Tax Type
BPOL Tax
Description
Performing technical support services
Topic
Local Taxes Discussion
Subtractions and Exclusions
Date Issued
09-14-2004
September 14, 2004
Re: Appeal of Assessment: Final Local 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 concerning the classification of the Taxpayer's business activities by the ***** (the "City") for purposes of the BPOL tax for tax years 2000, 2001 and 2002. I apologize for the delay in this response.
The following determination is based on the facts presented to the Department as summarized below. The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.
FACTS
The Taxpayer provides a variety of support services to the *****. These services encompass engineering and design work (11% of total revenues generated); other technical and nontechnical services in the areas of combat systems (13%); hull maintenance and electrical work (34%); command & control, communications, computers and intelligence systems (18%); and an array of logistics services (24%). The Taxpayer has ***** employees located at its corporate headquarters in the City. ***** or less than 1 percent of the Taxpayer's employees in the City, are licensed professional engineers, and ***** or 6.3 percent of the employees, have an undergraduate or graduate degree in engineering.
The Taxpayer holds itself out as having the "capabilities and resources positioned to successfully execute the ***** Life Cycle mission." This term references all the work associated with a ship's life cycle. The Taxpayer states that its role is "limited to post-design, technical and nontechnical support services primarily in areas of repairs, maintenance, training and logistic support to existing systems and equipment," and that its "personnel do not perform the engineering to design nor build the equipment."
The Taxpayer maintains that the role of the professional engineers in its employ is ancillary to the Taxpayer's primary business. The Taxpayer asserts that it would be perfectly capable of bidding on ***** contracts without any professional (licensed) engineers in its employ. It would merely subcontract for a professional engineer when necessary.
The City has issued three business licenses to the Taxpayer and apportioned the Taxpayer's receipts as follows: 28 percent as a professional service (engineering), 22 percent as a commercial service, and 50 percent as a repair service.
The Taxpayer contends the preponderance of its workforce is engaged in performing technical support services, rather than professional services directly associated with the practice of engineering. Therefore, it should be issued a single license under the classification of "repair, personal, business and other services" for purposes of the BPOL tax.
ANALYSIS
Professional Services and Business Services
There are two separate classifications of services for purposes of the BPOL tax: "financial, real estate and professional services," and "repair, personal, business and other services." Those businesses classified as providers of professional services are specifically enumerated in section 5.4.4.1 of the 2000 BPOL Guidelines. Engineers are included in this classification. Professionals that are employed by a corporation, however, are not individually subject to the BPOL tax. See 2000 BPOL Guidelines § 5.4.4.
All other business services not clearly identified as financial, real estate or professional services fall under the classification of "repair, personal, business and other services." A partial list of such businesses is found in § 5.5.2 of the 2000 BPOL Guidelines. Included in this partial listing are: business and governmental research and consulting services; computer and systems development services; drafting services; and services provided by instructors. These are the primary activities in which the Taxpayer is engaged.
Taxation of Multiple Businesses
The BPOL tax is a tax imposed by localities for the privilege of engaging in business within that locality. Generally, when a person operates two or more businesses, such person may elect to obtain a separate license for each business, or a single license under the classification that is taxed at the highest rate. Specifically, the law provides that:
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- A person engaged in two or more businesses or professions carried on at the same place of business may elect to obtain one license for all such businesses and professions if all of the following criteria are satisfied: (a) each business or profession is subject to licensure at the location and has satisfied any requirements imposed by state law or other provisions of the ordinances of this jurisdiction; (b) all of the businesses or professions are subject to the same tax rate, or, if subject to different tax rates, the licensee agrees to be taxed on all businesses and professions at the highest rate; and (c) the taxpayer agrees to supply such information as the assessor may require concerning the nature of the several businesses and their gross receipts. Va. Code § 58.1-3703.1(A)(1). [Emphasis added].
In other words, if the Taxpayer is engaged in more than one separate and distinct business and elects to be taxed at one rate, it must be the highest applicable rate. In this case, the Taxpayer holds itself out as an "engineering and support services" company; therefore, the engineering component of its business cannot be ignored. The Taxpayer contends, however, that it is actually in the business of ship repair and maintenance, and the engineering aspect of its business is a supportive, rather than the primary activity of its business.
Substantiality
Virginia Code § 58.1-3703.1(A)(1) presumes that each business can stand on its own and that neither business activity is ancillary to the other. For BPOL tax purposes, in those cases in which the various functions of a business are fully integrated, the business is to be taxed as a single entity at the rate applicable to the business function that meets the test of substantiality. See County of Chesterfield v. BBC Brown Boveri, 238 Va. 64 (1989).
In a similar case involving a defense contractor that provided engineering and technical assistance in areas including radio communications system design, integration and evaluation and installation planning and management, and "life-cycle support planning," the Attorney General opined that when: the Company's business activities are not separated, but are so integrated as to comprise a single business, then the Company is properly taxed a single rate based on whichever constitutes the "substantial" activity of the company, and not its ancillary activities. 1994 Report of the Attorney General, 99, 104.
Later in the same opinion the Attorney General states, "the Company should be taxed at the professional rate only if a substantial portion of its business is professional." [Emphasis in the original.] Op. cit. p. 105.
In the present case, if one were to accept the City's analysis, only 28 percent of the Taxpayer's business activity is associated with engineering, whereas 72 percent of its activities are classified as repair or commercial services. The Taxpayer maintains that only 6.3 percent of its employees are actually qualified to engage in engineering services, and that the 28 percent figure is inflated. At most, based on an examination of multiple contracts, the Taxpayer concedes that 20 percent of its hours billed under the sample contracts reviewed could be classified as being for engineering services.
The standard of substantiality was addressed by the Virginia Supreme Court in County of Chesterfield v. BBC Brown Boveri, 238 Va. 64 (1989). In BBC Brown Boveri, the Court found a corporation's manufacturing activities were substantial when compared to its total activities. The percentage of receipts attributed to manufacturing during the years in question ranged from 33.95% to 62.44%. In the Taxpayer's case, both the City's estimate of 28 percent and the Taxpayer's estimate of 20 percent of activities related to engineering services fall short of the substantiality test as applied by the Court in BBC Brown Boveri for purposes of BPOL taxation. Furthermore, because it is so fully integrated into the Taxpayer's business as a whole, the engineering component cannot be regarded as a separate business. Rather, while significant, engineering services must be regarded as an ancillary function.
In summary, a review of the Taxpayer's business and two sample contracts confirms the fact that although it holds itself out as providing engineering services as a part of the services it offers to support the "***** life cycle mission," these services complement and are integrated into the other business services its offers: those of hull maintenance and electrical work; command & control systems; communications; computers and intelligence systems; and an array of logistics services.
DETERMINATION
It is my determination that the City was in error in assigning separate licenses to various components of the Taxpayer's business. The Taxpayer's circumstances are similar to those of the taxpayer discussed in the 1994 opinion of the Attorney General.
The various components of the Taxpayer's business are so integrated that they must be assessed as a single business at the rate appropriate to the substantial part of its business: that of a business service. Therefore I am returning this matter to the City with instructions to reassess the Taxpayer' business at the single rate of a business service.
If you have any questions regarding this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/48897H
Rulings of the Tax Commissioner