Document Number
10-174
Tax Type
BPOL Tax
Description
Taxpayer is not entitled to deduct payments made to the subcontractor in determining its gross receipts
Topic
Local Taxes Discussion
Subtractions and Exclusions
Date Issued
08-10-2010

August 10, 2010


Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business, Professional and Occupational License (BPOL) Tax

Dear *****:

This final state determination is issued upon the application for correction filed by ***** (the "Taxpayer") with the Department of Taxation. You appeal the Business, Professional and Occupational License (BPOL) tax assessments issued to the Taxpayer by the ***** (the "County") for the 2007 through 2009 tax years.

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, i.e., 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, 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 Taxpayer is a contractor with a definite place of business in the County. During the tax years at issue, the Taxpayer deducted payments made to a third-party subcontractor from gross receipts in determining its BPOL tax.

Under audit, the County adjusted the Taxpayer's gross receipts to remove the deduction for payments made to the subcontractor and issued assessments. The Taxpayer appealed the assessments to the County. In its final local determination, the County concluded that payment, to subcontractors are a cost of doing business and are not deductible in determining gross receipts subject to BPOL tax.

The Taxpayer appeals the final local determination, contending that the County has already received 98% of the tax on the value of the contract from the subcontractor. The Taxpayer further asserts that it does not have the financial ability to pay the assessments.

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.

In this case, the Taxpayer won a bid on a contract on a construction project in the County. The Taxpayer subcontracted the work on the project to a subcontractor. Payments to the subcontractor were equivalent to 98% of the gross receipts received by the Taxpayer under its contract. The Taxpayer argues that, because the County had already received a substantial amount of tax from the subcontractor, it should not have to pay tax on its entire gross receipts.

Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-500-130 B, a contractor is considered to be engaged in a separate business from the business or person who enters into an agreement for that contractor's services. The regulation goes onto state:
    • if one licensable business subcontracts some of its business to an independent contractor, the primary business may not deduct from its taxable gross receipts any, payments to an independent contractor even though the independent contractor or subcontractor is also taxable on its gross receipts.

Furthermore, in 1976-77 Op. Att'y Gen. 272, the Attorney General addressed the issue of taxing the receipts of both the prime contractor and the subcontractor under circumstances analogous to the Taxpayer's case and opined:
    • [n]o exemption exists for instances where a contractor enters into an agreement for completion, of an entire project and subsequently agrees with a subcontractor for the latter to perform a part of the work on the project. Consequently the . . . contractor and his subcontractor each must determine the amount owed as a license fee on the gross amount of the contracts accepted by him during the prior year.

DETERMINATION


Based on the foregoing, the Taxpayer is not entitled to deduct payments made to the subcontractor in determining its gross receipts subject to BPOL tax. As such, the County's assessments for the 2007 through 2009 tax years are upheld.

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


                • Linda D. Foster
                  Deputy Tax Commissioner


AR/1-3915314405.C


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46