Tax Type
BPOL Tax
Description
Taxpayer asserts that all of its income is used to fund its charitable purpose
Topic
Exemptions
Date Issued
08-26-2005
August 26, 2005
Re: Application for Correction of Final Local Determination
Taxpayer: *****
Localities Assessing Tax: *****
Business, Professional and Occupational License 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 final local determinations made by the Commissioners of the Revenue for the cities of *****, ***** and ***** (the "Cities") denying refunds of Business, Professional and Occupational License ("BPOL") taxes paid in tax years 2003 and 2004.
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 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's web site, located at www.tax.virginia.gov.
FACTS
The Taxpayer is a charitable nonprofit organization classified as an Internal Revenue Code ("IRC") § 501(c)(3) corporation for federal income tax purposes. To support its primary mission, the Taxpayer provides education, job training and employment services to individuals with disabilities.
The Taxpayer's funding sources include production contracts, retail thrift store operations and fee-for-service contracts with federal, state and local governments. At issue in this appeal is the BPOL tax liability of the Taxpayer's retail operations. The merchandise for sale at the Taxpayer's retail operations in the Cities consists of donated goods and new merchandise purchased for resale. The new merchandise consists of final discount items purchased from a national retail store. The Taxpayer states that a very small percentage of its gross receipts is attributable to the purchased merchandise. The Taxpayer does not report any unrelated taxable business income for federal income tax purposes.
The Cities issued BPOL tax assessments based on the entire gross receipts of the Taxpayer's retail operations for license years 2003 and 2004. The Taxpayer paid the tax bills in their entirety and requested a refund of the taxes paid. The Cities denied the Taxpayer's request for refund, contending that the Taxpayer "conducts a licensable retail business like any other for profit retail business or resale store." The Cities regard the Taxpayer's gross receipts from its retail operations as unrelated taxable business income. In support of their refund denials, the Cities assert that a considerable percentage of the Taxpayer's gross receipts is derived from purchased inventory; the Taxpayer employs compensated staff that do not qualify for job training services provided as a part of the Taxpayer's charitable purpose; the Taxpayer advertised new and used merchandise for sale; and that the only distinction between the Taxpayer and other retail businesses is that most retailers purchase their entire inventory, while the Taxpayer benefits from donors who claim income tax deductions for charitable contributions to taxpayer's inventory.
The Taxpayer appeals the Cities' denial of the refunds on the basis that it has no unrelated business income. Rather, the Taxpayer asserts that all of its income is used to fund its charitable purpose.
ANALYSIS
Virginia Code § 58.1-3703 C 18 a provides that no locality may levy the BPOL tax
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- [o]n or measured by receipts of a charitable nonprofit organization except to the extent the organization has receipts from an unrelated trade or business the income of which is taxable under Internal Revenue Code § 511 et seq. For the purpose of this subdivision, 'charitable nonprofit organization' means an organization which is described in Internal Revenue Code § 501(c)(3) and to which contributions are deductible by the contributor under Internal Revenue Code § 170 . . . .
- [o]n or measured by receipts of a charitable nonprofit organization except to the extent the organization has receipts from an unrelated trade or business the income of which is taxable under Internal Revenue Code § 511 et seq. For the purpose of this subdivision, 'charitable nonprofit organization' means an organization which is described in Internal Revenue Code § 501(c)(3) and to which contributions are deductible by the contributor under Internal Revenue Code § 170 . . . .
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- To the extent that a charitable nonprofit organization is required to report income which is in fact 'unrelated business taxable income' for federal income tax purposes under IRC Code § 511 et seq., such organization may be presumed to have gross receipts from an activity which, depending on the applicable classification, is licensable for BPOL purposes. The fact that a charitable nonprofit organization does not report any unrelated business taxable income for federal income tax purposes would not prevent the locality from requiring a license for the business activity; however, local officials may only determine whether a charitable nonprofit organization has unrelated taxable business income pursuant to IRC Code § 511 et seq. [Emphasis added.]
Local commissioners of the revenue are instructed to look to IRC § 511 et seq. for guidance in determining whether a Taxpayer has unrelated taxable business income. This reference to IRC § 511 et seq. was added to the BPOL Guidelines in 1997 to clarify the definition of unrelated taxable business income of charitable nonprofit organizations for purposes of the BPOL tax.
IRC § 513(a) defines "unrelated business taxable income" as that income of a nonprofit charitable organization
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- which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 . . . except that such term does not include any trade or business . . . (3) which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions. [Emphasis added.]
In this case, the monies generated by the Taxpayer's retail sales activities constitute more than 40% of its operating revenues. These revenues are essential to the support of the Taxpayer's charitable purposes and as such would not be considered unrelated taxable business income. Furthermore, the Taxpayer's financial statements substantiate the Taxpayer's estimate that a very small percentage of its gross receipts are attributable to purchased inventory. The vast majority of its gross receipts are attributable to the sales of donated goods. Therefore, the exception to the definition of "unrelated business taxable income" provided in IRC § 513(a)(3) applies to the Taxpayer.
The fact that the salespersons in the Taxpayer's retail stores are paid employees, rather than volunteers, is not relevant because the Taxpayer's activities fall under the exception provided in IRC § 513(a)(3). The exception does not require the employees that are selling merchandise to be volunteers or receive training as a part of a nonprofit organization's mission. Furthermore, the exception does not prohibit advertising.
Finally, I must respond to the Cities' argument that the only difference between the Taxpayer and other retail businesses is that most businesses purchase their inventory, whereas the Taxpayer receives most of its inventory from charitable donations that yield tax deductions for the donor. The Taxpayer cannot grant those income tax deductions. The Taxpayer gives nothing of value to the donors in exchange for the donation. Rather, it is individuals and businesses that earn income tax deductions by making donations to the Taxpayer.
DETERMINATION
The Taxpayer's retail merchandise operation is essential to the funding of its charitable purpose. Substantially all of the merchandise for sale consists of donated goods. The fact that the Taxpayer holds itself out for business as a thrift store does not affect its status as a nonprofit organization. It is my determination that the Cities must issue the Taxpayer refunds for BPOL taxes paid in tax years 2003 and 2004.
If you have any questions regarding this determination, you may contact ***** in the 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/53476H
Rulings of the Tax Commissioner