October 16, 2018
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Business, Professional and Occupational License (BPOL) 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 the denial of a refund of Business, Professional and Occupational License (BPOL) tax paid to the ***** (the “County”) for the 2012 and 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 Taxpayer provided administrative services to insurers of extended service contracts. Some of these services were provided from an office in the County during the tax years at issue. The Taxpayer was a limited liability company (LLC) and a disregarded entity for federal income tax purposes. The Taxpayer wholly owned a subsidiary that was also an LLC and a disregarded entity. This subsidiary in turn wholly owned ***** (“Corporation A”). Corporation A contracted with the Taxpayer to act as an obligor for the extended service contracts and paid Taxpayer service fees for the administration of claims.
The Taxpayer filed amended 2012 and 2013 BPOL tax returns with the County, to remove the service fees from its measure of taxable gross receipts and request refunds of BPOL tax paid. Subsequently, the Taxpayer submitted second amended returns to claim the deduction under Virginia Code § 58.1-3732 B 2 for gross receipts attributable to business conducted in another state (the “out-of-state deduction”). In response, the County issued a letter styled as a final determination denying the refunds. In Public Document (P.D.) 17-60 (5/2/2017), the Department determined that the response was the denial of a refund claim, not a final determination, and instructed the Taxpayer to file a local appeal.
The Taxpayer filed an appeal with the County. In its final determination, the County concluded that the gross receipts from service fees were not eligible for exclusion from the taxable measure because the Taxpayer and Corporation A were not part of an affiliated group as defined under Virginia Code § 58.1-3700.1. The County, however, allowed the out-of-state deductions in part.
The Taxpayer appealed to the Department, contending that gross receipts from service fees paid by Corporation A should have been excluded because they were paid by an affiliate. The Taxpayer also contends that it was eligible for greater out-of-state deductions than the County allowed.
DETERMINATION
Affiliated Group
Under the provisions of Virginia Code § 58.1-3703 C 10, receipts or purchases made by members of an affiliated group of entities from other members of the same affiliated group are exempt from the BPOL tax. There are two tests, the parent-subsidiary test and the brother-sister test, that a group of entities can satisfy in order to be considered an affiliated group.
A group of related entities may meet the parent-subsidiary test if:
- one or more corporations subject to inclusion, other than the common parent, directly owns stock or other ownership interest possessing at least 80% of the voting power of all classes of interests and at least 80% of each class of the nonvoting interests of each of the related entities, and
- the common parent entity directly owns interests possessing at least 80% of the voting power of all classes of ownership interests and at least 80% of each class of the nonvoting interests of at least one of the other corporations subject to inclusion.
An affiliated group can consist of entities other than corporations, if the entities satisfy the above requirements “as if they were corporations and the ownership interests therein were stock.” An entity is defined as a business organization, other than a sole proprietorship, that is a corporation, limited liability company, limited partnership, or limited liability partnership duly organized under the laws of the Commonwealth or another state. See Virginia Code § 58.1-3700.1.
The County argues that because the Taxpayer was an LLC that elected to be treated as a disregarded entity for federal income tax purposes, it could not be treated as if it were a corporation and its ownership interest in any subsidiaries was in stock. An LLC, like any other person, firm, or corporation, may be subject to local license taxation based on its activities at a definite place of business in Virginia regardless of whether it has chosen to be disregarded for federal income tax purposes. See P.D. 99-9 (1/11/1999). The phrase “as if they were corporations and the ownership interests therein were stock” indicates that the non-corporate entities described in the statute are to be treated like corporations with stock ownership interests, even though they are not. LLCs are one of the non-corporate entities described in the statute, and there is no statutory exclusion for LLCs that have chosen to be treated as disregarded entities for federal income tax purposes. It would be inconsistent for an LLC that was disregarded for federal income tax purposes to be liable for BPOL tax on a separate entity basis but be prohibited from being part of an affiliated group for purposes of determining whether exempt transactions had occurred between affiliated entities.
The Taxpayer wholly owned a subsidiary which itself was an LLC that wholly owned Corporation A. This chain of ownership is no different than if all three entities were corporations, with each tier owning 100% of the stock of the next. Such an organizational structure clearly satisfies the definition of a parent-subsidiary control group. See also Title 23 of the Virginia Administrative Code (VAC) 10-500-50 C 1 a.
Out-of-State Deduction
Virginia Code § 58.1-3732 B 2 provides a deduction from gross receipts otherwise taxable for any 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.” Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-500-80 A 2, a taxpayer must file an income or income-like tax return in a state or foreign country even if there is not actual tax liability in a given year, in order to claim the deduction in that state or foreign country.
The County allowed the deductions in part, but the Taxpayer contends it was eligible to claim greater deductions than the County allowed. While the appeal was pending, the County agreed to review additional information the Taxpayer could provide to substantiate the deductions claimed. To date, the County is still reviewing that information.
DETERMINATION
The fact that the Taxpayer was a disregarded entity for federal income tax purposes has no bearing on whether it could be considered part of an affiliated group for purposes of the exclusion from BPOL tax for gross receipts derived from transactions between affiliates. Because the Taxpayer and Corporation A were members of a parent-subsidiary control group as described in Virginia Code § 58.1-3700.1, gross receipts attributable to service fees paid by Corporation A to the Taxpayer were not subject to BPOL tax.
The County, however, is still reviewing the additional information provided by the Taxpayer regarding the out-of-state deduction. Based on this determination, the County must issue refunds of BPOL tax paid on gross receipts attributable to service fees paid by Corporation A to the Taxpayer. Once the County’s review of the out-of-state deductions is complete, the County may also need to issue further refunds, to the extent the Taxpayer’s information substantiates the out-of-state deductions claimed. The County should communicate the result of that review in a final determination to the Taxpayer. If the Taxpayer wishes to appeal that determination with regard to the out-of-state deduction, it may do so within 90 days of the date of the final determination pursuant to the procedures set forth in Title 23 VAC 10-500-720.
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1414.M