Tax Type
BPOL Tax
Description
Rate of license taxes; Real estate brokers classified as contractors
Topic
Local Power to Tax
Date Issued
08-01-1997
August 1, 1997
Re: Request for Advisory Opinion: BPOL
Dear***************
This will respond to your letter dated May 7, 1997, regarding the application of the BPOL tax to certain activities of real estate brokers.
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 regarding the applicability of the BPOL tax to certain activities of real estate brokers, who purchase homes or other buildings, renovate such buildings and then sell the buildings. You indicate that renovations may range from the mere painting of buildings to major structural repairs and modifications. You indicate that the brokers in question engage in the described activity on a continuing basis and dedicate a significant part of their time to such renovation activity. You ask if this activity would be properly classified as "contracting" under the BPOL law.
You also indicate that several brokers, besides renovating houses, may finance the sale of particular houses for the buyers. You ask whether this activity would be properly classified as "financial services" under the BPOL law.
OPINION
Localities may charge a fee for issuing BPOL licenses and may levy a BPOL 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. The BPOL tax rate depends upon the classification under BPOL law of the person or firm's activity. Code of Virginia § 58.1-3706.
A taxpayer's classification for BPOL tax purposes is a question of fact to be determined by the local taxing authority. The business must be considered as a whole in determining its classification for BPOL purposes. Cases where a taxpayer will be properly classified into a single category 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). Where an entity is engaged in two separate lines of business, localities must require separate licenses for each business. Code of Virginia § 58.1-3703.1 A 1. Taxpayers engaged in two or more businesses at the same place of business may elect to obtain one license for all such businesses if certain requirements are met. Code of Virginia § 58.1-3703.1 A 1.
The 1979 General Assembly amended the local license law to include in the category of contractors those persons constructing for their own account for sale. Acts of Assembly 1979, c. 571. The amendment to Code of Virginia § 58.1-3706 broadened the contractor's rate category to include those persons who are developers and speculative builders who build for themselves for sale. The definition of contracting includes painting and those activities necessary to make major structural repairs and modifications to a building. Code of Virginia § 58.1-3714 B. Thus, one who performs those activities listed in Code of Virginia § 58.1-3714 B on his own real estate, with the intent to sell the real estate upon completion of the work, is engaged in the trade or business classified as contracting.
Further, the BPOL Guidelines state that a person shall be classified as a contractor if he accepts contracts to perform or regularly perform, or engages others to perform, any of the work described in Code of Virginia § 58.1-3714 B on buildings, structures or real estate owned by him when the buildings, structures or real estate are sold upon completion of such work (Emphasis added)2 1997 BPOL Guidelines § 5.1.
As a result of our review of your request, we have found that the BPOL Guidelines are unclear as to the question of the types and frequency of activities necessary to make a person a contractor in these situations. Accordingly, the Guidelines’ coverage of this area needs to be reviewed, clarified and made more specific as to the types and frequency of activities in which an entity must engage in order to be classified as a contractor under the above provisions.
In addition to their real estate brokerage activities, the brokers also engage in the activity of renovating houses which they own for ultimate sale and that they do so on a continuing basis and dedicate a significant part of their time to such renovations activity. Your inquiry speaks to the proper classification of this other, separate, line of business involving the renovation and sale of owned real estate.
Facts such as the number of houses a particular broker renovates each year, and the significance of each renovation, would assist in determining whether such brokers are also engaged in the activity of contracting. Without such information, drawing a conclusion about whether or not such brokers are engaged in the separate line of business of contracting for purposes of the BPOL law is difficult to determine.
You also indicate that several real estate brokers may act as mortgage lenders by financing for their buyers the sale of houses which the brokers own. You ask whether this activity would be properly classified as "financial services" under the BPOL law.
The BPOL Guidelines, at § 9.2., indicate that, unless specifically provided for elsewhere in the Guidelines, a taxpayer shall be classified as engaged in financial services if it renders a service for compensation as, among other things, a credit agency.
In classifying taxpayers for BPOL purposes, localities must make a determination whether a taxpayer's activities involve separate businesses performed independently, or are so integrated as to comprise a single business, with some ancillary activities. If the activities comprise a single business, then the taxpayer is taxed at a single rate based on the classification constituting its substantial activity. Op. Att'y Gen. 99 (1994).
Further, licensing for regulatory purposes serves a different purpose from BPOL license tax purposes. Op. Att'y Gen.114 (1994). While classifications under other laws of Virginia are not determinative of classifications for BPOL purposes, they may be instructive. "Mortgage lender" is defined under the Virginia Mortgage Lender and Broker Act as a person who originates or makes a mortgage loan. However, "mortgage loan" is defined to exclude loans to buyers of realty by persons selling such realty owned by them. Code of Virginia § 6.1-409.
Assuming a broker's renovations activity rises to the level of a separate line of business which constitutes contracting, in my opinion, the activities by the above brokers of providing financing for the sale of homes which the brokers own are not "financial services" for BPOL purposes. This is so because the brokers, as vendors, are merely facilitating the sale of houses they own through owner-financing. Such activity may promote the sale of houses, but it is not a separate business performed independent of the sale itself. Thus, such financing activities are ancillary to the brokers’ renovation for sale activities, and the receipts would be taxed at the classification which constitutes the taxpayer's substantial activity. The substantial activity would be contracting if a broker's renovations activity was sufficient to rise to the level of a separate line of business constituting that of contracting.
The Department desires to aid localities in the administration of their local BPOL ordinances, and will gladly assist in any way possible regarding this inquiry upon your written submission of more specific facts.
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/12521H
1Legislation 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.
2Code of Virginia § 58.1-3714 B indicates that the term "contractor" includes, but is not limited to, any business accepting contracts for work on or in buildings or structures, requiring the use of paint, stone, brick, mortar, wood, cement, structural iron or steel, or any other building material; or, accepting contracts for work on or in any building involving the installing, repairing, or maintaining electric wiring, devices or appliances permanently connected thereto, or the erecting, repairing or maintaining of lines for the transmission or distribution of electric light and power; or, engaging in the business of plumbing.
Rulings of the Tax Commissioner