Tax Type
BPOL Tax
Description
Reimbursements of expenses were gross receipts subject to the BPOL tax
Topic
Local Taxes Discussion
Records/Returns/Payments
Taxability of Persons and Transactions
Taxable Income
Date Issued
08-26-2014
August 26, 2014
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 an assessment of Business, Professional and Occupational License (BPOL) taxes issued to the Taxpayer by the ***** (the "County") for the 2010 through 2013 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 Laws, Rules and Decisions section of the Department's web site.
FACTS
***** (the "Client") had a warehouse that is located in the County. For the tax years at issue, the Client contracted with the Taxpayer to operate the warehouse. The Client paid the Taxpayer a fixed management fee plus additional incentive payments as compensation for its management and operation of the warehouse. In providing the management services, the Taxpayer paid all expenses associated with operating the warehouse. The Client reimbursed the Taxpayer dollar-for-dollar for these expenses.
The County audited the Taxpayer and determined that the management fee, incentive payments and expense reimbursements were gross receipts subject to the BPOL tax and issued assessments for the 2010 through 2013 tax years. The Taxpayer agreed that the management fee and incentive payments were gross receipts subject to the BPOL tax. However, it disagreed that the expense reimbursements were gross receipts and appealed the assessments to the County. In its final local determination, the County held that the payments received by the Taxpayer to reimburse it for operating expenses were gross receipts because gross receipts include all receipts, without deduction.
The Taxpayer appeals the County's final determination to the Tax Commissioner, contending the expense reimbursements were not subject to the license tax because the reimbursements were not derived from engaging in business. It also argues that the reimbursements were not gross receipts because the Taxpayer merely acted as an agent on behalf of the Client. The Taxpayer also asserts that the reimbursements represent a return of principal on a loan.
ANALYSIS
Gross Receipts of Business
For purposes of the BPOL tax, gross receipts means "the whole, entire, total receipts, without deduction." See Va. Code § 58.1-3700.1. Virginia Code § 58.1-3703.1 A 3 a. provides that "the gross receipts included in the taxable measure shall be only these gross receipts attributed to the exercise of a privilege subject to licensure at a definite place of business within [the] jurisdiction." Generally, gross receipts for license tax purposes exclude any amount not derived from the exercise of the licensed privilege to engage in a business or profession in the ordinary course of business. See Title 23 of the Virginia Administrative Code (VAC) 10-50-70.
The County's ordinance defines business in terms of earning a livelihood or profit. The Taxpayer contends that being engaged in business means operating with the intent of earning a profit. Therefore, the reimbursements cannot be considered gross receipts because are not derived with the intent of earning a livelihood or profit.
In Public Document (P.D.) 97-52 (2/10/1997), the Department found expenses paid on behalf of a customer, even without a markup, are generally considered to be a cost of doing business or an expense of the ultimate service provided by the taxpayer.
In this case, the Taxpayer paid for various services for the Client necessary to operate the warehouse. These expenses were passed on to the Client without any markup. Absent an agency relationship, the expenses were a necessary cost of doing business and as such were receipts derived from the exercise of a licensed privilege to do business.
Agency
The BPOL tax is a gross receipts based tax imposed upon business, trades, professions, occupations and callings and the persons engaged therein for the privilege of conducting business in a local jurisdiction. 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 Supreme Court decisions, opinions of the Attorney General and rulings by the Department. One such area is that of agency relationships. See 19861987 Op. Va. Att'y Gen. General 282 and Public Document (P.D.) 01-38 (4/12/2001).
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 P.D. 01-38 (4/12/2001) and P.D. 06-94 (9/28/2006). The Taxpayer contends that it met all three of the criteria for establishing an agency relationship with the Client.
Contractual Relationship
The Taxpayer had a contract with the Client that required it to pay the operating expenses of the facility and receive reimbursements. Absent any evidence to the contrary, the Taxpayer also selected third party vendors to perform certain services and paid for the services performed. The Taxpayer asserts that a contractual relationship existed between the third party vendors and the Client because the Client would assume all of its own liabilities if the Taxpayer ceased operations.
The essential elements of a valid contract must exist to support a binding agreement, which requires acceptance of an offer as well as valuable consideration. See Montagna v. Holiday Inns, Inc., 221 Va. 336, 269 S.E.2d 838 (1980). The provision cited by the Taxpayer does not contain an offer to or acceptance by the third party vendors or any consideration.
To the contrary, the contract between the Taxpayer and the Client is analogous to a cost-plus contract. In P.D. 97-231 (5/19/1997), the Department found that amounts expended by the taxpayer to perform under a cost-plus contract with the government, and for which the taxpayer is reimbursed, are included in the calculation of its gross receipts for BPOL tax purposes.
Commingling of Funds
The Taxpayer asserts that it did not commingle funds because it advanced the Client's expenses prior to reimbursement. The second criterion requires that a taxpayer maintain a separate accounting system or a fiduciary account for the pass-through receipts so that funds that belong to the principal and the funds that belong to the agent do not mix. Taxpayers may establish fiduciary funds for these monies, or establish a clear accounting system that segregates these monies from all other income the taxpayer receives. See P.D. 07-140 (9/5/2007). In either event, to claim an agency relationship for purposes of the BPOL tax, a taxpayer must be able to offer clear proof of a separate accounting of these "pass through" funds. The Taxpayer did not have either a fiduciary fund or a clear accounting system segregating the Client's funds from other funds. As such, the Taxpayer did not meet the second criteria for an agency relationship.
Reporting of Funds on Federal Income Tax Returns
The evidence provided indicates the Taxpayer did not report the reimbursements as income on its federal income tax returns.
Loan
Title 23 VAC 10-500-90 provides that customer payments to a lender that represent the return of principal on a loan are not gross receipts arising from the exercise of a licensable privilege in the ordinary course of a money lending business. The Taxpayer contends that the reimbursements represented a return of principal on a loan. It is well established that exclusions or exemptions must be narrowly construed against the taxpayer. See DKM Richmond Associates v. City of Richmond, 249 Va. 401 (1995). Typically, a loan has a note or credit application memorializing the transaction. In this case, there was no note or application reflecting the expense reimbursements.
The Taxpayer asserts that it advanced funds on behalf its Client to pay the operating expenses. However, the contract between the Taxpayer and the Client does not resemble a debt agreement. The Taxpayer was hired to provide a service (i.e., operate a facility), not lend the Client funds.
DETERMINATION
The Taxpayer has attempted to establish that it had an agency relationship with the Client with regard to certain expenses incurred in operating the facility in the County. The Taxpayer has, however, failed to provide evidence of separating accounting for agency funds. Further, the contractual relationships fail to establish a stated relationship between the Client and the third party vendors and indicate the reimbursement of the expenses is part of the Taxpayer's fee for operating the facility.
In addition, for the reasons stated above, the reimbursements were not a return on the principal of a loan. As such, I find there is no basis to overturn the County's determination that the reimbursements of expenses were gross receipts subject to the BPOL tax. Accordingly, the County's assessments of BPOL tax for the 2010 through 2013 tax years are upheld.
If you have any questions regarding this ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5612431697.B
Rulings of the Tax Commissioner