Tax Type
BPOL Tax
Description
Unrelated business taxable income
Topic
Exemptions
Local Power to Tax
Date Issued
04-02-1997
April 2, 1997
Re: Request for advisory Opinion: BPOL
Dear*****************
This will respond to your facsimile dated March 10, 1997, regarding the taxation of an exempt charitable organization.
The license tax is a local tax which is imposed and administered by local officials. The Code of Virginia limits the involvement of the Department of Taxation to promulgating guidelines and issuing advisory opinions. However, the department shall not be required to interpret any local ordinance.
While addressing the question raised in your letter, this response is intended to provide advisory guidance only and does not constitute a formal or binding ruling.
FACTS
A Historical society (the "Taxpayer") that is classified as a charitable nonprofit organization is located in your locality. It raises revenues through dues and contributions. It also has a store that sells souvenirs (e.g. hats, mugs, T-shirts) with the Taxpayer's logo on them. It claims that the sale of the souvenirs is not unrelated taxable business income ("UBTI"). You ask whether you must accept the Taxpayer's assertion that it has no UBTI. Also, you ask whether the proceeds from the souvenir sales are taxable for BPOL purposes.
OPINION
Taxpayer's assertion of no UBTI
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- § 3.3.1 of the 1997 BPOL Guidelines, copy enclosed, provides that:
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- [t]he fact that a charitable nonprofit organization does not report any [UBTI] for federal income tax purposes would not prevent the locality from requiring a license for the business activity, however, local officials shall only determine whether a charitable nonprofit organization has [UBTI] pursuant to IRC § 511 et seq.
Thus, even though the Taxpayer has reported to the IRS that it does not have any UBTI, you may determine whether they have UBTI for BPOL purposes. However, you must use IRC § 511 et seq. to determine whether they have UBTI.
Taxability of Souvenir Sales
Code of Virginia § 58.1-3703 C 18a, copy enclosed, states that no locality shall impose a license fee or levy a license tax:
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- [o]n or measured by receipts of a charitable nonprofit organization except to the extent that the organization has receipts from an unrelated trade or business the income of which is taxable under Internal Revenue Code § 511 et seq.
Thus, a charitable non-profit organization may only be taxed on its UBTI. The determinative question is whether the proceeds from the sales of the souvenirs constitute UBTI.
Internal Revenue Code § 512, copy enclosed, defines UBTI as "gross income derived by any organization from any trade or business regularly carried on by it ..." Internal Revenue Code § 513, copy enclosed, provides that unrelated trade or business means "... any trade or business the conduct of which is not substantially related .... to the exercise or performance by such organization of its charitable, educational or other purpose or function constituting the basis of its exemption ..." You must determine whether the Taxpayer regularly carries on the sale of souvenirs and whether the sales are substantially related to its charitable purpose. The sales are "substantially related" if they contribute importantly to the accomplishment of the charitable purposes. Internal Revenue Regulations 1.513-1 (d), copy enclosed.
A governing body must look at the facts and circumstances of each case to determine whether a taxpayer's sales contribute importantly to its charitable purpose. To assist you in making your determination, I have enclosed Internal Revenue Service Revenue Rulings 69-267, 73-104, 73-105 and 74-399 which contain fact scenarios that are similar to the Taxpayer's.
I hope that the above information will be beneficial to you. Although I believe this letter conforms with the law, it is written only for your guidance, and the final determination is with the locality.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12278B
Rulings of the Tax Commissioner