Tax Type
BPOL Tax
Local Taxes
Description
Real estate broker; Transaction fees
Topic
Local Power to Tax
Date Issued
04-17-2001
April 17, 2001
Re: Taxpayer: Locality Assessing Tax: Appeal of Business, Professional, and Occupational License (BPOL) Tax
Dear ****
This final determination is issued upon an application for correction of a BPOL tax assessment filed by you on behalf of ***** (the "Taxpayer"). The assessment was made by the Commissioner of the Revenue of the ****** (the "City").
The BPOL 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 by the Taxpayer and the City as summarized below. Copies of cited sources are enclosed.
FACTS
The Taxpayer is a real estate broker. Unlike many brokers, the Taxpayer does not compensate its agents using the traditional "commission split" arrangement. Under the commission split arrangement, the broker remits a percentage of the commission from each sale to the agent involved with the sale. Instead, the Taxpayer uses two different programs to compensate its agents.
The first program is the "100% Program." After deducting two items from each commission, the Taxpayer pays the remainder of the commission to the agent responsible for the sale. The first deduction is for business license taxes attributable to the broker's receipt of the commission income. The second deduction is for a charitable donation.
The second program is the "Transaction Fee Program." This program is similar in concept to the 100% Program. However, in addition to the deductions for business license taxes and a charitable donation, the Taxpayer deducts a flat transaction fee from each commission. After deducting these three items from each commission, the Taxpayer pays the remainder of the commission to the agent responsible for the sale.
Additionally, all agents pay monthly fees to the Taxpayer. The Taxpayer bills and collects these fees from the agents on a monthly basis. The Taxpayer does not deduct or withhold these amounts from the agent's commission income.
When determining its taxable gross receipts for business license tax purposes, the Taxpayer has traditionally reported only the amount of its gross commissions. As a result of an audit, the City determined that the Taxpayer should have included the monthly fees and the transaction fees paid by the agents in its taxable gross receipts. Additionally, the City determined that the Taxpayer should have included its interest income in its taxable gross receipts. The City assessed additional license taxes on account of these items.
The Taxpayer contends that when determining its gross receipts, it is entitled to exclude the monthly fees and the transaction fees received from the agents because these amounts are already reflected in its gross receipts as commission income. To include them in gross receipts would be double taxation. Additionally, the Taxpayer contends that it is entitled to exclude the monthly fees, the transaction fees, and the interest income because these amounts are not derived from the licensable privilege of engaging in business as a real estate broker. Finally, the Taxpayer contends that the City may not retrospectively disallow local license tax exclusions that have withstood several audits by the City over the years. The Taxpayer filed this appeal when its arguments were rejected by the City.
ANALYSIS
Gross Receipts
Section 1 of the 2000 BPOL Guidelines defines "gross receipts" to be "the whole, entire, total receipts, of money or other consideration received by the taxpayer as a result of transactions with others besides himself and which are derived from the exercise of a licensed privilege to engage in a business . . . without deduction or exclusion except as provided by law."
Special Rule for Real Estate Brokers
Code of Virginia § 58.1-3732.2 provides an exclusion for real estate brokers:
[g]ross receipts of real estate brokers for license tax purposes under Chapter 37 (§ 58.1-3700 et seq.) of this title shall not include amounts received by any broker which arise from real estate sales transactions to the extent that such amounts are paid to a real estate agent as a commission on any real estate sales transaction and the agent is subject to the business license tax on such receipts.
The broker is not entitled to the exclusion afforded by Code of Virginia § 58.1-3732.2 unless the agent is subject to a business license tax on such receipts in a Virginia locality. Public Document 97-8 (January 16, 1997). The City, as well as several other Virginia localities, has elected not to subject real estate agents to business license taxation. As the Taxpayer's agents are not subject to business license taxation, this exemption is not available to the Taxpayer.
Taxation of Monthly Fees Received from Agents
The facts presented reflect that the Taxpayer bills the monthly fees to the agents every month. The agents pay the monthly fees to the Taxpayer from their own funds. I am not aware of any provision of law that would authorize the Taxpayer to exclude the monthly fees from its taxable gross receipts. Accordingly, it is my determination that it is within the City's discretion to include the monthly fees in the Taxpayer's taxable gross receipts.
Taxation of Transaction Fees Received from Agents
The facts presented indicate that the Taxpayer receives the full amount of each commission and includes the full amount of each commission in its taxable gross receipts. After deducting certain amounts, including the transaction fee, the Taxpayer remits the remaining commission to the agent responsible for the sale. The retention of the transaction fee from a commission that is fully included in the Taxpayer's gross receipts does not give rise to additional gross receipts. Accordingly, it is my determination that the transaction fees should not be included again in the Taxpayer's taxable gross receipts because they have already been included in the full amount of each commission reported as the Taxpayer's gross receipts.
Taxation of Interest Income
Code of Virginia § 58.1-3732 (A)(8) provides an exclusion from taxable gross receipts for:
[i]nvestment income not directly related to the privilege exercised by a business subject to licensure not classified as rendering financial services. This exclusion shall apply to interest on bank accounts of the business, and to interest, dividends and other income derived from the investment of its own funds in securities and other types of investments unrelated to the licensed privilege. This exclusion shall not apply to interest, late fees and similar income attributable to an installment sale or other transaction that occurred in the regular course of business.
Code of Virginia § 58.1-3732 (A)(8) excludes investment income that is not directly related to the licensed privilege from taxable gross receipts. In general, Code of Virginia § 58.1-3732 (A)(8) authorizes the Taxpayer to exclude interest earned on its bank accounts. However, interest that is attributable to a transaction that occurs in the regular course of business is not excluded under Code of Virginia § 58.1-3732 (A)(8). For example, interest earned on funds held for a party to a real estate sales or lease transaction would not be excluded under Code of Virginia § 58.1-3732 (A)(8). Likewise, interest paid to the Taxpayer by a party to a real estate sales or lease transaction would not be excluded under Code of Virginia § 58.1-3732 (A)(8).
The facts presented do not identify the source of the interest income in question. Accordingly, this matter is returned to the City for a re-determination on this issue consistent with this determination.
Effect of Audit Approval of Prior License Years
The Taxpayer contends that the City may not retrospectively disallow local license tax exclusions that have withstood several audits by the City over the years.
I am not aware of any law that would preclude the City from assessing taxes and interest that are otherwise due on this basis. However, Code of Virginia § 58.1-3703.1(A)(2)(d) forbids a locality from imposing a late payment penalty in certain circumstances:
In the case of an assessment of additional tax made by the assessing official, if the application and, if applicable, the return were made in good faith and the understatement of the tax was not due to any fraud, reckless or intentional disregard of the law by the taxpayer, there shall be no late payment penalty assessed with the additional tax.
However, the facts presented reflect that the City has not assessed penalties.
CONCLUSION
This matter is returned to the City for a correction of the assessment regarding the transaction fees and a re-determination regarding the interest income. Otherwise, it is my determination that the assessment is correct.
The Taxpayer shall provide any facts supporting its position regarding the interest income issue to the City within 45 days after the date of this final State determination. The City shall issue its re-determination within 45 days thereafter. If the Taxpayer disagrees with the City's re-determination, the Taxpayer may appeal to the department within 45 days after the date of the City's re-determination.
If you have any other questions about this final determination, please do not
hesitate to contact *****, Tax Policy Analyst, in my Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
Re: Taxpayer: Locality Assessing Tax: Appeal of Business, Professional, and Occupational License (BPOL) Tax
Dear ****
This final determination is issued upon an application for correction of a BPOL tax assessment filed by you on behalf of ***** (the "Taxpayer"). The assessment was made by the Commissioner of the Revenue of the ****** (the "City").
The BPOL 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 by the Taxpayer and the City as summarized below. Copies of cited sources are enclosed.
FACTS
The Taxpayer is a real estate broker. Unlike many brokers, the Taxpayer does not compensate its agents using the traditional "commission split" arrangement. Under the commission split arrangement, the broker remits a percentage of the commission from each sale to the agent involved with the sale. Instead, the Taxpayer uses two different programs to compensate its agents.
The first program is the "100% Program." After deducting two items from each commission, the Taxpayer pays the remainder of the commission to the agent responsible for the sale. The first deduction is for business license taxes attributable to the broker's receipt of the commission income. The second deduction is for a charitable donation.
The second program is the "Transaction Fee Program." This program is similar in concept to the 100% Program. However, in addition to the deductions for business license taxes and a charitable donation, the Taxpayer deducts a flat transaction fee from each commission. After deducting these three items from each commission, the Taxpayer pays the remainder of the commission to the agent responsible for the sale.
Additionally, all agents pay monthly fees to the Taxpayer. The Taxpayer bills and collects these fees from the agents on a monthly basis. The Taxpayer does not deduct or withhold these amounts from the agent's commission income.
When determining its taxable gross receipts for business license tax purposes, the Taxpayer has traditionally reported only the amount of its gross commissions. As a result of an audit, the City determined that the Taxpayer should have included the monthly fees and the transaction fees paid by the agents in its taxable gross receipts. Additionally, the City determined that the Taxpayer should have included its interest income in its taxable gross receipts. The City assessed additional license taxes on account of these items.
The Taxpayer contends that when determining its gross receipts, it is entitled to exclude the monthly fees and the transaction fees received from the agents because these amounts are already reflected in its gross receipts as commission income. To include them in gross receipts would be double taxation. Additionally, the Taxpayer contends that it is entitled to exclude the monthly fees, the transaction fees, and the interest income because these amounts are not derived from the licensable privilege of engaging in business as a real estate broker. Finally, the Taxpayer contends that the City may not retrospectively disallow local license tax exclusions that have withstood several audits by the City over the years. The Taxpayer filed this appeal when its arguments were rejected by the City.
ANALYSIS
Gross Receipts
Section 1 of the 2000 BPOL Guidelines defines "gross receipts" to be "the whole, entire, total receipts, of money or other consideration received by the taxpayer as a result of transactions with others besides himself and which are derived from the exercise of a licensed privilege to engage in a business . . . without deduction or exclusion except as provided by law."
Special Rule for Real Estate Brokers
Code of Virginia § 58.1-3732.2 provides an exclusion for real estate brokers:
[g]ross receipts of real estate brokers for license tax purposes under Chapter 37 (§ 58.1-3700 et seq.) of this title shall not include amounts received by any broker which arise from real estate sales transactions to the extent that such amounts are paid to a real estate agent as a commission on any real estate sales transaction and the agent is subject to the business license tax on such receipts.
The broker is not entitled to the exclusion afforded by Code of Virginia § 58.1-3732.2 unless the agent is subject to a business license tax on such receipts in a Virginia locality. Public Document 97-8 (January 16, 1997). The City, as well as several other Virginia localities, has elected not to subject real estate agents to business license taxation. As the Taxpayer's agents are not subject to business license taxation, this exemption is not available to the Taxpayer.
Taxation of Monthly Fees Received from Agents
The facts presented reflect that the Taxpayer bills the monthly fees to the agents every month. The agents pay the monthly fees to the Taxpayer from their own funds. I am not aware of any provision of law that would authorize the Taxpayer to exclude the monthly fees from its taxable gross receipts. Accordingly, it is my determination that it is within the City's discretion to include the monthly fees in the Taxpayer's taxable gross receipts.
Taxation of Transaction Fees Received from Agents
The facts presented indicate that the Taxpayer receives the full amount of each commission and includes the full amount of each commission in its taxable gross receipts. After deducting certain amounts, including the transaction fee, the Taxpayer remits the remaining commission to the agent responsible for the sale. The retention of the transaction fee from a commission that is fully included in the Taxpayer's gross receipts does not give rise to additional gross receipts. Accordingly, it is my determination that the transaction fees should not be included again in the Taxpayer's taxable gross receipts because they have already been included in the full amount of each commission reported as the Taxpayer's gross receipts.
Taxation of Interest Income
Code of Virginia § 58.1-3732 (A)(8) provides an exclusion from taxable gross receipts for:
[i]nvestment income not directly related to the privilege exercised by a business subject to licensure not classified as rendering financial services. This exclusion shall apply to interest on bank accounts of the business, and to interest, dividends and other income derived from the investment of its own funds in securities and other types of investments unrelated to the licensed privilege. This exclusion shall not apply to interest, late fees and similar income attributable to an installment sale or other transaction that occurred in the regular course of business.
Code of Virginia § 58.1-3732 (A)(8) excludes investment income that is not directly related to the licensed privilege from taxable gross receipts. In general, Code of Virginia § 58.1-3732 (A)(8) authorizes the Taxpayer to exclude interest earned on its bank accounts. However, interest that is attributable to a transaction that occurs in the regular course of business is not excluded under Code of Virginia § 58.1-3732 (A)(8). For example, interest earned on funds held for a party to a real estate sales or lease transaction would not be excluded under Code of Virginia § 58.1-3732 (A)(8). Likewise, interest paid to the Taxpayer by a party to a real estate sales or lease transaction would not be excluded under Code of Virginia § 58.1-3732 (A)(8).
The facts presented do not identify the source of the interest income in question. Accordingly, this matter is returned to the City for a re-determination on this issue consistent with this determination.
Effect of Audit Approval of Prior License Years
The Taxpayer contends that the City may not retrospectively disallow local license tax exclusions that have withstood several audits by the City over the years.
I am not aware of any law that would preclude the City from assessing taxes and interest that are otherwise due on this basis. However, Code of Virginia § 58.1-3703.1(A)(2)(d) forbids a locality from imposing a late payment penalty in certain circumstances:
In the case of an assessment of additional tax made by the assessing official, if the application and, if applicable, the return were made in good faith and the understatement of the tax was not due to any fraud, reckless or intentional disregard of the law by the taxpayer, there shall be no late payment penalty assessed with the additional tax.
However, the facts presented reflect that the City has not assessed penalties.
CONCLUSION
This matter is returned to the City for a correction of the assessment regarding the transaction fees and a re-determination regarding the interest income. Otherwise, it is my determination that the assessment is correct.
The Taxpayer shall provide any facts supporting its position regarding the interest income issue to the City within 45 days after the date of this final State determination. The City shall issue its re-determination within 45 days thereafter. If the Taxpayer disagrees with the City's re-determination, the Taxpayer may appeal to the department within 45 days after the date of the City's re-determination.
If you have any other questions about this final determination, please do not
hesitate to contact *****, Tax Policy Analyst, in my Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner