February 9, 2021
Re: Request for Advisory Opinion
Business, Professional and Occupational License Tax
This is in response to your letter in which you request an advisory opinion on behalf of the ***** (the “City”) concerning whether forgivable loans paid out to businesses under the Paycheck Protection Program should be excluded from gross receipts for purposes of computing the Business, Professional and Occupational License (BPOL) tax.
The local license fee and tax are imposed and administered by local officials. Virginia Code § 58.1-3701 authorizes the Department to promulgate guidelines and issue advisory opinions on local license tax issues. The following opinion has been made subject to the fact 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 regulation cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), P.L. 116-136 (3/27/2020) established a loan program commonly known as the Paycheck Protection Program (PPP) which is administered by the federal Small Business Administration (SBA). Under certain circumstances, borrowers may qualify for loan forgiveness under the CARES Act. The City asks whether such forgivable loans should be included in a taxpayer’s gross receipts for purposes of the BPOL tax.
Normally, loan proceeds are not considered to be income for federal income tax purposes because they have to be paid back. Under Internal Revenue Code (IRC) § 61(a)(11), income from the discharge of indebtedness is considered gross income for federal income tax purposes. Section 1106(i) of the CARES Act created an exclusion from gross income for loans forgiven under the PPP, reversing the general rule as to the taxability of income from the discharge of indebtedness. Because the BPOL tax is a separate and distinct tax from income tax, however, the taxability of PPP loan proceeds for federal income tax purposes is not determinative of whether the proceeds should be considered taxable gross receipts. That question must be answered with reference to the applicable BPOL statutes and regulations.
For purposes of the BPOL tax, gross receipts means “the whole, entire, total receipts, without deduction.” See Virginia Code § 58.1-3700.1. The BPOL regulations further define gross receipts as:
[t]he 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.
According to the SBA, the PPP is a loan program designed to provide a direct incentive for small businesses to keep workers on their payroll. Borrowers may be eligible for loan forgiveness if the funds are used for eligible payroll costs, payments on business mortgage interest payments, rent or utilities during the covered period. In the case of PPP loans, it is questionable whether the loan proceeds result from the “exercise of the licensed privilege . . . in the ordinary course of business.” The primary purpose of the loans is to help businesses keep employees on the payroll during a period of extraordinary economic hardship caused by the coronavirus pandemic. Loan proceeds are not received by exercising the licensed privilege to do business by, for example, providing services or selling goods in the ordinary course of business.
Even if the loan proceeds could be considered gross receipts under the statutory and regulatory definition, Virginia Code § 58.1-3732 A 4 excludes receipts which are the proceeds of a loan transaction in which the licensee is the obligor. Although Virginia Code § 58.1-3732 A 4 does not expressly cover scenarios in which some part of all of a loan may be forgiven, the fact that a loan may eventually be forgiven does not change the character of the funds as proceeds of a loan transaction. The Department also observes that Virginia Code § 58.1-3732 A follows the regulatory definition of gross receipts, namely that gross receipts “shall 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.” The eight exclusions specifically described thereafter, including the exclusion for loan proceeds, are examples of such amounts that are not derived from the exercise of the licensed privilege to engage in a business or profession in the ordinary course of business, as explained above.
Accordingly, in the Department’s opinion, loan proceeds paid out under the Paycheck Protection Program are not gross receipts for purposes of the BPOL tax, regardless of whether some part or all of such loans are forgivable or not.
If you have any questions regarding this opinion, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Craig M. Burns