gross receipts to be computed so as to exclude certain types of revenue. Therefore, I find that a locality can identify revenues that will be exempt from the tax. See Southern Railway v. Commonwealth, supra. It is important to note, however, that such discriminatory treatment must be justified, as previously discussed, by reasonable distinctions in municipal policies.
A locality considering exempting government revenues from the gross receipts tax from one subclassification of business must carefully consider whether the policy justifications are equally applicable to all businesses that receive revenue from governmental agencies. If such is the case, the different treatment must be extended to all businesses receiving governmental revenues.
Based on the foregoing, it is my opinion that a locality may exempt from the gross receipts license tax those revenues of research and development firms which are generated by work performed for governmental agencies, provided that such discriminatory treatment is justified by reasonable municipal policies formulated to apply to all the subclassifications of businesses to which the policy of the governing body is applicable.
1 You asked that I consider your questions in light of § 58.1-3705 (effective January 1, 1985, recodifying § 58-266.5(b)(ii)) which states that "the basis for such tax, whether it be gross receipts or otherwise, shall be the same for all persons engaged in the same business, trade, occupation or calling." (Emphasis added; the emphasized language was added by the recodification of Title 58.) That section requires uniformity of license taxation by prohibiting the use of different bases of taxation for the same classification of business. For instance, it is prohibited to measure the tax on some firms by gross receipts and to measure tax on other firms engaged in the same classification of business by purchases. Because research and development firms may be regarded as a distinct business, this section does not control your question.
Attorney General's Opinion