March 10, 2017
Re: Request for Advisory Opinion
Business, Professional & Occupational License (BPOL) Tax
Dear *****:
This will reply to your letter in which ***** (the “Taxpayer”) requests an advisory opinion regarding its classification for purposes of the Business, Professional and Occupational license (BPOL) tax. I apologize for the delay in responding to your request.
The local license fee and tax are imposed and administered by local officials. Virginia Code § 58.1-3701 authorizes the Department to issue advisory opinions on local license tax issues. The following opinion has been made subject to the facts presented to the Department summarized below. Any change in these facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections, regulations and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.
FACTS
The Taxpayer purchases defaulted debt and bankruptcy claims from creditors and then pursues collection on the purchased debts from financial institutions. The financial institutions have generally exhausted their efforts to collect the debt and in many cases have used collection agencies to attempt collection. Because of the nature of the debt acquired, it is purchased at a small fraction of the outstanding balance. Once purchased, the financial institution or the seller has no rights to the amounts collected by the Taxpayer. It does not perform debt collection services on behalf of a creditor or client nor does it sell purchased debt.
The Taxpayer has a definite place of business in two Virginia localities and has been filing BPOL tax returns as a financial service business. The Taxpayer, however, believes that it should be classified as a collection agency and has asked the Department to issue an advisory opinion.
OPINION
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. The classifications are explained under Title 23 of the Virginia Administrative Code (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 does the enterprise generate gross receipts?
- Where the enterprise conducts its business?
- Who are the enterprise's customers?
- How does the enterprise hold itself out to the public?
- What is the enterprise's North American Industry Classification System (NAICS) code?
For income tax and sales and use tax purposes, the NAICS is used in determining a taxpayer's industry affiliation. While not the determinative factor to be used in classification for local tax purposes, it is instructive. See Public Document (P.D.) 06-79 (8/23/2006).
Financial Service Businesses
“Financial, real estate, and professional service businesses” are a separate classification of enterprise under Va. Code § 58.1-3706. Specific to this request, Va. Code § 58.1-3700.1 defines “financial services” as “the buying, selling, handling, managing, investing, and providing of advice regarding money, credit, securities, or other investments.” Any person rendering a service for compensation in the form of a credit agency, an investment company, a broker of dealer in securities and commodities, or a security or commodity exchange is providing a financial service. See Title 23 VAC 10-500-380. Currently, such businesses may be subject to a maximum license tax of $.58 per $100 of gross receipts.
Title 23 VAC 10-500-390 provides a list of occupations that are considered financial service providers. This list is not all inclusive. Two businesses listed that are considered financial services are “buying installment receivables” and “factors.”
Neither the statutes nor the regulations define “buying installment receivables” or “factors.” A factor, however, has been defined as one who buys accounts receivable at a discount. See Black's Law Dictionary 630 (8th Ed. 2004). According to Black's Law Dictionary, “the factor (who buys them) assumes risk of delay in collection and loss on the accounts receivable.”
Generally, factoring can be described as a transaction in which a business sells accounts receivable or invoices in order to secure working capital. In many cases, businesses use factoring to manage cash flow or as a means for acquiring financing to meet immediate cash needs. As such, businesses engaged in factoring accounts receivable are considered to be providing financing to others by assuming the risk of collection of collection and credit losses.
In addition, the activity of factoring is similar to a “dealer” under Title 23 VAC 10- 500-380 3 that buys and sells securities for its one account. Like a dealer, the factoring business is engaged in the business of buying receivables or debt (securities) for their own account and bears the risk of loss if the value of the receivable or debt cannot be recovered. Thus, buying accounts receivable and factoring are considered to be financial services.
Further, within the NAICS code for the finance and insurance industries, factoring accounts receivable and purchasing of accounts receivable are included with All Other Nondepository Credit Intermediation (522298). In P.D. 13-173 (9/19/2013), the Department indicated that it would consider the purchase of future receivables and different types of loans to be financial services for BPOL tax purposes.
Collection Agents or Agencies
All businesses not otherwise classified are included in “repair, personal and business services, and all other businesses and occupations not specifically listed or excepted” in this section pursuant to Va. Code § 58.1-3706 A 4. Under Title 23 VAC 500-480, service businesses not clearly identified as financial, real estate or professional are classified as “repair, personal, business and other services.” A list of occupations provided under Title 23 VAC 10-500-500 includes “Collection agents and agencies.” Currently, such businesses may be subject to a maximum license tax of $.36 per $100 of gross receipts.
As with factoring, the NAICS code can be instructive. The NAICS code for collection agencies (561440) describes the industry as “establishments primarily engaged in collecting payments for claims and remitting payments collected to their clients.” Unlike factors, which actually own accounts receivable, a collection agency does not assume any loss on any portion that is not collected. Instead, they are compensated for collecting the debts on behalf of others.
Classification
The Taxpayer believes its activities are consistent with that of collection agent under the NAICS code. As indicated above, collection agents do not own the debt that they are attempting collect. Instead, they remit amounts collected to their customers. By its own admission, the Taxpayer purchases discounted debts from other entities. While it may perform activities similar to that of a collection agent, it is not acting as an agent when it collects the debt.
Because the BPOL regulations do not define “collection agencies,” the Taxpayer asserts the Department should follow the definition of a “debt collector” under the Fair Debt Collection Protection Act (FDCPA), codified as 15 U.S.C. §§ 1692 et. Seq.” The FDCPA is enforced by the Consumer Financial Protection Bureau (CFPB). According to the CFPB's website, debt collectors include “companies that buy past-due debts from creditors or other businesses and then try to collect them.”
The Department is not persuaded by this definition. First, the terminology does not match the terms used in Virginia regulations or the NAICS code. Second, definitions under Title 15 U.S.C. § 1692a are specifically limited to the FDCPA and the purposes for which it was enacted. Third, Virginia regulations specifically include factoring and collections agent in separate classifications indicating the activities are different for BPOL tax purposes. As such, the Department finds the CFPB's definition of a debt collector is not applicable to the BPOL tax.
The Taxpayer also argues it cannot be a “broker” or a “dealer” for BPOL classification purposes because it does not deal in securities. As indicated above however, the risk involved with purchasing discounted debt or receivables is more similar to a dealer purchasing and selling securities than collecting on behalf of the owner of such debt.
In addition, the Taxpayer's claims that it acts more like a collector because revenues generated from installment receivables or from the business of factoring are based on the passage of time and debtors gradually pay off the balance. By contrast, it must act quickly to recover defaulted debt and bankruptcy claims. Again, the Department is not convinced. The Taxpayer bears the risk of loss much like dealer who is classified as a financial service provider. Further, factoring of accounts receivable is used by businesses to meet immediate cash needs in lieu of waiting for the debtor to pay over time.
Based on the facts presented, the nature of the Taxpayer's business is to buy discounted debt from customers and initiate actions to attempt to collect the debt. Gross receipts appear to be generated by successful collection efforts that result in proceeds exceeding the purchase price of the debt. The Taxpayer's customers appear to be financial institutions and businesses that provide financing to their clients. According to its website, the Taxpayer holds itself out as debt manager offering to help those who have had past due accounts with a former bank, finance company or service provider. Finally, the Taxpayer's activities appear more similar to those of an enterprise factoring accounts receivable or purchasing of accounts receivable under the NAICS code. Accordingly, it appears that the Taxpayer should properly be classified as a financial services business for Virginia BPOL tax purposes.
If you have any questions regarding this opinion, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/815.B