06-94 | Virginia Tax

Tax Type

BPOL Tax

Description

Gross receipts; passed through entity

Topic

Local Taxes Discussion

Records/Returns/Payments

Date Issued

09-28-2006

September 28, 2006

Re: Appeal of Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Business, Professional and Occupational License tax

Dear *****:

This final state determination is issued upon the appeal filed by you on behalf of your firm, ***** (the "Taxpayer") 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 Director of Finance of the ***** (the "County"). The tax years in dispute are 2001, 2002, 2003 and 2004.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections, and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.

FACTS

The Taxpayer is licensed by the United States Customs Service of the Department of the Treasury ("Customs") as a customs broker. As such, the Taxpayer represents clients, assisting them in processing the shipment of goods through customs. The Taxpayer also arranges for shipping and handling of goods on behalf of its clients. The Taxpayer receives a commission from clients for the services provided.

In most instances, the Taxpayer's client is required to advance monies to the Taxpayer for customs fees and import duties, freight and delivery charges, and other handling fees. In certain situations, the Taxpayer may extend credit to a client and is later reimbursed for duties and fees paid on the client's behalf.

During the tax years at issue, the Taxpayer reported the entire amount of its gross receipts, including customs and shipping charges and fees advanced by clients, on Schedule C for federal income tax purposes. Under audit, the County revised the Taxpayer's BPOL tax assessment to reflect gross receipts reported on Schedule C. The Taxpayer appeals the local determination, contending that these charges and fees are merely passed through from the client to another entity, and should not be included when calculating the Taxpayer's gross receipts for purposes of the BPOL tax.

ANALYSIS

For purposes of the BPOL tax, Va. Code § 58.1-3700.1 defines gross receipts as "the whole, entire, total receipts, without deduction." Public Document (P.D.) 01-38 (4/12/01) sets forth the criteria under which a 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 passed through receipts are recorded; and (3) the taxpayer cannot report these passed through costs as other business expenses on its federal income tax return.

Contractual relationship

In this case, the Taxpayer had a contractual relationship with its clients. The Taxpayer also had a contractual relationship with Customs in that it must hold the requisite license issued by Customs in order to carry on its business. Finally, the Taxpayer's clients are the actual importers of record and have a relationship with the shipping company and Customs independent of the relationship with the Taxpayer. Contractually, the Taxpayer is not liable for any fees or duties owed by its clients to Customs. If the Taxpayer became insolvent or unwilling to meet its contractual obligations, the shippers and Customs could seek recourse against the Taxpayer's client.

Commingling of funds

The facts provided indicate that a commingling of funds existed during the tax years in dispute. The Taxpayer maintains that while all funds were kept in a single account, its accounting system identified those monies that were ascribed to its clients. Evidence of this separate accounting was not presented with the Taxpayer's appeal, and the County maintains that the Taxpayer did not present any such evidence during audit. Based on the evidence presented, the second criterion identified in P.D. 01-38 is not satisfied.

Costs reported as other business expenses

Based on a review of the documentation provided, the Taxpayer reported Customs and shipping charges and fees as receipts and deductions for ordinary and necessary business expenses on Schedule C of its federal income tax return. Therefore, the third criterion established in P.D. 01-38 is not satisfied.

DETERMINATION

There are three criteria that must be met if a taxpayer is to establish an agency relationship between itself and its clients for purposes of the BPOL tax. The first and most important criterion has been met in that the nature of the agency relationship is clearly stated in the Taxpayer's contractual arrangements with the client/importer, the shippers, and Customs. The other two criteria, however, are not clearly established by the evidence presented.

The Taxpayer indicates it is in the process of filing amended federal income tax returns to reflect the fiduciary nature of the receipts received from his clients. Further, the Taxpayer states that it has corrected its accounting procedures, going forward, to reflect the fact that the Customs and shipping charges and fees advanced by clients are fiduciary in nature, used to pay the clients' Customs duties and shipping charges.

Based on the foregoing, I am returning this matter to the County for the purpose of determining if (1) the Taxpayer's accounting system separately identifies shipping and Customs charges and fees advanced by clients that were commingled with its general receipts, and (2) the necessary action has been taken to correct gross receipts and other business expenses reported for federal income tax purposes. In order for the gross receipts for federal income tax purposes to be correct, the amended federal income tax returns must be accepted by the Internal Revenue Service.

If the evidence indicates that the facts meet the criteria set forth in P.D. 01-38, then such funds are not subject to the BPOL tax, although the Taxpayer's other receipts remain taxable. If the Taxpayer is unable to provide documentation to support its position in relation to the two criteria noted above, the final local determination will stand.

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,

- - - - Janie E. Bowen
        Tax Commissioner

AR/55964O

Rulings of the Tax Commissioner