05-52 | Virginia Tax

Tax Type

BPOL Tax

Description

Independent contractor engaged in the securities business

Topic

Assessment

Basis of Tax

Local Taxes Discussion

Date Issued

04-08-2005

April 8, 2005

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 of a BPOL tax assessment made by the ***** (the "City"). I apologize for the delay in the Department's response.

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.policylibrary.tax.virginia.gov.

FACTS

The Taxpayer is an independent contractor engaged in the securities business. The Taxpayer's agreement with ***** (the "Firm") specifies that the Taxpayer must indicate that it is an independent contractor of the Firm in any form of advertising or solicitation of business. The agreement also specifies that "as a registered representative, [the Taxpayer] has the right to solicit and engage in the purchase and sale of securities with the general public" utilizing the brokerage services of the firm.

When a client of the Taxpayer places an order for a transaction, the Taxpayer transmits the information to the Firm for processing. The Firm has an established fee schedule for transactions. The entire fee passes from the client through the Taxpayer to the Firm. Upon receiving the fee from the Taxpayer, the Firm deducts its expenses from this fee and the balance of the fee is sent to the Taxpayer. The Firm annually issues a federal Form 1099 to the Taxpayer reflecting the total amount of the fees returned.

For BPOL tax purposes, the City assessed the Taxpayer as a professional service and based the assessment on the Taxpayer's entire gross receipts, including the monies that passed through the Taxpayer to the Firm and were retained by the Firm. The Taxpayer contends that it should be assessed only upon those receipts attributed to the commission it receives back from the Firm as reflected on the federal Form 1099 it receives, and not the gross amount of the original transaction fee.

ANALYSIS

Gross Receipts

For purposes of the BPOL tax, gross receipts means "the whole, entire, total receipts, without deduction." Va. Code § 58.1-3700.1(3). In instances when a taxpayer meets the criteria in Public Document (P.D.) 01-38 (4/12/01), the Taxpayer may exclude from the calculation of gross receipts certain receipts passed through to another entity. 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; it must have a separate accounting system or a fiduciary account where the pass through receipts are recorded and; (3) the taxpayer does not report these "pass through costs" on its federal income tax return.

In this case, it appears that the Taxpayer does have a contractual relationship with the Firm. What is not clear from the information provided is the contractual relationship between the Taxpayer and the client. Furthermore, from the facts provided, the question of commingling of funds is not addressed. It is not clear as to how the monies in question pass from the client, through the Taxpayer to the Firm. Finally, based on a review of the documentation provided, the Taxpayer reported these pass through fees as income on its federal income tax return and deducted the fees retained by the Firm as ordinary and necessary business expenses.

DETERMINATION

The Firm, through the Taxpayer, receives the total commission money from each transaction the Taxpayer completes on behalf of its clients. The Firm deducts its expenses from these monies and returns the balance of the fee to the Taxpayer. For BPOL tax purposes, all of the monies that pass through the Taxpayer to the Firm constitute the Taxpayer's gross receipts unless the Taxpayer can meet the criteria set forth in P.D. 01-38. In order to exclude the monies the Firm retained from a calculation of the Taxpayer's BPOL liability, the Taxpayer must satisfy the City with the following: (i) evidence of a contractual arrangement with its clients; (ii) a clear description of how the monies flow from the client through the Taxpayer to the firm and back to the Taxpayer; and (iii) an amended federal tax return that does not expense the receipts retained by the Firm. If the Taxpayer cannot meet these requirements, the City's assessment is determined to be 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 *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/49259H

Rulings of the Tax Commissioner