Tax Type
BPOL Tax
Local Taxes
Description
Funds deposited with advertising agency
Topic
Local Power to Tax
Date Issued
04-12-2001
April 12, 2001
Re: Appeal of Assessment Locality Assessing Tax: Business, Professional and Occupational License (BPOL) Tax Final State Determination
Dear ****
This final state determination is issued upon the application for correction filed by you with the Department of Taxation on behalf of your client, ***** (the "Taxpayer"). 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
Taxpayer's Position
The Taxpayer is an advertising agency with a definite place of business in the City. Its revenues are generated through specific services it provides to its clients: providing advice on proper target markets for their sales efforts, design of advertisements, public relations, client image and marketing effort. As a part of the services it renders to its clients, the Taxpayer contacts selected media outlets through which the various advertising campaigns will be conducted. The Taxpayer states that approval for all media purchases is made by the client as principal. In so doing, the client deposits its own funds with the Taxpayer. The Taxpayer holds the funds in reserve through a separate accounting system for the Taxpayer's use in acquiring advertisements on the client's behalf. The Taxpayer draws upon these funds to pay the invoices issued by the media outlets used for that particular client.
The Taxpayer returns to the client any excess funds that are not used to pay for client advertisements. The invoices from the television and radio stations and newspapers are issued in the name of the Taxpayer's client in care of the Taxpayer. The Taxpayer's contract with its media sources provides 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 in writing by [the Taxpayer]. This written authority is on file at the agency's offices, a copy of which will be produced upon demand, or with this order, if the station requires. [The Taxpayer] warrants that, if this client-agency agreement in fact does not exist or has expired, [the Taxpayer] is responsible to the station for payment due under this order. [Emphasis added.]
In addition, the Taxpayer's contracts with its clients specifically identify the relationship between the Taxpayer and the client with regard to the placing of advertisements as a principal-agency relationship.
The City's Position
In an audit of the Taxpayer's BPOL taxes for tax year 1996, the City took the position that client deposits for advertising funds constituted gross receipts of the Taxpayer and assessed additional BPOL tax on the deposit amounts. The Taxpayer objected, providing the City with a copy of its amended 1995 federal income tax return, which did not include the advertising deposits as gross receipts. The Taxpayer filed its federal returns in tax years 1996, 1997, and 1998 based on this same premise. The City disregarded this objection and issued its Final Local Determination on November 24, 1999, finding that the deposited advertising funds were to be included in its gross receipts. In response to the Taxpayer's appeal of the final local determination, the City stated that its office was never provided with documentation of the existence of the client escrow accounts, or the executed media contracts and client billing statements.
ANALYSIS
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.
The definition of "agency relationship," has been created through case law. The seminal case in this area in relation to the BPOL tax is City of Alexandria v Morrison-Williams Associates, Inc., 223 Va. 349 (1982). In this case, the Virginia Supreme Court ruled that an advertising agency that charged its clients a commission on media charges was taxable on total receipts from clients without deduction for the media charges. The court noted that:
An analysis of the arrangement shows that the Taxpayer is not the legal agent of either client or media. The association between each is contractual, and there is no contact between the media and the client. Thus, if the Taxpayer became insolvent or unwilling to meet its contractual obligations, media would have no recourse against client. [Emphasis added.]
This decision has been referenced in subsequent opinions of the Attorney General. Those opinions 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.
There are several marked differences in the facts that led to the Court's finding in Morrison and in the cited opinion of the Attorney General. The facts in the present case are similar to those in the Attorney General's opinion. A review of the Taxpayer's contracts with its clients reveals that the contracts specifically identify the relationship between the Taxpayer and the client with regard to the placing of advertisements as a principal-agency relationship. The Taxpayer's clients deposit funds with the Taxpayer, and those funds are designated for the payment of specific expenses that the client otherwise would have incurred directly. Any excess funds that are not applied to purchase advertisements on behalf of a client are refunded to the client. Furthermore, the contract provides that "The Client agrees to assume full and final responsibility for fulfilling all contracts with the media and suppliers and further agrees to furnish signature on all contracts to indicate assumption of such responsibility."
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]."
In its finding of facts in Morrison, the court also referenced the Taxpayer's method of reporting total income to the Internal Revenue Service as including pass-through receipts to the media as a deduction in computing federal taxable income. Unlike the case presented in Morrison, in the immediate case the Taxpayer did not deduct costs of media expenses incurred on behalf of its clients from its federal income tax return. Rather, they were treated as a "pass-through cost."
CONCLUSION
For the reasons outlined above and based on the documentation provided, it is my determination 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 gross receipts of the Taxpayer for purposes of the BPOL tax. This matter is returned to the City for a correction of the assessment in accordance with this determination.
I would note that this final determination is case specific, based upon the facts and documentation presented. If you have any questions regarding this letter, please contact ****, Tax Policy Analyst, in the department's Office of Tax Policy, at ****.
.
Sincerely,
Danny M. Payne
Tax Commissioner
Re: Appeal of Assessment Locality Assessing Tax: Business, Professional and Occupational License (BPOL) Tax Final State Determination
Dear ****
This final state determination is issued upon the application for correction filed by you with the Department of Taxation on behalf of your client, ***** (the "Taxpayer"). 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
Taxpayer's Position
The Taxpayer is an advertising agency with a definite place of business in the City. Its revenues are generated through specific services it provides to its clients: providing advice on proper target markets for their sales efforts, design of advertisements, public relations, client image and marketing effort. As a part of the services it renders to its clients, the Taxpayer contacts selected media outlets through which the various advertising campaigns will be conducted. The Taxpayer states that approval for all media purchases is made by the client as principal. In so doing, the client deposits its own funds with the Taxpayer. The Taxpayer holds the funds in reserve through a separate accounting system for the Taxpayer's use in acquiring advertisements on the client's behalf. The Taxpayer draws upon these funds to pay the invoices issued by the media outlets used for that particular client.
The Taxpayer returns to the client any excess funds that are not used to pay for client advertisements. The invoices from the television and radio stations and newspapers are issued in the name of the Taxpayer's client in care of the Taxpayer. The Taxpayer's contract with its media sources provides 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 in writing by [the Taxpayer]. This written authority is on file at the agency's offices, a copy of which will be produced upon demand, or with this order, if the station requires. [The Taxpayer] warrants that, if this client-agency agreement in fact does not exist or has expired, [the Taxpayer] is responsible to the station for payment due under this order. [Emphasis added.]
In addition, the Taxpayer's contracts with its clients specifically identify the relationship between the Taxpayer and the client with regard to the placing of advertisements as a principal-agency relationship.
The City's Position
In an audit of the Taxpayer's BPOL taxes for tax year 1996, the City took the position that client deposits for advertising funds constituted gross receipts of the Taxpayer and assessed additional BPOL tax on the deposit amounts. The Taxpayer objected, providing the City with a copy of its amended 1995 federal income tax return, which did not include the advertising deposits as gross receipts. The Taxpayer filed its federal returns in tax years 1996, 1997, and 1998 based on this same premise. The City disregarded this objection and issued its Final Local Determination on November 24, 1999, finding that the deposited advertising funds were to be included in its gross receipts. In response to the Taxpayer's appeal of the final local determination, the City stated that its office was never provided with documentation of the existence of the client escrow accounts, or the executed media contracts and client billing statements.
ANALYSIS
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.
The definition of "agency relationship," has been created through case law. The seminal case in this area in relation to the BPOL tax is City of Alexandria v Morrison-Williams Associates, Inc., 223 Va. 349 (1982). In this case, the Virginia Supreme Court ruled that an advertising agency that charged its clients a commission on media charges was taxable on total receipts from clients without deduction for the media charges. The court noted that:
An analysis of the arrangement shows that the Taxpayer is not the legal agent of either client or media. The association between each is contractual, and there is no contact between the media and the client. Thus, if the Taxpayer became insolvent or unwilling to meet its contractual obligations, media would have no recourse against client. [Emphasis added.]
This decision has been referenced in subsequent opinions of the Attorney General. Those opinions 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.
There are several marked differences in the facts that led to the Court's finding in Morrison and in the cited opinion of the Attorney General. The facts in the present case are similar to those in the Attorney General's opinion. A review of the Taxpayer's contracts with its clients reveals that the contracts specifically identify the relationship between the Taxpayer and the client with regard to the placing of advertisements as a principal-agency relationship. The Taxpayer's clients deposit funds with the Taxpayer, and those funds are designated for the payment of specific expenses that the client otherwise would have incurred directly. Any excess funds that are not applied to purchase advertisements on behalf of a client are refunded to the client. Furthermore, the contract provides that "The Client agrees to assume full and final responsibility for fulfilling all contracts with the media and suppliers and further agrees to furnish signature on all contracts to indicate assumption of such responsibility."
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]."
In its finding of facts in Morrison, the court also referenced the Taxpayer's method of reporting total income to the Internal Revenue Service as including pass-through receipts to the media as a deduction in computing federal taxable income. Unlike the case presented in Morrison, in the immediate case the Taxpayer did not deduct costs of media expenses incurred on behalf of its clients from its federal income tax return. Rather, they were treated as a "pass-through cost."
CONCLUSION
For the reasons outlined above and based on the documentation provided, it is my determination 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 gross receipts of the Taxpayer for purposes of the BPOL tax. This matter is returned to the City for a correction of the assessment in accordance with this determination.
I would note that this final determination is case specific, based upon the facts and documentation presented. If you have any questions regarding this letter, please contact ****, Tax Policy Analyst, in the department's Office of Tax Policy, at ****.
.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner