05-79 | Virginia Tax

Tax Type

BPOL Tax

Description

Classification of rental of independent living apartment units

Topic

Clarification

Property Subject to Tax

Date Issued

05-23-2005

May 23, 2005

Re: Request for Advisory Opinion
Business, Professional and Occupational License Tax

Dear ********:

You requested an advisory opinion on the applicability of the Business, Professional and Occupational License ("BPOL") tax to a retirement community (the "Taxpayer") located in the ***** (the "City").

The local license fee and tax are imposed and administered by local officials. § 58.1-3701 of the Code of Virginia authorizes the Department to promulgate guidelines and issue advisory opinions on local license tax issues. The following opinion is subject to the facts presented to the Department as summarized below. Any change in facts or the introduction of new facts may lead to a different result.

While addressing the questions raised in your letter, this response is intended to provide advisory guidance only, and does not constitute a formal or binding ruling. 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.policylibrary.tax.virginia.gov.

FACTS

The Taxpayer holds itself out as a retirement community, having both independent living and assisted living¹ units. The lease agreement for an independent living apartment is defined as a "one-year lease of real estate." In addition to the rental of the apartment, the lease agreement also includes the following services to be provided to tenants: one meal a day in the dining room; biweekly housekeeping; building and grounds maintenance; an emergency call system; scheduled transportation to destinations within the local area such as shopping, medical facilities, and grocery stores; 24-hour security; planned social cultural educational and spiritual activities; and access to and use of common areas and facilities.

A self-contained wing of the Taxpayer's facility is licensed by the Department of Social Services ("DSS") to provide "residential and assisted living care." The license specifies the units within the retirement community complex that are subject to licensure as a home for adults who are either "independently mobile or semi-mobile." The number of units so licensed has varied over the years, with some additional units outside the self-contained assisted living wing being included in the license. During the license period from 2002-2004, 55 of Taxpayer's 158 total units were so licensed by DSS.

The residency agreement for the assisted living wing of the Taxpayer's facility is quite different from the residency agreement for the independent living units. The assisted living agreement specifies that the "facility shall provide to the resident room and board" and "personal care services, i.e., bathing, feeding, dressing, medical supervision." Additionally, the agreement specifies that the facility provides the assisted living resident with three meals and snack daily, therapeutic services, linen service and certain other services and amenities. The resident must be in the care of a physician and may arrange to have private duty companion care. There is no reference to a lease or rental agreement in the assisted living agreement. The focus is on the services provided.

You ask if the Taxpayer's rental of the independent living apartment units should be classified as rental of real property or as a personal service for purposes of the BPOL tax.

ANALYSIS

The BPOL tax is a gross receipts tax imposed on the persons, firms and corporations for the privilege of engaging in business. While Va. Code § 58.1-3700.1 defines the term "gross receipts" as "the whole, entire, total receipts, without deduction," the law provides for certain deductions and exclusions from gross receipts. Included among these is an exemption for the rental of real property. Virginia Code § 58.1-3703 C 7 provides that no locality may impose a license fee or license tax:

- Upon any person, firm or corporation for engaging in the business of renting, as the owner of such property, real property other than hotels, motels, motor lodges, auto courts, tourist courts, travel trailer parks, lodging houses, rooming houses and boardinghouses; however, any county, city or town imposing such a license tax on January 1, 1974, shall not be precluded from the levy of such tax by the provisions of this subdivision.

The City did not impose such a tax prior to 1974; therefore, rentals of real property, as described above, are exempt from the City's BPOL tax.

I have carefully reviewed the facts presented in your letter and the information provided by the Taxpayer. It is my opinion that Public Document (P.D.) 97-257 (6/11/97) addresses your question. The situation addressed in that document is similar to the Taxpayer's case. In P.D. 97-257, the taxpayer had a facility that included two different types of living arrangements, independent living and assisted living. Tenants in the independent living apartments enjoyed many of the same amenities that are offered to the tenants in the Taxpayer's independent living units. In P.D. 97-257, the Tax Commissioner found that the services provided by the taxpayer to its tenants in the independent living units were ancillary to the business of the rental of the apartments,² stating:

- Except with regard to the assisted living residents, the central business activity of the retirement facility is providing housing to senior citizens. In order to make the housing arrangement attractive, the facility offers a wide range of services to make living at the facility convenient, accessible and enjoyable. Although all of these added services contribute to the entire package of quality living that the facility offers, they do not exist independently of the underlying real estate rental business.

The question of the classification of a business operating a facility that contains both independent living and assisted living units was also addressed in P.D. 97-257:

- Although it appears that the services rendered ordinary residents are ancillary to the operation of the business as a real estate rental enterprise, it appears that the assisted living services provided are in the nature of a separately licensable business. As stated in the 1991 Report of the Attorney General 261³ the intensive level of care provided with assisted living arrangements requires that providers of such services be classified as service providers rather than real estate rental businesses. [Emphasis added.]

A license from the DSS is required for all persons who operate an assisted living facility. The license the Taxpayer holds currently applies to approximately one-third of its units. Following the reasoning of Public Document 97-257, these units comprise a separate business activity, and should be subject to licensure as a business service, assessed at the applicable rate. Because the number of units so licensed is specified by the DSS every two years, the Taxpayer's BPOL tax assessment should reflect the changes, if any, in licensure by DSS.

In your request for an advisory opinion, you present certain Department of Housing and Urban Development ("HUD") data from tax year 2000 and limited information from the Taxpayer's federal income tax returns from 1996 that you believe has bearing on the Taxpayer's classification for purposes of the BPOL tax. The information from HUD and the two pages of the Taxpayer's federal tax returns supplied with your request is dated, and not particularly relevant to the to the question presented. While an examination of federal filings is often instructive in determining the classification of a business for purposes of the BPOL tax, the results of such an examination should not be considered to be the determinative factor.

In this case, the determining factor must be the actual business activity of the Taxpayer, as determined by the substance of its legal agreements with the residents. In this case, there is a significant difference in the residence agreements signed by those applicants for independent living and those applicants for assisted living. The former is a rental agreement that includes some services and is signed by the Taxpayer and the resident. The latter is a contract for room and board and specified personal services that is signed collectively by the Taxpayer, the resident and the resident's guarantor. The assisted living agreement states, "Facility shall provide to Resident personal care services, i.e., bathing, feeding, dressing, medication supervision." This is precisely the kind of care the Attorney General was addressing in the 1991 opinion cited above, where the business of the assisted living facility portion of the taxpayer's residential complex was appropriately classified as a business service. The services provided under the Taxpayer's independent living agreement, on the other hand, may be found to be ancillary to the primary business of property rental.

Another point to consider is the significant difference in rental rates charged to tenants in the independent living units and those in the assisted living units. In January 2005, a month's rent for a specific unit in the independent living part of the facility was *****. The monthly rental rate for an identical unit in the DSS licensed assisted living wing of the facility was ***** or 49.4% more than that charged for the independent living units. This difference can only be accounted for by the difference in the nature of the services provided under the two agreements.

You make note of the price differential between the assisted living units and units in neighboring apartment complexes. I do not find that information relevant. The neighboring complexes do not offer the amenities (bi-weekly maid service, one meal a day, etc.) that the Taxpayer offers its independent living tenants. In addition, the Taxpayer holds itself out as a luxury retirement community. The fact that individuals are willing to pay more to live in the Taxpayer's independent living units does not change the nature of the underlying activity.

In summary, the services the Taxpayer provides to its independent living tenants are ancillary to the business of renting property. Therefore, pursuant the Va. Code § 58.1-3703 C 7, it is my opinion the Taxpayer's gross receipts attributable to the rental of "independent living" units are exempt from the BPOL tax. The services the Taxpayer provides to its assisted living tenants, on the other hand, can be considered its primary business, and the Taxpayer should be licensed accordingly. The gross receipts attributed to its assisted living units should be assessed at the personal service rate.

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

- - - - Sincerely,
        
        Kenneth W. Thorson
        Tax Commissioner

AR/53285H

¹Under the category "assisted living," there is a third arrangement, for "Respite Care Assisted Living." For purposes of this analysis, it is treated as "assisted living."
²"Ancillary," as defined in Chapter 1 of the 2000 BPOL Guidelines, refers to business activities that are subordinate to, subservient to, auxiliary to, or in aid of, that which is principal and primary.
³ In this Opinion, the Attorney General was addressing the appropriate classification of a home for adults wholly licensed by DSS. The Opinion did not consider the issue of independent living rentals., . . .

Rulings of the Tax Commissioner