February 24, 2015
Re: Appeal of Final Local Determination
Locality: *****
Taxpayer: *****
Business, Professional and Occupational License (BPOL) Tax
Business Tangible Personal Property (BTPP) Tax
Dear *****:
This final state determination is issued upon the application for correction filed by ***** (the "Taxpayer") with the Department of Taxation. The Taxpayer appeals a final local determination upholding assessments of BPOL and BTPP taxes for the 2009 through 2012 tax years issued by the ***** (the "City").
The local license tax and fee and business tangible personal property tax are imposed and administered by local officials. Virginia Code §§ 58.1-3703.1 A 5 and 58.1-3983.1 D 1 authorize the Department to issue determinations on taxpayer appeals of certain BPOL and BTPP tax assessments, respectively. On appeal, a local 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
From 2001 through 2008, the Taxpayer operated a landscaping business in the City under the trade name of ***** (Business A). Business A was an unincorporated sole proprietorship. In 2007, the Taxpayer formed (the "Corporation") to incorporate his business. According to the Taxpayer, the Corporation conducted business under the same trade name as Business A.
In addition to landscaping, the Taxpayer also provided snow removal and junk removal services. In 2011, the Taxpayer obtained licenses for the 2009 through 2011 tax years for the Corporation operating under the name ***** (Business B) and a separate unincorporated junk removal business (Business C).
Under audit, the City consolidated all of the Taxpayer's gross receipts under Business A's license and issued an assessment for additional BPOL tax due for the 2009 through 2012 tax years. In addition, the City deactivated the license for Business C and credited the license fees which had been paid towards the assessment. The City also assessed additional BTPP tax.
The Taxpayer filed an appeal with the City, contending that the City had: (1) failed to change his license for Business A from a sole proprietorship to a corporation; (2) improperly included insurance payments for personal losses in gross receipts; (3) taxed him on business that had been conducted in another state; (4) taxed some of his gross receipts twice; (5) improperly apportioned gross receipts between his multiple businesses; (6) failed to acknowledge his contracting activities and apply the appropriate BPOL tax rate; and (7) overvalued his BTPP.
In its final determination, the City upheld the assessment. The City responded to the Taxpayer's contentions as follows: (1) it had treated Business A as a sole proprietorship because the Taxpayer's federal Schedule Cs were in Business A's name and the Corporation had not filed corporate income tax returns; (2) there was no evidence insurance payments for personal losses had been included in gross receipts because the City had based its assessment on the gross receipts the Taxpayer reported on the Schedule Cs (in the case of the 2009 through 2011 tax years) or to the City directly (in the case of the 2012 tax year); (3) it had not allowed a deduction from gross receipts for business conducted in another state because the Taxpayer had not provided business licenses or tax returns from other states; (4) it could not have taxed gross receipts twice because, again, the assessment was based on the gross receipts the Taxpayer had reported for federal income tax purposes or to the City directly; (5) it had allocated all gross receipts to Business A because the Taxpayer had not provided invoices to substantiate which gross receipts were attributable to which business and all proceeds had been deposited into a bank account held in Business A's name; (6) it had not applied the tax rate applicable to contractors because the Taxpayer had not provided any invoices to substantiate contracting activities; and (7) it had based the value of the Taxpayer's BTPP on the typical value of property owned by similar businesses because the Taxpayer had not provided depreciation schedules or responded to the City's request for a meeting.
The Taxpayer filed an appeal with the Department, raising the same issues he raised in his local appeal and also asserts that he sold Business A in 2011.
While the appeal was pending, the Taxpayer requested a conference with the Department. The Taxpayer also stated that he had additional documentation the City had previously been unable to review. The City requested that it be permitted to review the additional information prior to scheduling the meeting with the Department. After several attempts over a number of months to schedule a meeting to review the additional information, the City has informed the Department that the Taxpayer has not made contact to reschedule the meeting after he postponed it. As such, the Department is proceeding to issue a determination based on the available information.
ANALYSIS
Multiple Businesses
Virginia Code § 58.1-3703.1 A 1 provides that a separate license will be required for each definite place of business and for each business a taxpayer is operating. Local tax officials are responsible for making the determination as to whether a taxpayer is engaged in a single business or in two businesses, each of which could operate independently of the other. In order to make this determination, the local tax official must be provided with documentation demonstrating the substantiality of each business. See 1994 Op. Va. Att'y Gen. 99.
In order to obtain multiple licenses, a business must be engaged in clearly identifiable separate business activities and not merely activities ancillary to the primary business. In Public Document (P. D.) 97-257 (6/11/1997), the Department concluded that the term "ancillary" refers to business activities that are subordinate, subservient, auxiliary, or in aid of the business' principal business activity. Distinguishing between an ancillary activity and an activity that rises to the level of a separate business can often be accomplished by determining if the activity under scrutiny exists independently of the principal business. In general, an activity for which no separate charge is made will be presumed to be ancillary to the activity for which a charge is made, but separately stating charges for different activities will not create a presumption that each such activity is a separate business. See Title 23 of the Virginia Administrative Code (VAC) 10-500-110 B.
Based on established law, policies and procedures, it is incumbent upon the taxpayer to supply the local assessing official with information supporting its claim that it was engaged in multiple businesses. By inference, if a taxpayer claims to operate multiple businesses, the taxpayer bears the burden of proof in substantiating its claim. See P.D. 07-41 (4/20/2007).
In this case, the Taxpayer operated Business A as an unincorporated sole proprietorship prior to the tax years at issue. In 2011, the Taxpayer obtained separate licenses for the Corporation and Business C, another unincorporated sole proprietorship. During each of the tax years at issue, the Taxpayer also maintained the license for Business A. Under audit, the City was unable to determine which gross receipts were attributable to which business because the Taxpayer had commingled all business proceeds in Business A's bank account. In addition, the Taxpayer filed only one federal Schedule C for each of the 2009 through 2011 taxable years, in each case listing Business A as the name of the business. As a result, the City attributed all of the Taxpayer's gross receipts to Business A.
The Taxpayer provided the City with a breakdown of how much of his revenue came from landscaping, snow removal, junk removal and "contracting" services. The City requested supporting invoices from the Taxpayer which were never provided, and no additional documentation has been provided on appeal.
Sale of Business A
The Taxpayer asserts that he sold Business A in 2011. As evidence, the Taxpayer provided copies of a bill of sale and asset purchase agreement. The information available indicates the transaction was financed by the Taxpayer, but the buyer defaulted on his payments, and the Taxpayer continued to operate Business A. In addition, it appears that the Taxpayer reported all of Business A's gross receipts on his federal Schedule C for the 2011 taxable year. The Taxpayer has failed to provide evidence to show he was no longer operating in 2011.
Classification
The BPOL tax is imposed on businesses and professionals for the privilege of doing business in a locality. The tax is imposed at different rates according to the classification of an enterprise. See Va. Code § 58.1-3706. These classifications are regulated under Title 23 VAC 10-500-10 et seq. Classification of a specific business must be determined based on consideration of all the facts and circumstances. Some of the factors to be considered include:
- What is the nature of the enterprise's business?
- How the enterprise generates gross receipts.
- Where the enterprise conducts its business.
- Who are the enterprise's customers?
- How the enterprise holds itself out to the public.
- The enterprise's NAICS code.
Contractors
In this case, the Taxpayer asserts that he should have been classified as a contractor. Virginia Code § 58.1-3714 D 1-6 includes the following definitions for the term "contractor:"
- Accepting or offering to accept orders or contracts for doing any work on or in any building or structure, requiring the use of paint, stone, brick, mortar, wood, cement, structural iron or steel, sheet iron, galvanized iron, metallic piping, tin, lead, or other metal or any other building material;
- Accepting or offering to accept contracts to do any paving, curbing or other work on sidewalks, streets, alleys, or highways, or public or private property, using asphalt, brick, stone, cement, concrete, wood or any compositions;
- Accepting or offering to accept an order for or contract to excavate earth, rock or other material for foundation or any other purpose or for cutting, trimming or maintaining rights of way;
- Accepting or offering to accept an order or contract to construct any sewer of stone, brick, terra cotta or other material;
- Accepting or offering to accept orders or contracts for doing any work on or in any building or premises involving the erecting, installing, altering, repairing, servicing, or maintaining electric wiring, devices or appliances permanently connected to such wiring, or the erecting, repairing or maintaining of lines for the transmission or distribution of electric light or power; or
- Engaging in the business of plumbing and steam fitting.
The Taxpayer has presented no evidence indicating that he performed any of the specific activities enumerated in Va. Code § 58.1-3714 D. Landscaping, junk removal and snow removal services are not generally activities included in the definition of "contractor" under Va. Code § 58.1-3714 D.
Repair, Personal, Business and Other Services
There are two separate classifications of services for purposes of the BPOL tax: "financial, real estate and professional services," and "repair, personal, business and other services." Those businesses classified as providers of professional services are specifically enumerated in Title 23 VAC 10-500-450. All other services not clearly identified as financial, real estate or professional services fall under the classification of "repair, personal, business and other services." See Title 23 VAC 10-500-500.
Landscaping, junk removal and snow removal services are not identified as financial, real estate or professional services under the BPOL regulations. As such, they fall under the category of repair, personal, business and other services. In this case, the City's assessment indicated that the Taxpayer was classified as a provider of "miscellaneous services." Although the City used different terminology than the regulations, a review of the City's computations indicates that the Taxpayer was properly assessed at the rate applicable to providers of repair, personal, business and other services.
In addition, for classification purposes, it is immaterial whether a business is operated as a corporation or a sole proprietorship. Classification is based on the type of activities the business conducts, not its organizational form.
Insurance Claims
For BPOL tax purposes, "gross receipts" are defined as "the whole, entire, total receipts, without deduction." See Va. Code § 58.1-3700.1. Gross receipts, however, do not include 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 Va. Code § 58.1-3732 A.
The Taxpayer contends that the City included insurance payments he received for personal losses in the measure of gross receipts. Insurance proceeds covering personal losses that are not associated with a taxpayer's business would not be subject to BPOL tax. The assessment for the 2011 tax year, however, was based on the amount of gross receipts the Taxpayer reported on federal Schedule C, and the Taxpayer has not shown that the insurance payments were included in this amount.
Out-of-State Deduction
Under Va. Code § 58.1-3732 B 2 a deduction from gross receipts or gross purchases is permitted for "[a]ny receipts attributable to business conducted in another state or foreign country in which the taxpayer . . . is liable for an income or other tax based upon income." The regulations further explain that the taxpayer must be liable for an income or an income-like tax in the other state and file a return in that state to take advantage of the deduction. See Title 23 VAC 10-500-80 A 2.
The Taxpayer contends that the City improperly assessed BPOL tax on business activities he began conducting in State A in 2011. In its final determination, the City held that the Taxpayer was not eligible for a deduction from gross receipts for business conducted in State A because the Taxpayer had not provided any State A business licenses or income tax returns.
On appeal, the Taxpayer has provided a copy of a State A retail vendor's license issued in October 2011. It appears, however, that the Taxpayer also continued to do business in Virginia, and the extent of his business activities in State A is unclear. It is also unclear whether the Taxpayer was liable for income tax in State A. In any event, he has not provided evidence that he filed any State A income tax returns.
Property Valuation
Virginia Code § 58.1-3103 charges local commissioners of the revenue with the responsibility of assessing property at fair market value (FMV). The FMV of a particular item of tangible personal property is generally defined as the price such property will bring when offered by one who desires, but is under no obligation, to sell it, and the buyer has no immediate necessity to purchase it. See Tuckahoe Women's Club v. County of Richmond, 119 Va. 734, 101 S.E.2d 571 (1958).
In attempting to achieve property valuations that reasonably approximate FMV, the General Assembly has statutorily prescribed different methodologies for use in the valuation of different classifications of property. Virginia Code 58.1-3503 specifies that for most items of tangible personal property, FMV is to be ascertained either by a percentage or percentages of original cost, or in the case of trucks and cars and certain other vehicles, by means of recognized pricing guides. Further, this statute stipulates:
Methods of valuing property may differ among the separate categories, so long as each method used is uniform within each category, is consistent with requirements of this section and may reasonably be expected to determine actual fair market value as, determined by the commissioner of revenue or other assessing official . . . .
Under the provisions of Va. Code § 58.1-3109 6, the local commissioner of the revenue is empowered with the authority to require records and other information necessary to make an accurate assessment of a person's tangible personal property. It is incumbent upon the Taxpayer to prove to the satisfaction of the local taxing authority that it properly reported the value of its property on its BTPP returns. See Va. Code § 58.1-3983.1 B 4.
The City's valuation of the Taxpayer's BTPP property was based on the typical value of BTPP owned by similar businesses. It appears that the City would have considered the Taxpayer's depreciation schedules as evidence of value, but none were ever provided. The Taxpayer states that he tried to make arrangements for the City to inspect the property, but the City states that he never responded to its proposal to meet concerning the valuation issue.
DETERMINATION
In his appeal, the Taxpayer asserted he had documentation to support his claims. Despite requests from both the Department and the City, the Taxpayer has not provided sufficient documentation showing that he was operating multiple businesses or that he was no longer operating Business A.
In addition, landscaping, junk removal and snow removal services are not generally considered contracting activities as defined by Va. Code § 58.1-3714 D. Because landscaping, junk removal and snow removal services are considered to be business services, the City properly applied the tax rate applicable to repair, personal, business or other services.
Furthermore, the Taxpayer failed to show that the City improperly included the insurance payments he received in 2011 in the amount of gross receipts subject to BPOL tax. The Taxpayer also was not eligible to claim a deduction from gross receipts for business conducted in State A because he did not provide evidence that he filed any State A income tax returns. Based on the information provided, therefore, the Taxpayer has not shown that the City's assessments of BPOL tax were incorrect. Accordingly, the assessments are upheld.
With regard to the BTPP assessments, I am remanding this case back to the City in order to consider any other documentation the Taxpayer may be able to provide with regard to the assets it owns and the value of such assets. Such documentation or evidence should be provided to the City within 30 days of the date of this determination. If the required documentation is not provided within the time allowed, the assessments of BTPP tax will be considered to be correct.
If you have any questions regarding this determination, you may call ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5480754492.M