Tax Type
BPOL Tax
Local Taxes
Description
Multi-state professional corporation; Formula for determining BPOL tax; Prospective application of new methodology
Topic
Local Power to Tax
Local Taxes Discussion
Date Issued
05-14-2001
May 14, 2001
Re: Request for Advisory Opinion Business, Professional and Occupational License (BPOL) Tax
Dear ****:
This is in response to the request for an advisory opinion that you submitted concerning the method utilized in calculating the gross receipts of a multi-state professional corporation. It is my understanding that the **** (the "City") has been in contact with **** (the "Taxpayer") and its counsel, **** and that all parties have concurred in submitting this request. I apologize for the delay in responding to your request.
While addressing the issues raised in your joint submission, this response is intended to provide advisory guidance only, and does not constitute a formal or binding ruling. I have enclosed copies of cited material for your review.
FACTS
The Taxpayer's Position
The Taxpayer, an environmental engineering consulting firm, is organized as a Subchapter S corporation as defined in the Internal Revenue Code (IRC) § 1361. The Taxpayer is a professional corporation as defined in Code of Virginia § 13.1-543, and is registered with the State Corporation Commission as such. The Taxpayer is privately owned by the firm's management and boasts a staff of more than 1,300 engineers, scientists, consultants, designers, architects and technical support personnel in more than 40 offices nationwide. The Taxpayer does business and files tax returns in 40 states. Headquartered in ****, the Taxpayer has two offices in the Commonwealth, one of which is in the City. Eighty-eight of the Taxpayer's 1,300 employees, including 77 professionals, are based in the City. In terms of project assignments throughout the country, the Taxpayer states that the City's office ranks among the top six of its 40 offices.
The Taxpayer's accounting system is project driven, rather than profit-center driven. While it maintains an office in the City, those professionals located in the City may be assigned to as many as 500 projects throughout the country in a given year, depending upon the need for their expertise. However, for state income tax purposes, the employees at the City's office are treated as Virginia residents and their earnings are attributed to Virginia.
In 1972, the City's former Commissioner of the Revenue advised the Taxpayer that its BPOL liability was limited to the salaries and such part of the local office's gross receipts the licensed professional officers who are shareholders are entitled to on a percentage basis as officers of the corporation. The Taxpayer asserts it has followed that methodology for more than 25 years. In 1997, the City found that this methodology was not correct, and began discussions with the Taxpayer to resolve the question of the appropriate basis for assessing the BPOL tax.
While the Taxpayer agrees that the methodology was incorrect, it argues that imposition of the different methodology as outlined in the Code of Virginia § 13.1-554 should be prospectively imposed.
The City's Position
The City and the Taxpayer initially agreed to apportion Virginia income based on payroll. If this were to be the approach, the City wanted the Taxpayer to prove the existence of the two other offices within the Commonwealth. However, the City questions the apportionment on a payroll basis to "satellite offices." The City also ignores the potential impact of Code of Virginia §§ 13.1-554 and 58.1-(A)(5)(e) in its presentation.
The Taxpayer informed the City of its new proposal. The City responded by noting that the Taxpayer had not included any portion of gross receipts in its reporting of receipts in the years audited. The City did not believe that the new methodology should be applied prospectively. Both parties have requested an advisory opinion on (i) the entire issue of correct methodology to use in this case, and (ii) whether or not the new methodology should be prospectively imposed.
OPINION
The controlling law regarding the imposition of the BPOL tax on a professional corporation is found in Code of Virginia § 13.1-554, rather than in Title 58.1. Prior to examining that formula, it is important to review the definition of a "professional corporation" as it applies to a firm like the Taxpayer.
Professional Corporation
As a professional corporation, the Taxpayer is required to comply with Code of Virginia § 13.1-554, which provides:
Chapter 37 (§ 58.1-3700 et seq.) of Title 58.1, requiring a separate revenue license for each member of a firm or company of persons practicing any profession or calling which is regulated by the laws of this Commonwealth, shall be applicable to shareholders of professional corporations; and no state or local revenue license shall be required of any professional corporation as prerequisite to the rendering of professional services in this Commonwealth, or any county, city or town therein; provided, however, that if any such county, city or town requires a revenue license for the privilege of practicing any of the professions to which this chapter applies and such license is measured by gross receipts, the gross receipts of a shareholder in a professional corporation shall consist of (1) his salary and (2) such part of the gross receipts of the corporation remaining after the payment of salaries to all the licensed employees as bears the same ratio to all such remaining gross receipts as his ownership in the corporation bears to the ownership therein of all the shareholders. [Emphasis added.]
Formula for Determining BPOL Tax on Professional Corporations
The BPOL tax treatment of professional corporations is unique in that the tax is applied to shareholders. Note that no state or local revenue license shall be required of a professional corporation as a prerequisite for practicing a profession in the Commonwealth. However such a license tax may be imposed upon the shareholders at the locality's discretion. See Code of Virginia § 13.1-554. The formula to be utilized in assessing the BPOL tax for each shareholder is as follows:
BPOL tax due = {[(GRC - LP$) * (%SHO)] +SH$}*Rate
Where:
GRC = Gross Receipts of Corporation
LP$ = Salaries of all Professionals subject to BPOL
%SHO = Ratio of Shareholder's percent of Ownership in Corp.
SH$ = Shareholder's Salary
Rate = Local BPOL tax rate for professional services
Applying this formula to facts supplied by the Taxpayer:
GRC = *****
LP$ = *****
%SHO = *****
SH$ = *****
Rate = *****
1997 Newport News BPOL Tax Due:
In this instance, it is not clear how the Taxpayer calculated either the shareholders' salaries or the ratio of the shareholders' salaries to their percent share of ownership in the corporation. In the final analysis, the formula should apply individually to each shareholder. This way, each individual shareholder would be taxed only on the percentage of the gross receipts that reflects his percentage share in the corporation, plus his salary. If the Taxpayer's representation combines the shareholders' salaries and their percent ownership in the corporation, than it must be recomputed by individual shareholder. The taxpayers are the shareholders, not the professional corporation.
Threshold Implications in Localities that have the $100 000 Threshold
All licensed professionals whose salaries are above the threshold would pay the BPOL tax due; otherwise, they would pay a license fee of $50. However, their total salaries, regardless of the fee or tax the individual professional's pay, would be used in determining the individual shareholder's BPOL tax assessment. Note that this statutory formula refers to the entire gross receipts of the corporation. In this case, it makes the Taxpayer's compliance far easier than the 1972 interpretation because the Taxpayer's accounting system is project driven, rather than profit center driven, with accounting being a centralized function.
Prospective Application of the New Methodology
The second point of discussion between the Taxpayer and the City is that of whether or not the new methodology should be applied prospectively or retrospectively. The Taxpayer had been following the method presented to the commissioner of the revenue without challenge since 1972. It was not until a 1997 desk audit was performed that this method came into question. The answer to this question is found in Code of Virginia § 58.1-3703.1(A)(5)(e), which states:
A written ruling may be revoked or amended prospectively if (i) there is a change in the law, a court decision, or the guidelines issued by the Department of Taxation upon which the ruling was based or (ii) the assessor notifies the taxpayer of a change in the policy or interpretation upon which the ruling was based. However, any person who acts on a written ruling which later becomes invalid shall be deemed to have acted in good faith during the period in which such ruling was in effect.
CONCLUSION
This opinion offers guidance as to the correct method to assess professional corporations and their shareholders for BPOL tax purposes. In order to fully implement the formula described above, it is my opinion that the City and the Taxpayer must resolve the following issues: (i) assurance that the Taxpayer meets all of the criteria to be licensed as a professional corporation as defined in Code of Virginia §§ 13.1-543 and 13.1-549; (ii) provision of the relevant facts by the Taxpayer relating to the formula for determining the appropriate BPOL tax due for each shareholder; (iii) the appropriate timing of applying the new formula, given the fact that the Taxpayer was relying upon a former ruling made by the Commissioner of the Revenue; and (iv) a determination of penalties and interest (if any) that should apply to the tax years at issue.
I hope this has been helpful to you, and I appreciate the fact that you and the Taxpayer have worked together in seeking an advisory opinion. Although I believe this letter conforms with the requirements of the law, it is written only for your guidance. If you have any questions or if the department can be of further assistance, please contact **** in the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
Re: Request for Advisory Opinion Business, Professional and Occupational License (BPOL) Tax
Dear ****:
This is in response to the request for an advisory opinion that you submitted concerning the method utilized in calculating the gross receipts of a multi-state professional corporation. It is my understanding that the **** (the "City") has been in contact with **** (the "Taxpayer") and its counsel, **** and that all parties have concurred in submitting this request. I apologize for the delay in responding to your request.
While addressing the issues raised in your joint submission, this response is intended to provide advisory guidance only, and does not constitute a formal or binding ruling. I have enclosed copies of cited material for your review.
FACTS
The Taxpayer's Position
The Taxpayer, an environmental engineering consulting firm, is organized as a Subchapter S corporation as defined in the Internal Revenue Code (IRC) § 1361. The Taxpayer is a professional corporation as defined in Code of Virginia § 13.1-543, and is registered with the State Corporation Commission as such. The Taxpayer is privately owned by the firm's management and boasts a staff of more than 1,300 engineers, scientists, consultants, designers, architects and technical support personnel in more than 40 offices nationwide. The Taxpayer does business and files tax returns in 40 states. Headquartered in ****, the Taxpayer has two offices in the Commonwealth, one of which is in the City. Eighty-eight of the Taxpayer's 1,300 employees, including 77 professionals, are based in the City. In terms of project assignments throughout the country, the Taxpayer states that the City's office ranks among the top six of its 40 offices.
The Taxpayer's accounting system is project driven, rather than profit-center driven. While it maintains an office in the City, those professionals located in the City may be assigned to as many as 500 projects throughout the country in a given year, depending upon the need for their expertise. However, for state income tax purposes, the employees at the City's office are treated as Virginia residents and their earnings are attributed to Virginia.
In 1972, the City's former Commissioner of the Revenue advised the Taxpayer that its BPOL liability was limited to the salaries and such part of the local office's gross receipts the licensed professional officers who are shareholders are entitled to on a percentage basis as officers of the corporation. The Taxpayer asserts it has followed that methodology for more than 25 years. In 1997, the City found that this methodology was not correct, and began discussions with the Taxpayer to resolve the question of the appropriate basis for assessing the BPOL tax.
While the Taxpayer agrees that the methodology was incorrect, it argues that imposition of the different methodology as outlined in the Code of Virginia § 13.1-554 should be prospectively imposed.
The City's Position
The City and the Taxpayer initially agreed to apportion Virginia income based on payroll. If this were to be the approach, the City wanted the Taxpayer to prove the existence of the two other offices within the Commonwealth. However, the City questions the apportionment on a payroll basis to "satellite offices." The City also ignores the potential impact of Code of Virginia §§ 13.1-554 and 58.1-(A)(5)(e) in its presentation.
The Taxpayer informed the City of its new proposal. The City responded by noting that the Taxpayer had not included any portion of gross receipts in its reporting of receipts in the years audited. The City did not believe that the new methodology should be applied prospectively. Both parties have requested an advisory opinion on (i) the entire issue of correct methodology to use in this case, and (ii) whether or not the new methodology should be prospectively imposed.
OPINION
The controlling law regarding the imposition of the BPOL tax on a professional corporation is found in Code of Virginia § 13.1-554, rather than in Title 58.1. Prior to examining that formula, it is important to review the definition of a "professional corporation" as it applies to a firm like the Taxpayer.
Professional Corporation
As a professional corporation, the Taxpayer is required to comply with Code of Virginia § 13.1-554, which provides:
Chapter 37 (§ 58.1-3700 et seq.) of Title 58.1, requiring a separate revenue license for each member of a firm or company of persons practicing any profession or calling which is regulated by the laws of this Commonwealth, shall be applicable to shareholders of professional corporations; and no state or local revenue license shall be required of any professional corporation as prerequisite to the rendering of professional services in this Commonwealth, or any county, city or town therein; provided, however, that if any such county, city or town requires a revenue license for the privilege of practicing any of the professions to which this chapter applies and such license is measured by gross receipts, the gross receipts of a shareholder in a professional corporation shall consist of (1) his salary and (2) such part of the gross receipts of the corporation remaining after the payment of salaries to all the licensed employees as bears the same ratio to all such remaining gross receipts as his ownership in the corporation bears to the ownership therein of all the shareholders. [Emphasis added.]
Formula for Determining BPOL Tax on Professional Corporations
The BPOL tax treatment of professional corporations is unique in that the tax is applied to shareholders. Note that no state or local revenue license shall be required of a professional corporation as a prerequisite for practicing a profession in the Commonwealth. However such a license tax may be imposed upon the shareholders at the locality's discretion. See Code of Virginia § 13.1-554. The formula to be utilized in assessing the BPOL tax for each shareholder is as follows:
BPOL tax due = {[(GRC - LP$) * (%SHO)] +SH$}*Rate
Where:
GRC = Gross Receipts of Corporation
LP$ = Salaries of all Professionals subject to BPOL
%SHO = Ratio of Shareholder's percent of Ownership in Corp.
SH$ = Shareholder's Salary
Rate = Local BPOL tax rate for professional services
Applying this formula to facts supplied by the Taxpayer:
GRC = *****
LP$ = *****
%SHO = *****
SH$ = *****
Rate = *****
1997 Newport News BPOL Tax Due:
In this instance, it is not clear how the Taxpayer calculated either the shareholders' salaries or the ratio of the shareholders' salaries to their percent share of ownership in the corporation. In the final analysis, the formula should apply individually to each shareholder. This way, each individual shareholder would be taxed only on the percentage of the gross receipts that reflects his percentage share in the corporation, plus his salary. If the Taxpayer's representation combines the shareholders' salaries and their percent ownership in the corporation, than it must be recomputed by individual shareholder. The taxpayers are the shareholders, not the professional corporation.
Threshold Implications in Localities that have the $100 000 Threshold
All licensed professionals whose salaries are above the threshold would pay the BPOL tax due; otherwise, they would pay a license fee of $50. However, their total salaries, regardless of the fee or tax the individual professional's pay, would be used in determining the individual shareholder's BPOL tax assessment. Note that this statutory formula refers to the entire gross receipts of the corporation. In this case, it makes the Taxpayer's compliance far easier than the 1972 interpretation because the Taxpayer's accounting system is project driven, rather than profit center driven, with accounting being a centralized function.
Prospective Application of the New Methodology
The second point of discussion between the Taxpayer and the City is that of whether or not the new methodology should be applied prospectively or retrospectively. The Taxpayer had been following the method presented to the commissioner of the revenue without challenge since 1972. It was not until a 1997 desk audit was performed that this method came into question. The answer to this question is found in Code of Virginia § 58.1-3703.1(A)(5)(e), which states:
A written ruling may be revoked or amended prospectively if (i) there is a change in the law, a court decision, or the guidelines issued by the Department of Taxation upon which the ruling was based or (ii) the assessor notifies the taxpayer of a change in the policy or interpretation upon which the ruling was based. However, any person who acts on a written ruling which later becomes invalid shall be deemed to have acted in good faith during the period in which such ruling was in effect.
CONCLUSION
This opinion offers guidance as to the correct method to assess professional corporations and their shareholders for BPOL tax purposes. In order to fully implement the formula described above, it is my opinion that the City and the Taxpayer must resolve the following issues: (i) assurance that the Taxpayer meets all of the criteria to be licensed as a professional corporation as defined in Code of Virginia §§ 13.1-543 and 13.1-549; (ii) provision of the relevant facts by the Taxpayer relating to the formula for determining the appropriate BPOL tax due for each shareholder; (iii) the appropriate timing of applying the new formula, given the fact that the Taxpayer was relying upon a former ruling made by the Commissioner of the Revenue; and (iv) a determination of penalties and interest (if any) that should apply to the tax years at issue.
I hope this has been helpful to you, and I appreciate the fact that you and the Taxpayer have worked together in seeking an advisory opinion. Although I believe this letter conforms with the requirements of the law, it is written only for your guidance. If you have any questions or if the department can be of further assistance, please contact **** in the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner