Tax Type
BPOL Tax
Description
Intercompany transfers from gross receipts
Topic
Credits
Local Taxes Discussion
Penalties and Interest
Date Issued
03-07-2005
March 7, 2005
Re: Appeal of Assessment: Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Business, Professional and Occupational License Tax
Dear **********:
This final state determination is issued upon the application for correction filed by you (the "Owner") on behalf of ***** ("Company B"), with the Department of Taxation. You appeal a final local determination upholding an audit assessment of Business, Professional and Occupational License ("BPOL") taxes made by the Commissioner of the Revenue of the ***** (the "City") for license tax years 2000, 2001 and 2002.
The following determination is based on the facts presented to the Department as summarized below. The Code of Virginia sections and regulations cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.virginia.gov.
FACTS
***** ("Company A"), an accounting firm, was first incorporated in 1992. In 2000, the Owner formed a second affiliated corporation, Company B that took over most of Company A's business operations. Company A operated as a provider of payroll functions for Company B through license tax year 2002.
Company B did not file a business license tax return for license years 2000, 2001 and 2002. Upon a routine audit of Company A in January 2003, the City discovered Company B and assessed Company B on its gross receipts plus penalties and interest for taxes owing and due in license years 2000, 2001 and 2002. During this period, the Owner had reported the gross receipts attributable to Company B's business on Company A's license tax returns.
After a series of communications, the City presented the Owner with an adjusted audit in May 2004. In the adjusted audit, taxes paid on gross receipts attributed to Company B but reported by Company A were applied to the taxes Company B owed for tax years 2000, 2001 and 2002. The City applied the credit to the oldest year first, in the order of: interest owed; penalties owed; and taxes owed. After all the transfers were made and the various penalties and interest were satisfied, the adjusted audit assessment issued May 21, 2004 reflected a balance of ***** owed by Company B for the years in dispute.
The Owner asserts that the taxes on all the gross receipts attributable to Company B during the years in question were in fact paid in full by Company A. The Owner contends that these monies should be applied to Company B's tax assessments without penalty or interest.
ANALYSIS
There are four issues raised by the Taxpayer's appeal: (1) the licensing of a new business; (2) the base year used in calculating the BPOL tax; (3) the BPOL tax treatment of transactions between affiliated entities; and (4) the application of interest and penalties to taxes past due.
Licensing of New Business
Virginia Code § 58.1-3700 provides that where a locality has adopted a BPOL ordinance, persons or entities must apply for a license prior to the beginning of a business. There are no exceptions to this rule. In the present case, the Owner formed a new corporation, Company B, an entity independent of Company A. As such, it was incumbent upon the Owner to apply for a business license for Company B prior to beginning business in 2000. The Owner failed to do so.
The City agreed that the majority of the receipts reported by Company A in tax years 2001 and 2002 were actually receipts generated by Company B's business activity. The City transferred credit for tax payments made by Company A on those receipts against taxes owed by Company B for license years 2000, 2001 and 2002.
Base Year
The Owner asserts that the taxes paid by Company A in license year 2000 should be transferred to Company B as well. With the exception of beginning businesses, the license tax is based on the prior year's gross receipts. Company A's 2000 tax was based on its 1999 gross receipts. Company B did not begin business until 2000, at which time, had it filed for a business license, it would have estimated its gross receipts for that license year. This is provided for in section 18-10 of the City's Code.
Upon audit, the City was able to determine Company B's actual receipts and assessed tax accordingly for tax year 2000. The City properly left Company A's 2000 license tax assessment, which was based on its 1999 gross receipts, unchanged.
Affiliated Entities
Virginia Code § 58.1-3703 C 10 provides that no county, city or town may impose a license tax:
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- On or measured by receipts or purchases by an entity which is a member of an affiliated group of entities from other members of the same affiliated group. This exclusion shall not exempt affiliated entities from such (license or other tax measured by receipts or purchases from outside the affiliated group. [Emphasis added.]
The City determined that the majority of Company A's actual gross receipts (receipts solely attributable to Company A's business) were attributed to intercompany transactions and, therefore, exempt from BPOL taxation. The City did find, however, that Company A also had other receipts in the amounts of ***** and ***** for the 2001 and 2002 license years, respectively. The City's ordinance provides that a person or entity engaged in business whose gross receipts are greater than $25,000 but less than $100,000, must pay a license fee of $50. In the adjusted audit, Company A was assessed an annual $50 license fee for license years 2001 and 2002. The City added penalties and interest to the $50.00 in each year because Company A was delinquent in filing its license tax return in both years.
Penalties and Interest
Virginia Code § 58.1-3703.1 A 2 d provides that localities may impose a penalty of 10% of the BPOL tax upon a taxpayer's failure to file a BPOL application or to pay the BPOL tax by the appropriate due date. If both the license application and payment of the tax are late, then only the late filing penalty shall be imposed. If the assessing official determines that the taxpayer has a history of noncompliance, both penalties may be imposed. See Va. Code § 58.1-3703.1 A 2 d. In this case, the City found that Company A's payments were neither complete nor timely. This resulted in the accrual of additional interest and penalties.
Company B did not file a business license application with the City in 2000, 2001 or 2002. The City did not impose penalties on the tax receipts transferred from Company A to Company B; it only imposed penalties on those monies that were owed after the transfers were applied to Company B's balances. These penalties; continued to accrue until the Owner filed an Application for Review on June 16, 2004. The City suspended collection activity at that time and has continued to suspend collection activity while the appeal is with the Department.
The Owner also contests the interest charges in the assessment. Public Document (P.D.) 97-279 offers a succinct discussion of the application of interest to unpaid taxes:
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- Interest shall be charged on the late payment of the tax from the due date until the date paid without regard to fault or other reason for the late payment. Moreover, this interest accrues on both the unpaid tax and the penalty, as the penalty becomes part of the tax. See Va. Code § 58.1-3703 A 2 e.
[Emphasis added.]
- Interest shall be charged on the late payment of the tax from the due date until the date paid without regard to fault or other reason for the late payment. Moreover, this interest accrues on both the unpaid tax and the penalty, as the penalty becomes part of the tax. See Va. Code § 58.1-3703 A 2 e.
In transferring the credit for taxes paid from Company A to Company B, the City first assigned the credit to license year 2000, followed by 2001. In each year the City applied the credits first to interest owed, then to penalties and finally to taxes. The amount of credit for taxes paid by Company A on gross receipts attributable the business of Company B did not equal the taxes owed by Company B because the amount was applied first to interest, then to penalties and finally to taxes owed. Furthermore, there was no transfer of credit in 2000 for the reasons discussed above. Interest will continue to accrue on Company B's outstanding balance until such time as payment is made in full.
DETERMINATION
After reviewing the facts and the applicable law, I find the City's assessment is correct. The City was correct in refusing to transfer credit for the taxes paid by Company A in 2000 to Company B; the City was correct to exempt only those receipts that were in fact intercompany transfers from gross receipts; and the City was correct in assessing both Company A and Company B with penalties and interest on the late payment or underpayment of taxes or fees.
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/52729H
Rulings of the Tax Commissioner