Document Number
09-145
Tax Type
BPOL Tax
Description
Taxpayer acts as an umbrella organization for local chapters of a nationwide organization; Gross receipts
Topic
Exemptions
Local Taxes Discussion
Nonprofits
Taxpayers' Remedies
Date Issued
10-08-2009


October 8, 2009




Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
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 a final local determination upholding an assessment of Business, Professional and Occupational License (BPOL) taxes made by the Commissioner of the Revenue of ***** (the "County") for tax years 2001 through 2004. I apologize for the delay in responding to your letter.

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 of Taxation's web site.

FACTS


The Taxpayer is a nonprofit organization, exempt from federal income taxes under Internal Revenue Code (IRC) § 501(c)(6). It acts as an umbrella organization for local chapters of the ***** (the "Members") nationwide.

In conjunction with the Taxpayer, Members provide dispute resolution services to businesses. To this end, the Taxpayer established dispute resolution procedures, published arbitration rules, trained arbitrators, and provided support services to Members as they administer mediations and arbitrations. In some programs, the Taxpayer receives the complaint intake, initiates settlement attempts and logs case records, while the local Members administer the hearings.

Payments from dispute resolution participants are made to the Taxpayer, which reimburses the Members on a per-case basis determined by the hours expended by the Taxpayer and Member staffs. The Taxpayer does not earn commissions from payment to Members, nor does it report reimbursements to its members as unrelated business taxable income (UBTI) on its federal Exempt Organization Business Income Tax Return (Form 990-T).

The County audited the Taxpayer and issued assessments for the 2001 through 2004 tax years. In its final determination addressing the Taxpayer's local appeal, the County concluded that all gross receipts generated through the dispute resolution proceedings were subject to BPOL tax because the Taxpayer was not affiliated with the Members. The Taxpayer appeals the County's determination, contending the receipts at issue are exempt under the County's ordinance and it operated as an agent on behalf of the Members and its payments to the Members should not be reported in its gross receipts.

ANALYSIS


Exemptions from Gross Receipts

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. 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." There is no question that the Taxpayer is a nonprofit organization for purposes of this exemption.

Under this statute, however, not all gross receipts of such a nonprofit organization are exempt from taxation. The statute provides that activities conducted for consideration that are similar to activities conducted by businesses conducted for profit are presumed to be subject to BPOL tax. Under the state statute, the analysis would focus on whether the receipts from the dispute resolution services are similar to activities conducted by businesses conducted for profit. To that end, there is a strong presumption that receipts reported as UBTI are similar to activities conducted for profit.
    • The County's ordinance, however, does not follow the state statute. It states:
    • There is no business license tax on federally tax-exempt gross receipts of trades associations, business leagues, and other organizations exempt from federal taxation as Internal Revenue Code 501(c)(6) organizations . . . .

Under this ordinance, all gross receipts exempt from federal taxation would be exempt from BPOL taxation. Essentially, the County's ordinance exempts from the BPOL tax gross receipts generated by organizations that are exempt from federal taxation under IRC § 501(c)(6), with the exception of gross receipts subject of federal taxation or UBTI.

In this case, the Taxpayer filed and paid BPOL tax for the tax years at issue based on gross receipts reported as UBTI on its federal income tax return as required under the County's ordinance. The County determined that additional gross receipts, not reported on the Taxpayer's federal Form 990-Ts, received by the Taxpayer and passed through to the Members were subject to the BPOL tax. The Taxpayer contends that because the Internal Revenue Service (IRS) audited its federal Form 990-Ts for the tax years at issue and did not adjust the UBTI to include the amounts paid to the Members, the County is required by ordinance to accept the Taxpayer's gross receipts as reported.

In examining statutory construction, the Virginia Supreme Court has emphasized that "when a statute is clear and unambiguous, its plain meaning must be accepted without resort to extrinsic evidence or to the rules of construction. Legislative intent is determined from the plain meaning of the words used." See City of Richmond v. Confrere Club of Richmond, Virginia, Inc., 239 Va. 77, 387 S.E.2d 471 (1990).

Based on the clear meaning of its ordinance, in order to include the additional gross receipts, the County must snow that these gross receipts were improperly excluded from the Taxpayer's UBTI computation. The County has provided no explanation or evidence to support such a finding.

The BPOL model ordinance enacted by the General Assembly; which includes Va. Code § 58.1-3703 C 18 b, is a permissive statute in that the locality may or may not choose to enact local ordinances that do not tax gross receipts permitted by the state statute. The County could have adopted the more expansive definition of taxable gross receipts of business leagues and similar organizations in its local ordinance. The County did not elect to do so, however, and adopted a more restrictive definition noted above.

Agency Relationship

Virginia Code § 58.1-3700.1 defines "gross receipts" as the "whole, entire, total receipts, without deduction." However, there are specific exemptions, deductions and exclusions that are either provided by statute or affirmed through Virginia Supreme Court decisions, opinions of the Attorney General and rulings by the Department. One such area is that of agency relationships.

The definition of "agency relationship" has been created through case law and affirmed through both opinions of the Attorney General and rulings by the Department. In City of Alexandria v Morrison-Williams Associates, Inc., 223 Va. 349, 288 S.E.2d 432 (1982), the Virginia Supreme Court established three criteria that must be met if a taxpayer is to establish it has an agency relationship with its clients. These criteria are: (1) contractual relationships exist between the taxpayer and both the client and the contracted third party, and there is a stated relationship between the client and the contracted third party; (2) the taxpayer does not commingle its "agency" funds with other sources; rather it must have a separate accounting system or a fiduciary account where the pass through receipts from its clients are recorded and; (3) the taxpayer does not report these "pass through costs" on its federal income tax returns. See Public Document (P.D.) 01-38 (4/12/2001) and P.D. 06-94 (9/28/2006).

Because the County has failed to show that the gross receipts in question are subject to BPOL tax, it is not necessary to address the issue of whether the Taxpayer is an agent of the Members or the amounts paid to the Members in connection with the dispute resolution services are deductible.

DETERMINATION


I find that the County has failed to show that the gross receipts not included in the Taxpayer's UBTI for the tax years at issue were subject to the BPOL tax under the County's ordinance. Based on this determination, I am remanding this matter to the County for the purpose of making the appropriate adjustments to the assessments for the 2001 through 2004 tax years.

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


                • Janie E. Bowen
                  Tax Commissioner



AR/1-2329090762.B


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46