Tax Type
BPOL Tax
Description
Mailing List Broker
Topic
Basis of Tax
Date Issued
10-17-2001
October 17, 2001
Re: Appeal of Assessment: Final State Determination
Taxpayer: *****
Locality Assessing Tax: *****
Business, Professional and Occupational License (BPOL) 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 a final local determination upholding an audit assessment of BPOL taxes made by the Commissioner of the Revenue of ***** (the "City").
The local license tax and fee are imposed and administered by local officials. Code of Virginia § 58.1-3703.1(A)(5) authorizes the department to issue determinations on taxpayer appeals of certain BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct. In other words, 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 as summarized below. This determination addresses the question of whether or not certain funds deposited with the Taxpayer are subject to the BPOL tax imposed by the City. Copies of cited sources are enclosed.
FACTS
The Taxpayer is a mailing list broker. It provides mailing list information to mass marketers on a one-time basis. The Taxpayer's clients are mass marketers or "mailers" that enlist the Taxpayer's services in locating mailing lists that are appropriate to the client's needs. In placing the order, the Taxpayer submits a standard form to the owner of the list, which states that the "Mailer guarantees that names are for a one time mailing only. [Taxpayer] acts as an agent on behalf of mailer and mailer is solely responsible for full payment." [Emphasis added.]
Billing for the lists comes from the list service through the Taxpayer. It specifies the total cost of the list and lines out the commission due. The Taxpayer then forwards a bill for the total amount including the commission to the mailer. The client pays the bill to the Taxpayer, who then acts as a dispersing agent, remitting the amount due the list service (the owner of the list) and retaining its commission.
DETERMINATION
Code of Virginia § 58.1-3700.1 states that "'Gross receipts' means the whole, entire, total receipts, without deduction." However, there are specific exemptions, deductions and exclusions that are provided by statute and affirmed through Supreme Court decisions, opinions of the Attorney General and opinions of the department. One such area is that of agency relationships.
Agency Relationships
Although certain monies received by an agent are not included in the agent's gross receipts, a business may not exclude monies received from its customer that are attributable to 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). In Alexandria v. Morrison-Williams 223 Va. 349 (1982), the Virginia Supreme Court found that an advertising agency's pass through costs were not exempt from local license taxation primarily because: the "Taxpayer is not the legal agent of either the client or media ...the relationships are mutually exclusive." The other facts lending weight to the decision in Morrison were that the Taxpayer commingled his funds with all other sources, reported all income to the Internal Revenue Service and deducted the pass through costs from his federal tax return. These two criteria were not given significant weight in the opinions of the Attorney General.
Prior opinions of the Attorney General conclude that, under certain circumstances, the term "gross receipts" does not include funds that the business receives and disburses as the agent for another. As noted in the opinions, "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." See Op. Va. Att'y Gen: 1998 at 110; 1995 at 250; 1986-87 at 285; 1985-1986 at 281.
These opinions were cited in Public Document (P.D.) 01-38 (April 21, 2001) which found that:
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- The Taxpayer's contract creates a connection between the client and the media that did not exist in Morrison. The contract with the media also specifically states that the Taxpayer is "acting as the legal agent for the principal named on the face of this contract. As such, [the Taxpayer] shall be liable to the station for the payment of sums due on this order, but only to the extent that the advertiser has made payment to the agency. Express authority to purchase time or space as a legal agent has been secured by [the Taxpayer]."
However, there are differences in the two cases. The ruling in P.D. 01-38 cited three criteria as set forth in the opinions of the Attorney General. These criteria are: (1) there must be a contractual relationship between the taxpayer and both the client and the contracted third party; (2) the taxpayer cannot commingle its funds with all other sources, rather it must have a separate accounting system or a fiduciary account where the pass through receipts are recorded and; (3) the taxpayer does not report these "pass through costs" on its federal income tax return.
In this case, the first and most important criterion, that of the nature of the agency relationship, is only stated in the billing statement. I have not seen evidence of specific contractual agreements. Furthermore, the other two criteria are not clearly established in the facts presented.
In the case addressed in P.D. 01-38, the Taxpayer did not deduct the costs of the expenses it incurred on behalf of its client on its Federal tax forms. Rather, they were treated as pass through funds. Also, any excess funds the Taxpayer received from the client for purposes of expenditures on media outlays were refunded to the client. This presumes a separate accounting system or the establishment of a fiduciary fund that would conceivably generate "excess funds." I have not seen evidence of either of these reporting methods in the present case.
Conclusion
Based on the foregoing, I am returning this case to the City for the purpose of determining if: (1) the Taxpayer has a contractual relationship with the list providers and the mailers; (2) payments from the mailers are not commingled with its general receipts; and (3) these deposits are reported for federal and state income tax purposes and, if so, in what manner. If the resulting determination indicates that the facts meet the criteria set forth in P.D. 01-38, then such funds are not subject to the BPOL tax, although the Taxpayer's other receipts are taxable. If the Taxpayer is unable to provide documentation to support its position in relation to the three criteria noted above, the final local determination stands.
I would note that this final determination is case specific, based upon the facts and documentation presented. If you have any questions regarding this final state determination, please contact ***** Tax Analyst, in the department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
ARO/333522H
Rulings of the Tax Commissioner