08-82 | Virginia Tax

Tax Type

BPOL Tax

Description

At no time did any profit inure to the Taxpayer or its members A and B

Topic

Exemptions

Date Issued

06-06-2008

June 6, 2008

Re: Appeal of Final Local Determination
Locality: *****
Taxpayer: *****
Business, Professional and Occupational License 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 an assessment of Business, Professional and Occupational License (BPOL) taxes made by the ***** (the "City") for license tax years 2002 through 2004.

The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct. That is, the local assessment will stand unless the taxpayer proves that it is incorrect.

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 Virginia Underground Utility Damage Prevention Act (the "Act") of 1989 creates "underground utility notification centers" that are charged with the responsibility of notifying utility operators of excavation projects that might intrude on existing underground utility facilities. See Va. Code § 56-265.15. The notification centers are regulated and certificated by the State Corporation Commission (SCC) and assigned to specific geographic areas.

The centers are funded on a per call fee basis by the affected utilities in the designated service areas. Virginia Code § 56-265.16:1 mandates that every operator of a utility utilizing underground lines join notification centers. Furthermore, it mandates that the SCC certificate every notification center. The primary purpose of the notification centers is to prevent damage to underground utility lines through the operation of a toll free telephone information center and to conduct public education campaigns encouraging the use of the center.

Persons planning to engage in underground excavation projects must first notify the center. The center contacts the utilities that potentially could be affected by the project. The utility operators in turn mark the lines that might be damaged by the proposed excavation, and let the center know when they are finished marking the lines. The center then notifies the excavator when the marking of the affected underground lines is complete.

Historically, the SCC certificated two separate nonprofit entities, ***** (A) and the ***** (B), as the statutorily mandated underground utility notification centers for the state. Each company was assigned a specific geographic area within the state and each contracted with independent vendors who conducted daily notification operations. Both were exempt from tax pursuant to Internal Revenue Code (IRC) §§ 501 (a) and 501(c)(6).

In 2001, A and B decided to consolidate their operations and provide one notification center to serve the entire state. While waiting the SCC's approval of the merger and certification of the new notification center, ***** (the "Corporation"), A and B formed the Taxpayer to manage the overall operations of the two certificated entities. A and B each had a 50% interest in the Taxpayer.

For federal income tax purposes, A and B continued to exist until 2004. The Taxpayer was organized as a limited liability company (LLC) that elected to be treated as a pass-through entity for federal and state income tax purposes. The Taxpayer provided utility protection services on behalf of A and B.

On April 1, 2003, the SCC issued a Certificate of Incorporation to the ***** (the "Corporation"). The SCC gave its final approval to the merger of A and B, creating the Corporation effective April 1, 2004. The SCC certificated the Corporation as the sole notification center for underground utilities in Virginia. The Taxpayer was dissolved at the same time, and the Corporation absorbed all of Taxpayer's functions. The Corporation has been granted tax-exempt status under the provisions of IRC §§ 501 (a) and 501(c)(6).

Under audit, the City determined that the Taxpayer was subject to BPOL licensure and issued tax assessments for the years in question. For BPOL tax purposes, the City did recognize A and B as tax-exempt entities under the provisions of IRC § 501(c)(6) prior to 2002 and subsequently recognized the Corporation as a tax-exempt entity after it was certificated by the SCC in 2004.

The Taxpayer appealed the assessments to the City, arguing that the tax-exempt status enjoyed by the two single entities A and B, and later by the Corporation, should also apply to the Taxpayer because of its relationship with the entities. Secondly, the Taxpayer asserts that it was a member of an affiliated group, and as such, any monies attributed to transactions between the members of the group were exempt from BPOL taxation. Finally, the Taxpayer contends that because it did not engage in business for the purpose of earning a profit or maintaining a livelihood, it was not subject to the BPOL tax. The Taxpayer requested an abatement of taxes, interest and penalties owing and due in tax years 2002 through 2004, and a refund of taxes paid in tax year 2002.

The City denied the Taxpayer's application, concluding that the Taxpayer was formed to provide call center services to A and B. Both A and B had previously engaged separate vendors or independent contractors to provide the call center services. The City maintains that as an independent contractor, the Taxpayer was performing the same service as the vendors and therefore was subject to the BPOL tax in license tax years 2002 through 2004.

The City also asserts that the Taxpayer was not a member of an affiliated group as defined for purposes of BPOL taxation, and finally, there is no exemption based on a business's lack of profit motive in the provisions of the BPOL statute.

ANALYSIS

Exemptions from Gross Receipts

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." There are some specific exemptions provided in Va. Code § 58.1-3703.

Virginia Code § 58.1-3703 C 18 b provides that no locality may levy the BPOL tax on gross receipts measured by gifts, contributions and membership dues of nonprofit organizations from BPOL taxation. Under this provision, the statute defines a nonprofit organization as an "organization exempt from federal income tax under IRC § 501 other than charitable nonprofit organizations." The question is, was the Taxpayer operating as a tax-exempt organization as described under the provisions of Internal Revenue Code (IRC) §§ 501 (a) and 501(c)(6)?

IRC § 501 provides that certain organizations, including those described in IRC § 501(c)(6) are exempt from federal taxation. IRC § 501(c)(6) provides for the exemption of business leagues that are not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual. Treasury Regulation 1.501(c)(6)-I defines a business league as "an association of persons having a common business interest, whose purpose is to promote the common business interest and not to engage in a regular business of a kind ordinarily carried on for profit. Its activities are directed to the improvement of business conditions of one or more lines of business rather than the performance of particular services for individual persons."

The Taxpayer was created to further the interests of the business league in which A and B were principals. Organizational documents provided by the Taxpayer do not indicate that any benefits would inure to it or to its members. The issue for the City is the Taxpayer's organization for federal income tax purposes.

The Taxpayer claims that during the period in which it was organized as an LLC, it was essentially functioning as a nonprofit organization. Organized as a pass-through entity, however, the Taxpayer could not claim the federal income tax exemption in tax years 2002 through 2004. ¹ Both A and B retained their nonprofit exempt status and each reported a 50% ownership interest in the Taxpayer for income tax purposes during the tax years in question. All of the Taxpayer's receipts and expenses passed through to its tax-exempt members, A and B. The Taxpayer was formed for one reason: to perform the statutorily required functions assigned to A and B until such time as the merger between A and B into the Corporation could be completed. For federal and state income tax purposes, the Taxpayer had no taxable income.

The City denied the Taxpayer's request to be treated as a tax-exempt entity because the Taxpayer could not furnish a complete filed copy of Form 990 (Return of Organization Exempt from Income Tax), Form 1024 (Application for Recognition of Exemption) under Section 501(a), and the IRS determination letter recognizing the Taxpayer's tax exempt status. As a pass-through entity whose receipts flowed through to members A and B, the Taxpayer was not required to file these forms, A and B were required to file these forms, however, and the Taxpayer presented to the City and to the Department copies of their Form 1024, which identified the Taxpayer's pass-through income.

The City contends that the Taxpayer was operating as an independent contractor. The operating agreement between the Taxpayer and members A and B suggests otherwise. Specifically it stipulates that the "members (A and B) agree to operate the Company (the Taxpayer)." The agreement also defines the Taxpayer's business purpose as follows:

- To provide services to notification centers certificated by the State Corporation Commission pursuant to the Virginia Underground Utility Damage Protection Act and to engage in any business of any kind and character that is permitted under the laws of the State that is incident and necessary thereto.

It is clear that the Taxpayer was created for the purpose of accomplishing the goals of nonprofits A and B and therefore should be treated as such by the City.

Because I have determined that the Taxpayer is exempt under the provisions of Va. Code § 58.1-3703 C 18 b, it is not necessary to address the questions of whether the Taxpayer is a member of an affiliated group or if it is engaged in business to make a profit.

DETERMINATION

The Taxpayer operated under the direct and exclusive ownership of A and B, two entities exempt from federal income taxation, for the sole purpose of running a statutorily mandated notification center on a nonprofit basis on behalf of A and B, pending the certification of the Corporation by the SCC. At no time did any profit inure to the Taxpayer or its members A and B. Based on these specific facts, it is my determination that the Taxpayer, was exempt from the City's BPOL tax under the exclusion in Virginia Code § 58.1-3703 C 18 (b) for nonprofit organizations.

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

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-235352801H

¹The exemption presumes a filing of a federal 1024 and 990 form. Individuals (partners or LLC subsidiaries) are not required to do so under current law. The parents, in this case A and B, filed such forms, properly including the income of the Taxpayer.

Rulings of the Tax Commissioner