December 14, 2021
Re: Appeal of Final Local Determination
Locality: *****
Taxpayer: *****
Business, Professional and Occupational License 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 an assessment of Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by ***** (the “City”) for the 2017 through 2019 tax years.
The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3103.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct. That is, 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 online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website.
FACTS
The Taxpayer’s only definite place of business was in the City, where it operated an online-based financial wellness program (the “Program”) that provided financial wellness tools, including a personal financial assessment, budgeting tools, educational resources, and other products. The Program also provided access to loans issued by a bank in Utah (the “Utah Bank”). A majority of the Taxpayer’s revenue was earned from marketing, servicing, and providing data for Utah Bank’s loans, but the Taxpayer also earned interest on its own portfolio of loans and from the sale of its financial wellness program to other companies.
The Taxpayer timely filed BPOL returns for the 2017 through 2019 tax years and paid the reported amount due. For each tax year, the Taxpayer classified itself as an accounting service business and deducted certain revenues as attributable to business conducted in Utah. Under audit, the City reclassified the Taxpayer as a financial services business, denied the out-of-state deduction, and issued an assessment.
The Taxpayer appealed to the City, contending that it did not perform financial services activities and that it was eligible for the deduction because it was liable for Utah income taxes. The City’s final determination upheld its adjustments and resulting assessment. The Taxpayer appealed to the Department, contending that any financial services activities were ancillary to its primary accounting services business and that it was eligible for the deduction because at a minimum it was subject to Utah franchise tax, which is considered an income tax.
ANALYSIS
BPOL classification
The BPOL tax is imposed on businesses and professionals for the privilege of doing business in a locality. The tax is imposed at different rates according to the classification of an enterprise. See Virginia Code § 58.1-3706. These classifications are regulated under Title 23 of the Virginia Administrative Code (VAC) 10-500-10 et. seq. Classifications of a specific business must be determined based on consideration of all the facts and circumstances. Some of the factors to be considered include:
- What is the nature of the enterprise’s business?
- How the enterprise generates gross receipts.
- Where the enterprise conducts its business.
- Who are the enterprises customers?
- How the enterprise holds itself out to the public.
- The enterprises NAICS code.
Financial Services
In its final determination, the City concluded that the Taxpayer was engaged in a financial services business because its activities involved buying and accounting for loans. While the Taxpayer did not issue loans directly, the Taxpayer was required to acquire a portion of the loans issued by Utah Bank pursuant to their contractual agreement. Additionally, the Taxpayer’s financial statements included accounts for interest income, provisions for loan losses, finance receivables, and allowance for finance receivable losses.
The Taxpayer argues that the income generated from such activities was ancillary to its primary business activities of providing loan marketing, loan servicing, and loan reporting services for Utah Bank. As such, the Taxpayer argues that it should be classified in accordance with its primary business activities and that the income generated from the other activities was not attributable to a separately licensable business.
The Taxpayer describes these activities, in part, as preparing marketing pieces for distribution to employers participating in the Program, accepting payments from borrowers, applying payments to the proper account, providing Utah Bank access to the loan information, and transmitting various reports to Utah Bank regarding new and existing loans under the Program. The Taxpayer provided a summary of its revenue for the taxable years at issue indicating that these activities accounted for approximately 85% of its total revenue.
Virginia Code § 58.1-3700.1 defines financial services as “the buying, selling, handling, managing, investing, and providing advice regarding money, credit, securities, or other investments.” Title 23 VAC 10-500-10 similarly defines financial services as “the buying, selling, handling, managing, and investing money, credit, securities, or other investments for others, as well as providing advice to others on such matters.”
In the Department’s opinion, the marketing, servicing and reporting activities described by the Taxpayer constitute marketing and administrative types of activities that would not meet the definition of financial services. Based on the information provided, these activities appear to have been the Taxpayer’s primary business activities. The Department agrees with the City, however, that to the extent the Taxpayer earned interest income from the purchase of loans it held on its own account, such gross receipts could be attributable to a financial service activity.
Multiple Business
Virginia Code § 58.1-3703.1 A 1 provides that a separate license shall be required for each definite place of business and for each business a taxpayer is operating. Local tax officials are responsible for making the determination as to whether a taxpayer is engaged in a single business or in two businesses, each of which could operate independently of the other. In order to make this determination, the local tax official must be provided with documentation demonstrating the substantiality of each business. See 1994 Op. Va. Att’y Gen. 99.
In order to obtain multiple business licenses, a business must be engaged in clearly identifiable separate business activities and not merely activities ancillary to the primary business. In Public Document (P.D.) 97-257 (6/11/1997), the Department concluded that the term “ancillary” refers to business activities that are subordinate, subservient, auxiliary, or in aid of the business’ principal business activity. Distinguishing between an ancillary activity and an activity that rises to the level of a separate business can often be accomplished by determining if the activity under scrutiny exist independently of the principal business.
In this case, the City failed to address the issue of whether or not the Taxpayer may be engaged in multiple licensable businesses. Instead, the City reclassified the Taxpayer’s entire business based solely upon the fact that the Taxpayer had interest income from loans it held on its own account. The Taxpayer was contractually obligated to acquire a portion of the loans it had marketed to borrowers and serviced on behalf of Utah Bank. The loans were an additional component of the Program and were offered on an emergency basis to employees of participating employers as a short-term borrowing alternative to payday lending, payroll advances, and loans from retirement plans, or in cases when the employee could not obtain credit. It appears that the Taxpayer would not hold any portion of these loans but for its primary business service providing loan marketing, servicing and reporting in connection with the Program.
Out-of-State Deduction
Virginia Code § 58.1-3732 B 2 provides for 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 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.
Gross receipts are not automatically attributable to business conducted in another state or foreign country simply because a return was filed there. A business must be required by the law of another state or foreign country to file an income or income like tax return in that jurisdiction. See P.D. 97-490 (12/19/1997).
In this case, the City concluded that the Taxpayer was ineligible for the deduction because it was subject to the Utah corporate franchise tax rather than the Utah corporate income tax and because the situs of all gross receipts was the Taxpayer’s only definite place of business located in the City.
Income Like Tax
Virginia Code § 58.1-3732 B 2 allows a deduction from gross receipts when a business is liable for a tax based upon income in another state. This statutory construction contemplates a business would be eligible for the deduction based upon the substance on which a tax is computed and not simply whether it is called an income tax. See P.D. 18-170 (10/10/2018).
Any analysis of the taxes imposed by other states must also be consistent with the character of the state taxes at issue. By reason of their character as legislative grants, statutes relating to deductions allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See City of Lynchburg v. English Constr. Co., 277 Va. 574, 675 S.E.2d 197 (2009) and DKM Richmond Associates, L.P. v. City of Richmond, 249 Va. 401, 457 S.E.2d 76 (1995).
The Department has stated that Virginia’s statutes for administering other taxes are not generally applicable with regard to BPOL tax. See P.D. 97-490 and P.D. 04-46 (8/12/2004). By tying the subtraction for out-of-state receipts to an income tax liability, however, the legislature has infused income tax principles into a tax based on gross receipts. Thus, for purposes of determining whether a business is eligible for a subtraction, an income tax type analysis is required with regard to whether a business was subject to an income tax in another state.
Fortunately, Virginia’s income tax modification under Virginia Code § 58.1-402 B 4 includes language substantially similar to Virginia Code § 58.1-3732 B 2. The modification requires taxpayers to add amounts attributable to net income taxes and other taxes based on, measured by, or computed with reference to net income in computing Virginia taxable income. See P.D. 99-126 (5/28/1999). Under Title 23 VAC 10-120-101 D, the addition for income taxes would include any income taxes and other taxes, including franchise and excise taxes which are based on, measured by, or computed with reference to net income, imposed by any other taxing jurisdiction were deducted in determining federal taxable income.
Utah Admin. Code r. 865-6F-6(2) provides that if a corporation is subject to the Utah franchise tax, it must be computed under the provisions of Utah Code Ann. § 59-7-104. This statute computes the tax “based on the corporation’s Utah taxable income…” [Emphasis added.] A further review of the Utah corporate tax definitions indicates that the computation of Utah taxable income begins with federal taxable income, which is indicative of a tax based on income.
Situs of Receipts
The City also argued that this deduction cannot apply because all of the Taxpayer’s gross receipts were properly sitused to the City. The City was correct in finding that the situs of all the Taxpayer’s gross receipts was its only definite place of business in the City, but that fact does not change the Taxpayer’s eligibility for the deduction. In fact, it is only after gross receipts are attributed to a locality through the situs rules that they become eligible for deduction, if they are also attributable to business conducted in another state which a taxpayer is liable for an income or other tax based upon income. The conduct of a business in another state does not require a definite place of business in that state.
DETERMINATION
The Department finds that the City improperly changed the Taxpayer’s business classification to that of financial services and incorrectly disallowed the Taxpayer’s deduction for gross receipts attributable to business conducted in another state. Therefore, the City is instructed to abate the assessments in accordance with this determination.
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/3466-C