September 1, 2020
Re: Request for Advisory Opinion
Dear *****:
This is in response to your letter in which you request an advisory opinion regarding the exclusion for gross receipts of real estate brokers for amounts paid to real estate agents as commissions under Virginia Code § 58.1-3732.2 for purposes of the Business, Professional and Occupational (BPOL) license tax.
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 and public document cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.
FACTS
The City describes a scenario in which a principal broker excludes amounts paid as commissions to real estate salespersons, a real estate company (the “Company”) and a real estate team (the “Team”) from gross receipts. The Company and the Team are each limited liability companies separately licensed for BPOL purposes. The Company has three real estate salespersons but no brokers. The Team has an associate broker and two real estate salespersons. In addition, each of the Company’s and Team’s real estate salespersons are sole proprietors who are also separately licensed for BPOL purposes. The City asks whether the Company and the Team should also be permitted to exclude commissions paid to their real estate salespersons from the amounts previously paid to the Company and Team by the principal broker.
OPINION
For purposes of the BPOL tax, gross receipts means “the whole, entire, total receipts, without deduction.” See Virginia Code § 58.1-3700.1. In determining the BPOL tax, however, the Code of Virginia provides a number of exemptions and exclusions from gross receipts.
Code of Virginia § 58.1-3732.2 provides an exclusion for real estate brokers:
Gross receipts of real estate brokers for license tax purposes under Chapter 37 (§ 58.1-3700 et seq.) of this title shall not include amounts received by any broker that arise from real estate sales transactions to the extent that such amounts are paid to a real estate agent as a commission on any real estate sales transaction and the agent is subject to the business license tax on such receipts.
Real estate brokers are not defined for purposes of Virginia Code § 58.1-3732.2. The Department believes it is appropriate, therefore, to consult Chapter 21 of Title 54.1 of the Code of Virginia which provides for the regulation of this industry. See Public Document (P.D.) 00-210 (12/6/2000). Business entities can be either real estate brokers or real estate salespersons. See Virginia Code § 54.1-2100 and 54.1-2101. In the Department’s opinion, whether the Company or the Team can properly claim the exclusion depends on whether the business entity is a real estate broker. The statute is clear that real estate brokers can exclude any amounts received from real estate sales transactions to the extent that such amounts are paid to real estate agents as commissions. In the City’s example, it appears that both the Company and the Team pay commissions to their own salespersons from amounts the Company and the Team receive from real estate transactions. If the entity that pays the commission is a broker, then it appears the statutory requirements would be satisfied to claim the exclusion.
It is well established, however, that exclusions or exemptions must be narrowly construed against the taxpayer. See DKM Richmond Associates v. City of Richmond, 249 Va. 401 (1995). Although the statute seems to contemplate the possibility that business entities may be “real estate brokers” under Virginia Code § 54.1-2100, it is not clear based on the facts presented whether they are actually licensed as such. They would, however, be considered “real estate salespersons” under Virginia Code § 54.1-2101 as entities that are already affiliated with a real estate broker. Their status as real estate salespersons also appears to be consistent with Title 18 of the Virginia Administrative Code (VAC) 135-20-45 which sets forth requirements for “an applicant for a salesperson’s license as a business entity” [emphasis supplied].
Because business entities are separate and distinct from their owners, the fact that the Team has an associate broker would not be relevant unless that individual’s licensure affected the entity’s licensure. The Department observes that associate brokers are specifically designated as individuals under Title 18 VAC 135-20-10. Again, it is the Department’s opinion that the exclusion would not apply unless the entity itself was considered a broker and licensed as such. Should the exclusion not apply, and to the extent the gross receipts are not otherwise excludable or deductible, then the gross receipts would be taxable at both the entity level and at the salesperson level because both the entities and the salespersons are separately licensable for BPOL tax purposes under the City’s scenario. The fact that double taxation would occur, however, does not affect the outcome.
The City may wish to examine the entities’ licenses and any related documentation to verify how the entities are licensed. The City may also wish to consult the appropriate licensing agency for clarification as to how entities are licensed.
This opinion is expressly limited to the application of Virginia Code § 58.1-3732.2 to the facts presented. The Department expresses no opinion regarding what other exclusions or deductions from gross receipts any of the persons or entities described herein may be eligible for, if any.
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/3402.M