Tax Type
BPOL Tax
Description
Exceptions; Nonprofit hospital
Topic
Local Power to Tax
Date Issued
04-21-1997
April 21, 1997
Re: Request for Advisory Opinion: BPOL
Dear**********
This will respond to your letter dated February 4, 1997, on whether your locality may apply the BPOL tax to certain activities conducted by nonprofit hospitals.
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 questions raised in your letter, this response is intended to provide advisory guidance only and does not constitute a formal or binding ruling.
FACTS
You request an opinion on the applicability of the BPOL tax for taxable years 1996 and 1997 to various activities of a nonprofit hospital and its affiliated entities, most of which have IRC § 501 (c)(3) status.
You ask whether the nonprofit hospital and its subsidiaries are exempt from the BPOL tax under Code of Virginia § 58.1-3703 C 18a solely upon the basis of such entities' status as exempt organizations under IRC § 501 (c)(3).
You also inquire what other information your locality should review before it exempts such entities from the BPOL tax in those situations where such entities are not exempt from the BPOL tax because of their IRC § 501 (c)(3) status.
In the materials sent to us, you include descriptions of the activities conducted and services rendered by the organizations herein. We have categorized those activities into the following groups:
Direct medical treatment: Emergency room, Psychiatric services, Outpatient psychiatric services, Pediatric care & therapy, Family practice clinic, OB/GYN, Sleep disorder center;
Indirect medical services: Educational services, Diagnostic center (X-ray services, etc.), Perinatal center (ultrasound/lab testing), Convalescence center, Dialysis center, Adult-day care, Retirement community, Outpatient physical therapy, Outpatient rehabilitation, Home infusion treatment; and,
Sales/service: Affiliate services, Real estate leasing company, Hearing aid sales, Medical supply sales, TYY-Deaf Communications center, and Gift shops.
OPINION
For purposes of this opinion, we assume that the entities under consideration have been granted tax exempt status by the Internal Revenue Service and thus meet the requirements of a nonprofit organization as defined in IRC § 501 (c)(3). To the extent any entity has not been granted tax exempt status by the Internal Revenue Service pursuant to § 501 © (3), then, barring some other restriction, that entity would otherwise be subject to the BPOL tax.
The term "charitable nonprofit organization" was added as Code of Virginia § 58.1-3703 C 18a effective January 1, 1997. Before that date, but after July 1, 1991, a hospital was exempt from the BPOL tax only if it were not organized for profit. Code of Virginia § 58.1-3703 C 15. 1 Accordingly, I will review your questions regarding tax year 1996, then I will review your questions referencing tax year 1997.
1996 TAX YEAR
For tax years beginning on or after July 1, 1991 to the end of 1996, unless a BPOL tax upon nonprofit hospitals was enacted by a locality on or before January 15, 1991, a locality was restricted from imposing the BPOL tax, or requiring a BPOL license, on any hospital not organized or conducted for profit which was by reason of its purposes or activities exempt from income tax under the laws of the U.S. Code of Virginia § 58.1-3703 C 15.
The exemption under Code of Virginia § 58.1-3703 C 15 applies to, among other things, a hospital organized as a nonprofit entity and rendering those types of services normally provided by hospitals. 1996 Op. Att'y. Gen. (Letter to The Honorable Charles Crowson dated April 19, 1996.) Therefore, for tax years July 1, 1991 through 1996, a nonprofit hospital performing those types of activities normally provided by hospitals would not be subject to the BPOL tax.
Based upon the facts you have provided, in our opinion the activities and services listed above, under the heading of Direct and Indirect medical services, would generally constitute those activities conducted, and services provided, by hospitals and would, therefore, not be subject to the BPOL tax for the 1996 tax year.
1997 TAX YEAR
Code of Virginia § 58.1-3703 C 18a restricts localities' ability to impose the BPOL tax on "charitable nonprofit organizations." Code of Virginia § 58.1-3703 C 18a became effective for tax years beginning on and after January 1, 1997, and preempts the application of Code of Virginia § 58.1-3703 C 15 in those situations involving nonprofit hospitals which are categorized as "charitable nonprofit organizations" as defined in Code of Virginia § 58.1 -3703 C 18a. "Charitable nonprofit organization" means an organization which is described in Internal Revenue Code § 501 (c)(3) and to which contributions are deductible by the contributor under Internal Revenue Code § 170.2
If an entity meets the definition of § 501 (c)(3) organization for federal tax purposes, then it is a "charitable nonprofit organization" for BPOL purposes and is exempt from the BPOL tax. The only determination then is whether such an organization reported "unrelated business taxable income" for federal income tax purposes under IRC Code § 511, et seq.
The 1997 BPOL Guidelines state that to the extent a charitable nonprofit organization is required to report income which is in fact "unrelated business taxable income" for federal income tax purposes under IRC Code § 511 et seq., such organization may be presumed to have gross receipts subject to the BPOL tax. The fact that a charitable nonprofit organization does not report any unrelated business taxable income for federal income tax purposes would not prevent a locality from requiring a license for the business activity if it were discovered on audit that the organization in fact had unrelated business taxable income. Local officials shall determine whether a charitable nonprofit organization has unrelated taxable business income pursuant to IRC § 511, et seq. 1997 BPOL Guidelines, § 3.3.1.
Unrelated business taxable income is gross income derived from any unrelated trade or business. 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 for its exemption under IRC § 501. IRC § 513. Unrelated trade or business income does not include any trade or business: I) in which substantially all of the work in conducting such trade or business is carried on for the organization by another person or organization without compensation, ii) where the activity is carried on for the organization's members, or iii) where the activity is the selling of merchandise received by the organization as gifts.
Further, the furnishing of particular services by certain hospitals does not constitute unrelated trade or business if specific conditions are met.3 Also, unrelated trade or business income generally does not include, among other things, income from research by hospitals. IRC § 512.
Based upon the facts you have provided, and assuming the entities in question are organizations described in IRC § 501 (c)(3), in our opinion the activities of these organizations would not subject them to the BPOL tax, with the possible exception of the following items listed under Sales/service above: Affiliate services, Real estate leasing company, Hearing aid sales, Medical supply sales, and Gift shops. However, to the extent any of these activities are conducted by a § 501 (c)(3) organization and are related to its exempt purpose, such activities would also be exempt from the BPOL tax.
Regarding your inquiry on other types of information which your locality might review before it exempts such entities from the BPOL tax, where such entities are not already exempt therefrom because of their § 501 (c)(3) status, the BPOL tax is a local tax and a locality may exempt any group or subgroup of taxpayers not already exempt from the tax if such exemption is based upon a reasonable distinction in municipal policy.
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/12149H
1Code of Virginia 58.1-3703 C 15 became effective July 1, 1991 and was scheduled to expire July 1, 1993, but has been extended until July 1, 1997.
2 In order to be exempt as described in IRC 501 (c)(3), an organization must be organized and operated exclusively for one or more of certain exempt purposes; no part of its net earning may inure to the benefit of private shareholders or individuals; and, it may not devote a substantial part of its endeavors to political or lobbying activities.
3The furnishing of certain administrative services [as described in § 501 (e)(1 )(A)] by a hospital described in § 170(b)(1 )(A)(iii) does not constitute unrelated trade or business if such services are provided to hospital described in § 170(b)(1)(A)(iii) and the following apply: I) such services are furnished solely to such hospitals which have facilities to serve not more than 100 inpatients; ii) such services, if performed on its own behalf by the recipient hospital, would constitute activities in exercising or performing the purpose or function constituting the basis for its exemption; and, iii) such services are provided at a fee which does not exceed the actual cost of providing such services, including straight line depreciation and a reasonable amount for return on capital goods used to provide such services. IRC § 51 3(e). A hospital described in §170(b)(1)(A)(iii) is a hospital whose principal purpose or function is the providing of medical or hospital care. To the extent such services are provided by a hospital which is qualified as a § 501 (c)(3) organization, and to the extent such services are provided on a centralized basis and would normally be provided by such a hospital on its own behalf, the services described in § 501 (e)(1 )(A) include: data processing, purchasing (including the purchasing of group insurance), warehousing, billing and collection, food, clinical, industrial engineering, laboratory, printing, communications, record center and personnel services (including selection, testing, training, and education thereof).
Rulings of the Tax Commissioner