Tax Type
BPOL Tax
Description
Provides mailing list information to mass marketers on a one-time basis
Topic
Local Power to Tax
Date Issued
08-23-2004
August 23, 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 upholding an audit assessment of BPOL taxes made by the Commissioner of the Revenue of the ***** (the "City") for tax years 1998, 1999 and 2000. I apologize for the delay in this response.
The local license tax and fee are imposed and administered by local officials. Virginia Code § 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, that is, 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 the Code of Virginia, 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 is a mailing list broker. It provides mailing list information to mass marketers on a one-time basis. The Taxpayer's clients are mass marketers or "mailers" that enlist the Taxpayer's services in locating mailing lists that are appropriate to the client's needs. In placing the order, the Taxpayer submits a standard form to the owner of the list, which states that the "Mailer guarantees that names are for a one time mailing only. [Taxpayer] acts as an agent on behalf of mailer and mailer is solely responsible for full payment."
During the tax period in dispute, billings for the lists came from the list service through the Taxpayer. The bill would specify the total cost of the list and include a separate line for the commission due to the Taxpayer. The Taxpayer would then forward a bill for the total amount including the Taxpayer's commission to the mailer. The client would pay the total sum of the bill to the Taxpayer, who then would act as a disbursing agent, remitting the amount due the list service (the owner of the list), and retaining its commission. The funds for the commissions and the monies due to the list providers and other business-related funds of the Taxpayer were not segregated.
The Taxpayer first filed an appeal on this issue with the Tax Commissioner in 2001. Responding to the Taxpayer's appeal, in Public Document (P.D.) 01-155 (10/17/01), the Tax Commissioner noted that while Va. Code § 58.1-3700.1 states that "gross receipts" means the whole, entire, total receipts, without deduction, "there are specific exemptions, deductions and exclusions that are provided by statute and affirmed through Supreme Court decisions, opinions of the Attorney General and opinions of the Department. One such area is that of agency relationships." When an agency relationship is established, the receipts that are "pass-through costs" are not included in the agent's gross receipts for purposes of the BPOL tax.
In P.D. 01-38 (04/12/01), the Tax Commissioner stated that three criteria must be met in order to establish a true "agency relationship" for purposes of the BPOL tax. These criteria are: (1) there must be a contractual relationship between the taxpayer and both the client and the contracted third party; (2) the taxpayer cannot commingle its funds with all other sources, rather it must have a separate accounting system or a fiduciary account where the pass-through receipts are recorded; and (3) the taxpayer cannot report these "pass-through costs" on its federal income tax return.
An examination of the evidence presented in the Taxpayer's 2001 appeal presented questions as to whether the three criteria necessary to establishing an agency relationship for BPOL tax purposes had been met. The case was remanded to the City for the purpose of establishing whether the Taxpayer's operation met the three tests of P.D. 01-38 and P.D. 01-155. The ruling stated that if the resulting final local determination indicates that the facts meet the criteria set forth in P.D. 01-38 and P.D. 01-155, then such funds would not be subject to the BPOL tax. The ruling also noted that the remainder of the Taxpayer's business-related income would be subject to the BPOL tax.
In a subsequent review of new information, the City's local commissioner of the revenue concluded that the Taxpayer did meet the first and third criteria, specifically the existence of the requisite contractual relationships and the appropriate method of reporting "pass-through costs" on its federal tax returns. (Addressing the Department's determination, the Taxpayer filed amended federal income tax returns to remove the "pass-through costs" for the years in question. The City has accepted these amended returns.) The City found, however, that the Taxpayer had commingled its funds during the audit period of 1998-2000 and, therefore, did not meet all three requirements for establishing an agency relationship during the years in question. Although the Taxpayer has subsequently set up separate accounts as required, the City maintains that the Taxpayer owes BPOL tax for the years in question.
The Taxpayer again appeals the City's final local determination because "the only source" of its funds is the receipts from its clients. The Taxpayer notes that because it only reports its commissions as gross receipts for federal income tax purposes, it is able to delineate those gross receipts for both BPOL tax and federal income tax purposes. Finally, the Taxpayer notes that prior to establishing its business in the City, it had first established the business in another Virginia locality ("City B"). The Taxpayer states that City B advised the Taxpayer to report its gross receipts on the basis of its net income. Furthermore, the Taxpayer states the City had advised the Taxpayer to report its gross receipts to the City in the same manner it had reported such receipts to City B.
The Taxpayer seeks a determination from the Department that it is "in compliance with the spirit if not the letter of the ruling and that [the Taxpayer] be absolved of the requirement to pay back taxes and accumulated interest."
ANALYSIS
The determination in P.D. 01-155 was quite specific in stating that the Taxpayer had to provide the City with documentation to support the fact that it complied with all three criteria outlined in P.D. 01-38, in order to qualify as being engaged in an agency relationship with its clients for purposes of the BPOL tax.
In the present case, the Taxpayer's presented evidence revealing a contractual relationship between the Taxpayer, its clients and its suppliers, and the amended federal income tax returns demonstrated that the Taxpayer did not deduct the "passthrough costs" of monies it received from its clients. Based on this information, the City found that the Taxpayer satisfied two of the three criteria necessary to establish an agency relationship for purposes of the BPOL tax. The City also found, however, that the Taxpayer did not segregate the funds used to pay list providers for lists sold to its clients, and, therefore, did not satisfy the third criterion.
In a similar case addressed in P.D. 01-162 (10/25/01), the Tax Commissioner emphasized that to qualify for an exclusion under the agency relationship rule, the Taxpayer must present evidence that it has not commingled its funds and that its method of reporting income for purposes of federal taxation does not include these funds. This case was also returned to the local commissioner of the revenue for clarification.
In the present case, the Taxpayer amended its federal income tax returns to comport with the Department's ruling in P.D. 01-155. The Taxpayer also set up a separate accounting system in 2001 to address the question of commingling of funds. It did not, however, prove to the City's satisfaction that its funds were not commingled during the tax years in question. The City's final local determination found that because the Taxpayer's funds were commingled during the tax years in question, the Taxpayer did not qualify for the agency relationship exclusion. No evidence has been presented to warrant overturning the final local determination regarding this factual matter.
On a final point, the Taxpayer contends that it was erroneously advised by the City as to the correct basis for its self assessment. The Department has no information regarding such advice and cannot overturn an assessment based on such an assertion. This is a matter for the local commissioner of the revenue to consider.
DETERMINATION
Based on the facts presented, both the Taxpayer and the City agree that the Taxpayer did not maintain a separate accounting system during the tax years in question. While the Taxpayer contends that a separate accounting system was not necessary (given that it could segregate the pass through funds for purposes of reporting income on its federal income tax return), this does not necessarily result in the segregation necessary for BPOL tax purposes. The Attorney General and the Tax Commissioner have recognized the requirement of creating a separate fiduciary or other kind of account for pass-through costs to establish an agency relationship for BPOL tax purposes. This requirement was not satisfied for the periods at issue. Accordingly, it is my determination that the City's assessment for tax years 1998, 1999 and 2000 is correct.
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
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AR/44738H
Rulings of the Tax Commissioner