Tax Type
BPOL Tax
Description
Gross fees of fee basis contractor
Topic
Local Power to Tax
Rate of Tax
Date Issued
04-17-1997
April 17, 1997
Re: Request for Advisory Opinion: BPOL
Dear****************
This will respond to your letter transmitted by facsimile on February 11, 1997, in which you questioned whether ********* may tax fee basis contractors on gross fees as opposed to gross receipts.
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 written opinions. However, the department shall not be required to interpret any local ordinance.
While addressing the questions raised in your letter, this response is intended to provide advisory guidance only and does not constitute a formal or binding ruling.
FACTS
The ************* ("Locality") imposes a license tax upon contractors for the privilege of engaging in business. The locality imposes the license tax on contractors within the statutory maximums of Code of Virginia § 58.1-3706 A. The locality has also created a subclassification of contractors for license tax purposes, specifically fee basis contractors. The license tax is imposed on fee basis contractors at a rate of $1.50 per $100 of gross fees.
Fee basis contractors, as defined by the locality, manage construction projects but typically do not perform any of the actual work. They are hired by the owner of the land to make sure the construction project is completed in a timely fashion. Fee basis contractors generally will have a state contractor's license.
Typically, fee basis contractors are not awarded the construction contract as a general contractor. In some circumstances, fee basis contractors will hire the general contractor responsible for performing the construction work.
As compensation, fee basis contractors are paid a percentage of the construction contract price, historically averaging ten percent ("gross fees" as defined by the locality). Normally, all moneys to be paid under the construction project will be received by the fee basis contractor who will disburse such funds accordingly.
OPINION
It is my opinion that the locality cannot tax fee basis contractors on gross fees as opposed to gross receipts. I have reached this conclusion based upon the following: (1) the license tax is a privilege tax assessed on gross receipts; and (2) the locality's current license tax rate on the gross fees of fee basis contractors violates the maximum rate limitations set forth in Code of Virginia § 58.1-3706 A.
LICENSE TAX BASED ON GROSS RECEIPTS
Subject to limits in Code of Virginia § 58.1-3703 C, localities may charge a fee for issuing BPOL licenses and may levy a license tax on a business for the privilege of engaging in business within the locality. Code of Virginia §§ 58.1-3700 and 58.1-3703 A (copies enclosed). The maximum license tax that can be levied upon contractors is $.16 per $100 of gross receipts. Code of Virginia §58.1-3706 A (copy enclosed). Gross receipts means the "whole, entire, total receipts, of money or other consideration received by the taxpayer as a result of transactions with others besides himself and which are derived from the exercise of the licensed privilege to engage in a business. . ., without deduction or exclusion except as provided by law." 1997 BPOL Guidelines, page 5 (copy enclosed).
As all moneys to be paid under the construction project will be received by the fee basis contractor, these receipts are the fee basis contractor's gross receipts and are the proper basis upon which the license tax is to be imposed. I can find no authority which would allow the locality to fix gross fees (i.e. a percentage of the construction contract price) as the measure for the license tax for fee basis contractors. In fact, longstanding policy reinforces the principle that gross receipts is the proper basis for the license tax in this type of situation. Op. Att'y Gen. 287 (1985-1986); Op. Att'y Gen. 224 (1990) (copies enclosed).
Localities may create a subclassification of contractors for license tax purposes. Additionally, localities may provide different rates or exemptions for such subclassifications. 1997 BPOL Guidelines, page 23 (copy enclosed). While stating that localities may exempt subclassifications or tax subclassifications at lower rates, the BPOL Guidelines do not provide for localities to tax subclassifications on a basis other than gross receipts, except as provided by law. More importantly, the BPOL statutes set maximums which cannot be exceeded.
MAXIMUM RATE LIMITATIONS FOR CONTRACTORS
The current license tax rate imposed by the locality on fee basis contractors violates the $.16 per $100 gross receipts maximum rate limitation in two ways. First, even assuming that gross receipts for a fee basis contractor is properly a percentage of the construction contract price as opposed to total moneys received, the $1.50 rate far exceeds the maximum rate limitation allowed under Code of Virginia § 58.1-3706 A.
Second, assuming that all moneys received under the construction contract price is the proper measure for the license tax, the maximum license tax the locality may impose is $.16 per $100 of the full contract price. However, in certain circumstances, a license tax imposed at a rate of $1.50 per $100 of a fraction of a construction contract price will result in a higher tax paid when compared to a license tax assessed at a rate of $.16 per $100 of the full contract price. Thus, the current tax rate imposed by the locality on fee basis contractors exceeds the maximum license tax rate permitted for contractors.
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/12168C
Rulings of the Tax Commissioner