Tax Type
BPOL Tax
Description
Rate of license taxes; Service provider may be subject to business services rate
Topic
Local Power to Tax
Date Issued
07-31-1997
July 31, 1997
Re: Request for Advisory Opinion: BPOL
Dear***************
This will respond to your letter dated April 23, 1997, regarding the proper classification for BPOL purposes of the business activities of a certain taxpayer.
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 indicate that the taxpayer in question assists an agency of the federal government, specifically a branch of the military, in procuring goods and services. You state that the particular government office which is assisted by the taxpayer does not perform engineering services, but relies upon other offices within the agency for such work.
You also explain that some of the taxpayers' employees are engineers and at least one such employee holds an engineering license. You point out that less than 40% of the labor force dedicated to servicing the government has an engineering background. You also state that the compensation paid to the taxpayer for its non-engineering services outweighs that paid for its engineering services by a three to one ratio. You further indicate that the services which the taxpayer provides to the government require the use of business and systems management skills in the purchasing of equipment, not professional knowledge. Finally, you indicate that the taxpayer's physical plant is designed to support the rendering of business services, not engineering services.
OPINION
In addition to assessing a fee for the issuance of a BPOL license, localities may levy a BPOL license tax on businesses, trades, professions, occupations and callings, and upon the persons, firms and corporations engaged therein within the locality1 Code of Virginia § 58.1-3703 A. The BPOL tax rate is based upon four general classifications each with different maximum rate limitations. The maximum rate which may be imposed upon professionals under the BPOL tax is fifty-eight cents per $100, while the maximum rate which may be imposed on entities providing business services is thirty-six cents per $100. Code of Virginia § 58.1-3706.
The operations of a business entity may consist of a myriad of activities. While an entity may be engaged in, and taxed upon, more than one business, the issue here is whether the activities of an entity must be taxed at one rate. Answering this question requires distinguishing whether the firm is carrying on two or more separate businesses, as opposed to merely performing some function ancillary to its primary activity which, if performed alone, would be taxed at a different rate.
While companies may, in some instances, be properly subject to more than one BPOL license tax rate, localities cannot merely split a company into component parts and tax those parts separately. A company will be properly classified into a single category if a substantial portion of its business pursuits consists of one activity. The test of "substantiality" does not lend itself to a rigid definition; rather, the business must be considered as a whole in determining its classification for BPOL purposes. Cases where the rule of "substantiality" will apply are distinct from those cases where an entity is engaged in two separate lines of business. County of Chesterfield v. BBC Brown Boveri, 238 Va. 64, 70-72 (1989).
The Virginia Supreme Court stated that a company's particular operations may be deemed substantial whether based upon any of the following criteria: a) the financial receipts they bring to the company, b) the proportion of the entire income they comprise, c) the percentage of capital invested in them compared with the entire entity, d) the number of employees compared with total company employees, or, e) the ratio of business activities compared to total entity operations. County of Chesterfield v. BBC Brown Boveri, 238 Va. 64, 69 (1989).
To be taxed at the professional rate, a business must perform "professional services" which require being engaged in an occupation or vocation in which the professed knowledge of some department of science or learning, gained by a prolonged course of specialized instruction and study is used by its practical application to the affairs of others. See 1997 BPOL Guidelines, § 8.4.1. On the other hand, business services comprise any service rendered for compensation to any business, trade, occupation or governmental agency, unless such service is provided for elsewhere in the Guidelines. See 1997 BPOL Guidelines, § 9.1.
While factual determinations involving the application of a local tax ordinance to a particular taxpayer are best made on a case-by-case basis by the appropriate local tax official, my opinion is as follows. You state that certain federal government regulations prevent the taxpayer from performing engineering services for the government; however, you also indicate that some of the compensation paid to the taxpayer is for engineering services rendered on behalf of the government. If, in addition to procurement support services, the taxpayer is performing, and derives receipts from, rendering engineering services for the government, then, assuming the engineering services rise to the level of a separate business, a locality could classify such activity as professional services for BPOL purposes. On the other hand, if the engineering activities do not rise to the level of a separate business, then the inquiry becomes one of "substantiality." While classification decisions are more properly left to the local tax official, l believe, if the engineering activities do not rise to the level of a separate business, this taxpayer would be more properly classified as engaged in one activity, that of rendering procurement services. This type of activity is more commonly classified as business services.
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/12488H
1 However, legislation passed in 1997 provides that, effective July 1, 1998, localities may impose either a BPOL license fee or a tax but not both. Acts of Assembly 1997, c. 903.
Rulings of the Tax Commissioner