September 28, 2021
Re: Request for Advisory Opinion
Business, Professional and Occupational License Tax
Dear *****:
This is in response to your letter in which you request an advisory opinion regarding the interpretation of the affiliated group provisions of the Business, Professional and Occupational License (BPOL) tax as it applies to ***** (the “Taxpayer”).
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 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 regulation cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site.
FACTS
The Taxpayer is an S corporation located in ***** (the “City”). The Taxpayer is owned by four siblings. Sibling A owns 100% of the Class A voting stock, but is only 40% shareholder of Class B non-voting stock. Siblings B, C, and D each own 20% of the Class B stock.
Each sibling is the grantor of a trust. The trusts’ beneficiaries are the children of the siblings. The trusts’ trustees are brothers-in-law or unrelated third parties.
A Virginia limited liability (the “LLC”) has been formed. Sibling A owns 100% of the voting membership interests of the LLC and 2% of Class B non-voting interests The four trusts own the remaining 98% interest in Class B non-voting memberships.
The Taxpayer seeks an advisory opinion as to whether an affiliated relationship exists between it and the LLC such that the Taxpayer will be exempt from paying BPOL tax on certain fees it will receive from the LLC.
OPINION
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. In applying the statutory definition of “affiliated” under Virginia Code § 58.1-3700.1 to entities, the tests are applied “as if they were corporations and the ownership interests therein were stock.”
Under Virginia Code § 58.1-3700.1, the brother-sister test may be met if five or fewer owners that are individuals, estates, or trusts (the “ownership group”) hold stock or other ownership interests that meet both the total membership and common ownership prongs of the test. Both prongs of the test will be met if:
- the total ownership group owns at least 80% of the total voting power of all classes of ownership interests or the total value of all ownership interests (total membership), and
- the common ownership group holds more than 50% of the total voting power of all classes of ownership interests or the total value of all ownership interests when such ownership only includes identical interests of the common owners.
In this case, one person, Sibling A, owns 100% of the voting power in both the Taxpayer and the LLC. Therefore, both the 80% test and the 50% tests are met. Accordingly, receipts or purchases made between the Taxpayer and LLC will be exempt from the BPOL tax.
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/3746.B