Document Number
02-153
Tax Type
BPOL Tax
Description
Construction projects, BPOL
Topic
Local Power to Tax
Date Issued
12-11-2002

December 11, 2002



Re: Request for Advisory Opinion
Business, Professional and Occupational License (BPOL) Tax

Dear *****:

This is in response to your letter requesting an advisory opinion on the BPOL tax classification of a business, ***** (the "Taxpayer"), located within the *****. You also inquire about the proper allocation of the Taxpayer's receipts between the ***** ("City A") and the ***** ("City B").

The local license fee and tax are imposed and administered by local officials. The following opinion has been made subject to the facts presented to the department as summarized below. Any change in these facts or the introduction of facts by another party may lead to a different result. While addressing the questions raised in your letter, this response is intended to provide advisory guidance only, and does not constitute a formal or binding ruling.

Copies of the Code of Virginia, regulations and public documents cited are included for reference purposes. These and other reference documents are also available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.
FACTS

You state that the Taxpayer, whose offices are located in City A, has been licensed as a commercial service by the City since 1992. The Taxpayer renders supervisory and management services on housing projects within the City and in other jurisdictions.

Recently, the Taxpayer has supervised construction projects for ***** (the "Owner") in City B, and City B has assessed the Taxpayer for BPOL tax as a contractor on the same gross receipts that City A has assessed the Taxpayer.

The Taxpayer entered into an agreement with the Owner to provide management and supervisory assistance for the Owner's development project. The Taxpayer also has entered into a construction management agreement with the Owner. The construction management agreement stipulates that the Taxpayer shall receive a fee of $6,000 for each unit payable upon the issuance of a building permit.

The development management agreement addresses all phases of the project. For a $15,000 monthly fee as stipulated in the agreement, the Taxpayer agrees to be the authorized agent of the Owner. As such, it is responsible for:

1. Employing of all executive management personnel necessary to work on the project with the exception of brokers and sales personnel. The development manager is responsible for paying all salaries, wages and fringe benefits of its personnel, which include bookkeeper(s), secretary(ies) and a project manager;

2. Preparing financial analysis of all aspects of the project;

3. Overseeing the development of all phases of the project;

4. Recommending selection of architects and contractors to Owner for the design and construction of the project;

5. Soliciting proposals from engineering firms, making recommendations on selection of such firms to Owner;

6. Making recommendations to Owner regarding the procurement of development loans; preparing development loan applications;

7. Developing sales and marketing programs for sale of property in the project (Owner is responsible for employing personnel necessary to implementing the sales and marketing program); and

8. Keeping of all books and financial records related to the project.

The Taxpayer is not responsible for failure on the part of contractors, subcontractors, engineers, architects, etc., nor is it responsible for costs and expenses incurred in connection with agreements between the Owner and third parties. The third parties include the general contractor, architects, consulting engineers, construction and permanent lenders, guarantors, underwriters, public utilities, public authorities and government officials. The Owner carries the insurance for the project.

In addition to the management fee, the Taxpayer is to be reimbursed by the Owner for any other expenses it incurs in the scope of the activities it performs pursuant to the development management agreement. All debts and liabilities incurred to third parties in the course of managing the project are the obligations of the Owner, not the Taxpayer. It is not clear from the sample contract if the Taxpayer receives any other compensation for its work as development manager.

City B has classified the Taxpayer as a contractor and assessed the Taxpayer on the sum of its gross receipts earned in connection with its work with the Owner.

The Taxpayer holds itself out for business as a real estate developer in the Yellow Pages for City A. It does not have a listing in City B's Yellow Pages. The Taxpayer's office is located in the City. The Owner maintains a trailer on site in City B that the Taxpayer's project manager uses daily in his project oversight capacity. All other employees of the Taxpayer assigned to the project report to the Taxpayer's office in City A. The Taxpayer's sign is on the trailer; however, the only telephone listing the Taxpayer has is for its office in City A.

The Taxpayer does have a State Class A contractor's license that enables it to file for building permits for housing projects. In the case presented, the Taxpayer obtained all of the building permits for the housing project. You ask:

1. What is the correct classification of the Taxpayer?

2. Does the fact that the Taxpayer uses a trailer on a project site in City B constitute situs in City B?

3. If the trailer does constitute situs, how should the Taxpayer's gross receipts be allocated?
ANALYSIS

Business Services

City A has classified the Taxpayer as a business services company for purposes of BPOL taxation. Under § 5.5 of the 2000 BPOL Guidelines, services that are "not clearly identified as financial, real estate or professional are classified as repair, personal, business and other services." None of the services the Taxpayer provides come under strict definition of "professional services." While the services it provides are not in the list of repair, personal, business and other services enumerated in the Guidelines, that list is not all inclusive. In fact, § 5.4.4.2 of the 2000 Guidelines makes reference to "management consulting" as probably falling in the "other services" category.
    • The term "management consulting" does not convey enough information about the service offered to determine the proper classification. Services which assist the business in the conduct of its day-to-day operations would generally not be considered professional. For example, payroll services, marketing surveys, and cash management, are all services that would not properly be classified as professional services.

Contractors
    • For purposes of state licensure, Va. Code § 54.1-1100 defines a contractor to mean:
    • any person, that for a fixed price, commission, fee, or percentage undertakes to bid upon, or accepts, or offers to accept, orders or contracts for performing, managing, or superintending in whole or in part, the construction, removal, repair or improvement of any building or structure permanently annexed to real property owned, controlled, or leased by him or another person or any other improvements to such real property. The Taxpayer is licensed by the State as a "Class A" contractor, which means it is licensed to perform or manage construction, removal, repair, or improvements when (i) the total value referred to in a single contract or project is $70,000 or more, or (ii) the total value of all such construction, removal, repair, or improvements undertaken by such person within any twelve-month period is $500,000 or more.
    • Persons with a state contractor's license are not necessarily classified as
contractors for BPOL tax purposes. For BPOL tax purposes, contractors are defined in Va. Code § 58.1-3714 as persons who accept or offer to accept orders for:
    • • doing any work on or in any building or structure, requiring the use of paint, stone, brick, mortar, wood, cement, structural iron or steel, sheet iron, galvanized iron, metallic piping, tin, lead, or other metal or any other building material;
      • doing any paving, curbing or other work on sidewalks, streets, alleys, or highways, or public or private property, using asphalt, brick, stone, cement, concrete, wood or any composition;
      • excavating earth, rock, or other material for foundation or any other purpose or for cutting, trimming or maintaining rights-of-way;
      • constructing any sewer of stone, brick, terra cotta or other material;
      • doing any work on or in any building or premises involving the erecting, installing, altering, repairing, servicing, or maintaining electric wiring, devices or appliances permanently connected to such wiring, or the erecting, repairing or maintaining of lines for the transmission or distribution of electric light and power; or
      • engaging in the business of plumbing and steam fitting.

The 2000 BPOL Guidelines § 5.1.1 further defines contractors to be persons who engage others to perform any of the above-mentioned work. In this case, it is the Owner who employs others to perform contracting work. The Taxpayer, in its role as development manager, employs an individual project manager and office support staff necessary for project oversight. The project manager, however, might be regarded as a contractor under the definition in the 2000 BPOL Guidelines. The part of the Taxpayer's business relating to its construction management contract could be classified as contracting.

The services the Taxpayer performs under its management agreement do not meet the definition of a contractor. The facts presented here do not conform with the facts governing a 1991 Opinion of the Attorney General. In that case, the Attorney General held that because the contractor accepted a single contract for the entire project, it was taxable on the entire gross receipts related to the project. 1991 Op. Va. Att'y. Gen. 257, 260. In the present case, the Owner employs a general contractor and several subcontractors for the project. Their BPOL tax liability in City B is for the local commissioner of revenue to decide.

The Owner has a separate agreement with the Taxpayer for development management services, which are largely rendered from the Taxpayer's offices in City A.

BPOL Tax Treatment of Contractors

Generally, when a contractor has a definite place of business in one jurisdiction and pays his license tax to that jurisdiction, it is not required to pay a license tax to any other jurisdiction. However, when the amount of business done by any such contractor in another jurisdiction exceeds the sum of $25,000 in any year, that jurisdiction may require the contractor to pay a license tax. The amount of business performed in the other jurisdiction must be deducted from the contractor's gross receipts it attributed to its principal office. See Va. Code § 58.1-3715.

In this instance, the Taxpayer's employee, the project manager, is the only member of the Taxpayer's company engaged in contracting. The Taxpayer's business is that of overall development management, a small aspect of which is devoted to supervising the construction site. The Owner hires the architects, engineers, general contractor and subcontractor, negotiates salary and wage agreements with them, and pays them. The project manager is hired by the Taxpayer, as are its office personnel.

The Taxpayer contracts with the Owner to provide specified services for a monthly fee. These services include the provision of the project manager's supervisory services. The Taxpayer also receives a set fee per dwelling for construction management, which is essentially what the project manager does. These monies can easily be segregated from the other receipts attributed to the Taxpayer's business as a development manager.

Definite Place of Business
    • Definite place of business means an office or a location at which occurs a regular and continuous course of dealing for thirty consecutive days or more. Va. Code § 58.1-3700.1.

For the purpose of local license taxation, Va. Code § 58.1-3703.1(A)(3)(a)(1) provides that:
    • (T)he gross receipts of a contractor shall be attributed to the definite place of business at which his services are performed, or if his services are not performed at any definite place of business, then the definite place of business from which his services are directed or controlled, unless the contractor is subject to the provisions of § 58.1-3715 . . . .

The Taxpayer's definite place of business is in City A. All of its activities are directed and controlled from that location. The Owner's trailer in City B is used by the project manager so he can perform his oversight function. The fact that he remains on site on a daily and continuous basis suggests that the Taxpayer has a definite place of business in City B as well.
                        • OPINION

The Taxpayer's role in this project involves substantially more than that of a contractor. The agreement specifies that the Owner is retaining the Taxpayer as a development manager for a specific project. The Taxpayer's responsibilities as summarized in the agreement are to provide the Owner with development management services that cover "all aspects of the design, financing, administration, administration construction and marketing, sales and leasing of all phases of the project." The Taxpayer also agrees to provide day-to-day coordination and evaluation of architects, general contractors, consulting engineers, attorneys, project consultants, construction and permanent lenders, underwriters, public utilities, public authorities and government officials. With the exception of the project manager, who is in the Taxpayer's employ and reports directly to it, the Taxpayer's business activities all take place in City A.

The Taxpayer is not primarily engaged in actual construction of the project. Its business is that of overall coordinator. As such, the Taxpayer's primary function is that of a business service whose definite place of business is in City A. However, the gross receipts earned from its construction management agreement, if in excess of $25,000 in a year, could require the Taxpayer to pay a BPOL tax on those gross receipts in City B. If this is the case, City A would have to deduct those receipts from the taxable receipts apportioned to City A.

The contractors, subcontractors and engineers working on the project in City B may be subject to the BPOL tax in City B. Likewise, the Owner may be subject to BPOL tax in City B under the real estate services provision in Va. Code §§ 58.1-3703(C)(19) and 58.1-3706(A)(3).

If you have any questions regarding this opinion, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

                • Sincerely,

                • Kenneth W. Thorson
                  Tax Commissioner



AR/36820H


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46