May 14, 2019
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 ***** (the “Taxpayer”) with the Department of Taxation. You appeal an assessment of Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by ***** (the “County”) for the 2017 tax year.
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, regulation and public document 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 owned an individual retirement account (IRA) for which a trust company was custodian. The Taxpayer selected residences to renovate for resale and directed the trust company to use the funds from the IRA for their purchase and renovation. The Taxpayer determined what work needed to be done and was responsible for finding the tradesmen to complete the work. He then directed the trust company to remit payment to them for the work performed. Upon completion of a renovation, the Taxpayer determined the price to list the property for sale. Once the property was sold, the proceeds were paid to the trust company and were reinvested in the Taxpayer’s IRA.
The County audited the Taxpayer, determined he was engaged in a licensable business activity within its jurisdiction, and issued a BPOL tax assessment for the 2017 tax year. The Taxpayer appealed the assessment to the County. In its final determination, the County determined that the Taxpayer was subject to the BPOL tax because he was engaged in the business of purchasing, renovating and selling homes.
The Taxpayer filed an appeal with the Tax Commissioner, contending he was not subject to BPOL tax because the business was conducted by the trust company, an entity exempt from BPOL tax. The Taxpayer also argues that his IRA was exempt from BPOL taxation.
ANALYSIS
Engaged in Business
The BPOL tax is a tax on the privilege of doing business within a locality. A local government body, by ordinance, may levy and provide for the assessment and collection of BPOL taxes on businesses, trades, professions, occupations and callings and upon persons, firms, and corporations engaged in business within the locality. See Virginia Code § 58.1-3703. A business is defined in Virginia Code § 58.1- 3700.1 as a course of dealing which requires the time, attention and labor of the person so engaged for the purpose of earning a livelihood or profit. It implies a continuous and regular course of dealing, rather than an irregular or isolated transaction.
The Taxpayer was conducting business activities in the County during the taxable year at issue, and the parties do not dispute that any gross receipts derived from such activities would be properly sitused to the County. The question in this case, however, is whether the Taxpayer remained subject to BPOL tax on the gross receipts derived for such activities when he was using a “self-directed” IRA to conduct business.
The Taxpayer contends that the trust company, an entity he claims was exempt from BPOL tax, conducted the licensable business activity. The Department disagrees. The trust company was merely the custodian of the Taxpayer’s IRA. The Taxpayer, not the custodian, oversaw the renovation and repair of the properties. The custodian applied the IRA funds to purchase and renovate the properties at the Taxpayer’s direction, including paying third parties to complete the renovation work. In addition, although the sales proceeds were paid to the custodian, the funds were kept for the Taxpayer’s benefit, a fact clearly indicated on the sample Form 1099 provided that reported the sales proceeds.
The Taxpayer argues that trust companies are generally exempt from BPOL tax because they are subject to the bank franchise tax. See Virginia Code § 58.1-1202. As explained above, the trust company was merely the custodian of the Taxpayer’s account. Thus, the extent the custodian may be subject to the bank franchise tax has no bearing on the outcome of this case.
The County’s BPOL tax was assessed based on the amount of gross receipts generated by the business. Title 23 of the Virginia Administrative Code (VAC) 10-500-10 defines “gross receipts” as:
the whole, entire, total receipts, of money or other consideration received by the taxpayer as a result of transactions with others besides himself and that are derived from the exercise of the licensed privilege to engage in a business or profession in the ordinary course of business . . . .
It appears that gross receipts were paid to the IRA, not the Taxpayer. As the owner of the IRA, however, the Taxpayer was able to take withdrawals from it at any time. The fact that penalties may have applied for taking an early withdrawal from the IRA does not mean that the funds were not ultimately the Taxpayer’s. The IRA was functioning essentially as the Taxpayer’s business bank account, out of which he paid expenses and into which he deposited proceeds. In such circumstances, the person conducting the business activities would be considered to have received the revenues generated by such activities.
Tax Exemption for IRA
The Taxpayer contends his IRA is exempt from BPOL taxation. Pursuant to Internal Revenue Code (IRC) § 408(e)(1), IRAs are exempt from federal income taxation. The BPOL tax, however, is separate and distinct from income tax because an income tax is a tax based on a taxpayer’s income while a BPOL tax is based on the privilege of engaging in business. See Public Document (P.D.) 15-19 (2/11/2015). As such, the federal income tax exemption for IRAs does not apply to BPOL tax.
DETERMINATION
Based on the evidence, the Taxpayer, not the IRA custodian, was properly subject to BPOL licensure and taxation because all of the business activities at issue were being done at the Taxpayer’s direction and control. The Taxpayer was effectively using the IRA as a business bank account and the custodian was an agent making payments at the Taxpayer’s direction. The fact that expenses and revenues were channeled through the Taxpayer’s IRA does not change the result. The Taxpayer’s IRA would have been exempt from federal income tax, provided that it was administered in accordance with all the legal requirements applicable to IRAs. The federal income tax exemption, however, did not shield the gross receipts attributable to the Taxpayer’s business activities from BPOL taxation.
As stated above, the County’s assessment is deemed prima facie correct, and the Taxpayer must prove it was erroneous on appeal. It is my determination that the Taxpayer has not met this burden of proof for the reasons stated. Therefore, the County’s assessment is upheld.
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
1826.A