Document Number
08-12
Tax Type
BPOL Tax
Description
Churches that operate child care facilities must meet the tests of IRC § 501(c)(3); BPOL Tax Exemption
Topic
Classification
Exemptions
Nonprofits
Date Issued
01-11-2008


January 11, 2008




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

Dear *****:

This is in response to your letter requesting an advisory opinion about the applicability of the Business, Professional and Occupational License (BPOL) tax to certain church related day-care centers.

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

The Code of Virginia sections, regulations 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 request relates to the operations of two day-care centers operated by churches. The first scenario involves a church (Church A) affiliated in good standing with a national church organization that obtained an exemption from the Internal Revenue Service (IRS). The exemption covers all the affiliated local churches in good standing with the national church. Church A operates a day-care center (DCA) at a facility located away from the main church building. Church A and DCA share the same bank account for depositing receipts and paying expenses. Some donations to Church A are used to fund DCA. Church A and DCA use the same federal employer identification number (FEIN) to file payroll returns. The equipment utilized by DCA is owned by Church A.

In the other scenario, a church (Church B), which is a member of a national church organization granted the exemption from federal income tax, operates a day-care center (DCB) located at Church B's facility. DCB has a separate checking account from Church B. Church B and DCB use separate FEINs for purposes of filing federal withholding taxes. In its application for its FEIN, DCB represented itself as a "church/church-controlled organization." DCB does not have an official document from the IRS to support its claim that it is exempt from federal income tax as a charitable and or nonprofit organization. Church B does exercise oversight of DCB's operations and provides funding.

A ruling is requested as to whether the day-care centers described in the scenarios above qualify for the BPOL tax exemption permitted for gross receipts of certain charitable nonprofit organizations.

OPINION


The BPOL tax is based on a taxpayer's gross receipts, which are defined in Va. Code § 58.1-3700.1 as "the whole entire total receipts„ without deduction." Virginia Code § 58.1-3703 C 18, however, prohibits localities from imposing a BPOL tax on a charitable nonprofit organization unless the organization has receipts from an unrelated trade or business. Under the statute, a "charitable nonprofit organization" is:
    • 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, except that educational institutions shall be limited to school, colleges and other similar institutions of learning."

Internal Revenue Code (IRC) § 501(c)(3) defines charitable nonprofit organization as:
    • Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual . . .

Under the 2000 BPOL Guidelines, Appendix D, the determination as to whether or not an organization is eligible for this exemption for BPOL taxation purposes is based solely by reference to the relevant provisions of the IRC. If an organization meets these requirements, it is exempt from the imposition of a license fee or gross receipts tax unless it has unrelated taxable business income (UBTI). An otherwise exempt charitable nonprofit organization may be subject to BPOL tax on receipts resulting from UBTI as determined under IRC § 511, et seq. See Public Document (P.D.) 97-192 (4/21/97) for a discussion of UBTI.

Church A

In the case of Church A, as long as it can satisfy the locality that DCA furthers the church's exempt purpose under IRC § 501(c)(3), it should be exempt from BPOL taxation. The fact that Church A has a certification from the IRS through its national organization should be considered strong evidence that it meets the requirements of the BPOL tax exemption for charitable nonprofit organizations.

Church B

Church B's situation is different, but that does not necessarily disqualify DCB from the BPOL tax exemption. Although Church B is a member of a national church organization granted an exemption by the IRS, DCB obtained a separate FEIN and operates using a separate bank account. It is not clear whether DCB is a separate entity from Church B, but DCB has represented itself as a "church/church-controlled organization."

Neither IRC § 501(c)(3) nor the Treasury Regulations related to this section address charitable nonprofit organizations that are related or affiliated. However, some guidance can be found in regulations related to UBTI. Under Treas. Reg. §1.511-2(3), a church "includes a religious order or a religious organization if such order or organization (a) is an integral part of a church, and (b) is engaged in carrying out the functions of a church." If a religious order or organization fully meets these requirements, it will be exempt from the tax imposed on UBTI on all its activities, including those conducted through a separate wholly owned corporation or other entity.

In the case of DCB, a determination must be made as to the degree to which it is connected with and controlled by Church B and whether or not it is engaged in carrying out the functions of a church, including ministration of sacerdotal functions (furtherance of the church's exempt purpose or ministry) and conducting religious worship. See Treas. Reg. §1.511-2(3)(ii). What is included in the conduct of religious worship or the ministration of sacerdotal functions will depend on the tenets and practices of a particular church.

It is unclear from the facts presented as to whether DCB is an integral part of Church B. Clearly Church B wholly owns DCB, but DCE3 does have some degree of autonomy by having a separate bank account. In addition, it is unclear as to how much financial and supervisory control Church B exerts over DCB. Conversely, the fact that DCB and Church B share the same facility indicates at least some degree of integration.

In addition, the information provided does not identify whether DCB ministers sacerdotal functions or conducts religious services. However, after reviewing a number of IRS rulings and cases, it is clear that churches are given wide latitude when in comes to their tenets and practices. In addition, numerous churches that operate child care facilities meet the tests of IRC § 501(c)(3).

It is my opinion that DCB could likely be considered to meet the standard of carrying out the functions of Church B. The fact that it does so would be another factor in determining whether DCB is an integral part of Church B. As such, although the facts presented are not sufficient to make a determination as to whether DCB is eligible for the BPOL tax exemption under Va. Code § 58.1-3703 C 18, I find it highly probable that it could.

If you have any questions regarding this opinion, you may call *****, Office of Tax Policy, Appeals and Rulings at *****.
                • Sincerely,

                • Janie E. Bowen
                  Tax Commissioner



AR/1-1265404587H


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46