04-81 | Virginia Tax

Tax Type

BPOL Tax

Description

Gross receipts; residential property manager

Topic

Assessment

Computation of Tax

Taxpayers' Remedies

Date Issued

08-25-2004

August 25, 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 ***** with the Department of Taxation. You appeal a final local determination upholding an audit assessment of the BPOL tax for tax years 1999, 2000, 2001 and 2002 made by the Commissioner of the Revenue of the ***** (the "City"). I apologize for the delay of 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.

Copies of 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 is a residential property manager who manages five residential projects (the "clients") in the City. The Taxpayer maintains individual checking and savings accounts for each client and has signature authority for each account. The Taxpayer maintains a separate imprest¹ payroll account for the employees of all the clients. The payroll account is set up by the Taxpayer, and the monies deposited therein are strictly accounted for and used solely for the disbursing of "all wages and salaries, commissions and bonuses for all employees." In other words, in the supervision of these accounts, the Taxpayer acts as a payroll master for its clients. The Taxpayer states that the payroll account is reimbursed "dollar for dollar by the appropriate project account," and the payroll records clearly account for the reimbursements made on behalf of each client the Taxpayer manages. The clients also reimburse the Taxpayer for other incidental expenses. These expenses and reimbursements are run through the individual client accounts that include the Taxpayer's fees for services.

The Taxpayer is directly compensated for these services by its clients. The compensation is established in the contracts the Taxpayer has with its various clients. These monies are separate, distinctly specified fees and include a set management fee for "routine recurring services." This fee is deposited into the client's operating account and disbursed to the Taxpayer on the first day of the calendar month. Additionally, the Taxpayer is compensated by a negotiated fee for certain nonrecurring services and by a fee for nonroutine services. The latter fee is negotiated at the time the need for the service arises. It is the sum of these fees, or compensation, that the Taxpayer reported on its amended federal income tax returns in tax years 1998, 1999, 2000 and 2001. The Taxpayer did not report the monies that were deposited into the imprest payroll reimbursement account set up for its clients.

ANALYSIS

Code of Virginia § 58.1-3700.1 defines the term "gross receipts" to mean the whole, entire, total receipts, without deduction. Generally, gross receipts for license tax purposes exclude any amount not derived from the exercise of a licensed privilege to engage in a business or profession in the ordinary course of business.

Previous opinions of the Attorney General and the Tax Commissioner have concluded that under certain circumstances, the term "gross receipts" does not include funds that the business receives and disburses as the agent for another. As noted in the 1995 Report of the Attorney General 251, 252 (6/20/95), "The underlying principle is that gross receipts are not subject to a local gross receipts tax when the taxpayer acts as the agent or fiduciary for another in receiving and disbursing money on behalf of a person or entity other than the taxpayer." See also Reports of the Attorney General: 1986-87 at 285; and Public Documents: (P.D.) 01-162 (10/25/01); 01-155 (10/17/01); and 01-38 (04/12/01). The definition of "agency relationship" has been created through case law. The seminal case dealing with agency relationship in relation to the BPOL tax is City of Alexandria v Morrison- Williams Associates, Inc., 223 Va. 349 (1982).

A sample contract provided by the Taxpayer states that everything the Taxpayer does under the provisions of the agreement shall be done as an agent of the client and "all obligations or expenses incurred [under the agreement] shall be for the account, on behalf of, and at the expense of the [client]." Furthermore, any payments to be made by the client shall be made out of the funds of the client, or as may be provided by the client."

Under the provisions of the contract, the Taxpayer shall not incur any liabilities or obligations on the account of the client without the assurances that the necessary funds will be provided. The contract further provides that the client will not be responsible to pay the Taxpayer's overhead expenses, including the salaries, transportation or other expenses of the Taxpayer's employees. These obligations remain separate and are considered to be a part of the Taxpayer's business.

The contract establishes a specific fee schedule for the enumeration of the Taxpayer's various services, which include the collection of all special fees and assessments and the payment of the client's payroll obligations from the funds deposited by the client and transferred to an imprest account for this purpose. To that end, the Taxpayer is charged with providing checking and savings accounts for the client. The Taxpayer must provide the client with monthly reports containing a balance sheet, operating statements, monthly disbursement summaries and the accounts receivable status.

The fees to be paid to the Taxpayer as set forth in the contract constitute the Taxpayer's gross receipts, and it is these monies that the Taxpayer reports as gross receipts for federal income tax purposes. These fees are paid out of the client's funds, but are not commingled in that they are specified in a schedule, and may only be withdrawn by the Taxpayer according to that schedule. All monies in the client's accounts are subject to strict accounting procedures and drawn upon at the direction of the clients.

For federal income tax purposes, the Taxpayer could report its income either including or excluding the payroll income that it was managing. Initially, the Taxpayer included payroll reimbursement income on line one of its 1120S federal returns and deducted this income on line 8 of the same return. The City did not recognize this deduction for purposes of the BPOL tax and assessed the Taxpayer on its entire gross receipts, including the receipts attributable to payroll reimbursement. After the City issued its final local determination, the Taxpayer submitted amended 1120S federal income tax returns that excluded monies for payroll reimbursement.

In this case, the Taxpayer's contract with its client specifies that: (1) the Taxpayer is the agent of the client, (2) the client indemnifies the Taxpayer from all suits in connection with the client's business, and (3) the only relationship between the parties is that of one between a "principal and agent." Second, the Taxpayer's fees for services rendered are separately accounted for and distributed to the Taxpayer on a monthly basis or as specified in addendums to the general contract. The Taxpayer establishes a separate accounting procedure and maintains an imprest account for those clients' funds deposited and distributed for the purpose of meeting their payroll obligations. Third, the Taxpayer did not report the monies deposited into the payroll accounts as an expense on its amended federal tax returns, as allowed by the Internal Revenue Code.

DETERMINATION

My examination of the Taxpayer's amended federal tax returns and a sample contract clearly identifies the Taxpayer as engaging in an agency relationship with its clients. The Taxpayer has met the criteria for establishing an agency relationship as set forth in the earlier opinions of the Attorney General and the rulings of the Tax Commissioner. As such, those receipts that are administered by the Taxpayer on behalf of its clients and that are in fact deposited into and disbursed from an imprest account are to be excluded from the Taxpayer's gross receipts for purposes of the BPOL tax. The City must recalculate the Taxpayer's BPOL assessment based upon only those gross receipts the Taxpayer receives for its performance of services.

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

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/46170H

¹ An imprest bank account is used to make a specific amount of cash available for a limited purpose. The specific amount to be deposited into such an account is transferred from a general account and deposited into the imprest account for distribution solely for its specified purpose. It is often used for distributing payroll checks, commissions, bonuses, etc.

Rulings of the Tax Commissioner