Tax Type
BPOL Tax
Description
Taxable Gross Receipts
Topic
Basis of Tax
Date Issued
10-25-2001
October 25, 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 ***** (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 marketing communications agency with a definite place of business in the City. Its revenues are generated through specific services it provides to its clients. It is directly compensated only for the advice and services it renders. The Taxpayer states that it collects monies from its clients for use in media outlet expenditures and uses these funds to pay invoices issued for those specific clients.
Any balances for unfulfilled contracts are returned to the clients. The service agreement into which the agency and its clients enter states:
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- Client employs and empowers Agency as its exclusive agent and attorney in fact to handle all advertising and related matters and special services on client's behalf... Client empowers and authorizes Agency to take all appropriate action, to place advertising and to incur related expenses in Client's or Agency's name ...Where expenditures are incurred in the Agency's name, Client agrees to guarantee payment thereof and to allow third-party creditors to collect all sums due directly from the Client. [Emphasis added.]
This is reinforced by a stamp that is on every contract that holds the Taxpayer responsible only for those costs for which the Taxpayer has received monies from the Client. Any sums in excess of monies received are to be billed by the media firm directly to the client. The stamp that appears on all contracts with the media states:
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- For sums owing but not cleared to the agency the Publisher agrees to hold the Advertiser named on the face of this form solely liable.
The Taxpayer states that the media deposits are not taxable in calculating either its federal or state income taxes.
In an audit of the Taxpayer's BPOL taxes for tax years 1998 and 1999, the City took the position that client payments for advertising constituted gross receipts of the Taxpayer and included these monies when assessing the BPOL tax. The City found that under existing law, there was no exemption for pass-through costs. In its determination, the City relied upon Alexandria v. Morrison-Williams, Associates Inc. 223 Va. 348 (1982).
DETERMINATION
Code of Virginia § 58.1-3700.1 defines the term "gross receipts" to mean the whole, entire, total receipts, without deduction. Generally, gross receipts for license tax purposes exclude any amount not derived from the exercise of the licensed privilege to engage in a business or profession in the ordinary course of business.
However, in some instances, an agency relationship meeting the criteria as defined in Public Document (P.D.) 01-38 (April 12, 2001) enables the Taxpayer to exclude certain receipts from the calculation of gross receipts. In this ruling, prior opinions of the Attorney General were cited. The ruling found that those opinions of Attorney General:
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- have delineated the difference between independent agents with a singular contract with one of the parties and legal agency relationships. In the latter instance, the Attorney General opined that "[g]ross receipts do not arise because the taxpayer merely handles funds in certain transactions." 1986-1987 Report of the Attorney General 282.
Some of the facts in the present case are similar to those cited in P.D 01-38. The agreement between the Taxpayer and its client, and the stamp on the contract between the Taxpayer and the media outlet, both make clear the client's obligation for payment of any monies in excess of the amount provided to the Taxpayer for advertising expenses.
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 clearly stated in both the client/agency and the media/agency agreements, so this criterion is met. 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 and the documentation provided, it appears that the funds deposited with the Taxpayer pursuant to the contracts establishing a principal-agency relationship between the Taxpayer and the client for purposes of purchasing media services do not constitute taxable gross receipts of the Taxpayer for purposes of the BPOL tax. However, to qualify for an exclusion, the Taxpayer must present evidence that it has not commingled its funds and that its method of reporting income for purposes of federal taxation does not include these funds.
Therefore, I am returning this case to the City for the purpose of establishing that the Taxpayer's media deposits are not commingled with its general receipts, and to clarify how these deposits are reported for federal and state income tax purposes. 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 the necessary documentation to support its position in relation to the criteria noted above, the final local determination stands.
I would note that this final state determination is case specific, based upon the facts and documentation presented. If you have any questions regarding this letter, please contact ***** in the department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
ARO/31882H
Rulings of the Tax Commissioner