Tax Type
BPOL Tax
Description
Attorneys
Topic
Local Power to Tax
Date Issued
09-15-1998
September 15, 1998
Re: Business, Professional, and Occupational License Tax - Opinion Request
Dear *****
You requested that the Department of Taxation provide an advisory opinion on whether or not settlement amounts received by attorneys and paid to their clients are subject to the Business, Professional, and Occupational License (BPOL) tax. Your request is prompted by a letter from ***** who asked the ***** (Bar) to review this question and whose letter you attached to your request.
Although, the BPOL tax is a local tax that is imposed and administered by local officials, the Department of Taxation is authorized to promulgate guidelines and issue advisory opinions. The Department, however, is not required to interpret local ordinances.
This response is intended to provide advisory guidance only and does not constitute a formal or binding ruling. Copies of pertinent, cited sources are enclosed for your review.
FACTS
When a personal injury attorney receives a settlement amount, the attorney is required by Bar rules to deposit the money in a trustee account. From that account, the attorney collects a fee and pays the rest to the client. Based on new federal reporting requirements, any business that makes payments to attorneys or law firms must report such payments to the Internal Revenue Service (I.R.S.) and notify the attorneys or law firms of such reported amounts.(Taxpayer Relief Act of 1997, P.L. 105-34 Sec.1021(a) (8/5/97))***** is concerned that the gross income reported to the I.R.S. will be subject to BPOL tax without deducting any settlement amounts that are paid to clients of such attorneys or law firms. In his letter, ***** references a case in which the Supreme Court of Virginia did not allow any deductions for ``media buys or other expenses' from the gross receipts of an advertising agency. Alexandria v. ***** Morrison-Williams Assoc., 223 Va. 349, 288 S.E.2d 482 (1982).
Regardless of the federal reporting changes and the cited case, settlement amounts are not part of an attorney's or law firm's taxable gross receipts under the BPOL tax law because these amounts are not part of an attorney's or law firm's business receipts. If an attorney or law firm, as an agent of a client, receives any settlement amounts from a claim, such as for personal injury, then these amounts must be placed in a trust account and not be commingled with the attorney's or firm's money according to Bar rules. Because the attorney or law firm cannot use the funds as business proceeds, these funds are not part of the taxable gross receipts of the attorney or firm. Only the fee earned from representing the client is subject to taxation under BPOL tax law. This response is based on the following analysis.
ANALYSIS
Generally, a locality may impose a BPOL fee or tax on a business's gross receipts from activities performed within such locality. Code of Virginia Sec. 58.1-3703. Specifically, taxable gross receipts are only those receipts derived from ``the exercise of the licensed privilege to engage in a business or profession in the ordinary course of business.' Code of Virginia Sec. 58.1-3732(A). The BPOL law does not base such taxable gross receipts on any designated federal income tax amounts.
The Guidelines for Business, Professional, and Occupational License Tax Imposed by City, County, and Town Ordinances provides several examples of which gross receipts are not considered part of the ``ordinary course of business.' Department of Tax'n, (Jan.1, 1997) [hereinafter Guidelines]. Funds that are advanced by a client to an attorney to pay legal filing fees or to purchase a piece of real estate are not part of taxable gross receipts. Id. at 28-29. A Bar rule requires that attorneys who receive settlements for their clients must deposit the amount in a trustee account and cannot commingle these funds with the attorneys' operating funds. Code of Professional Responsibility Canon 9, D.R. 9-102, D.R. 9-103 (1997). Only the fee received by the attorney for providing legal services is subject to BPOL tax. Guidelines, at 29. In a situation in which a taxpayer, as agent or fiduciary for another, ***** receives and disburses money on behalf of such person or entity, then these amounts are not taxable as gross receipts for BPOL tax purposes. P.D. 97-292.
In the case cited by ***** the Court determined that the advertising agency was taxable on total gross receipts because the agency could not show that it received and disbursed money as the legal agent of its clients. Morrison-Williams Assoc., 223 Va. at 351, 288 S.E.2d at 484. The advertising agency commingled the funds it received from clients with the agency's other income sources and had the use of such funds for its own purposes. Id. at 350, 288 S.E.2d at 483. The Court found that the agency was not merely handling clients' funds for the clients but used the funds for the agency's purposes, which did not require the clients' consent. Id. at 352-53, 288 S.E.2d at 485. Therefore, the agency was subject to BPOL tax on total receipts without deduction since these receipts were derived from its business activities.
In the situation presented by the Bar, the attorney or law firm is the agent of the client for purposes of the settlement funds. When the settlement funds are received, they are deposited by the firm directly into a trust account and kept separate from the firm's money. When the funds are disbursed, two checks are written - one to the attorney or law firm as payment for legal services rendered and one to the client for the balance of the settlement from the client's legal claim. In this case, the attorney or law firm has the legal authority to receive and disburse the funds to the client, but cannot use these funds for the attorney's or firm's own purposes. Consequently, the settlement funds are not part of the attorney's or law firm's gross receipts that are subject to BPOL tax. The legal fees, however, are subject to BPOL tax since they reflect payment for business activities rendered.
I trust that this analysis answers your question. If not, please call me.
Sincerely,
Danny M. Payne
Tax Commissioner
Re: Business, Professional, and Occupational License Tax - Opinion Request
Dear *****
You requested that the Department of Taxation provide an advisory opinion on whether or not settlement amounts received by attorneys and paid to their clients are subject to the Business, Professional, and Occupational License (BPOL) tax. Your request is prompted by a letter from ***** who asked the ***** (Bar) to review this question and whose letter you attached to your request.
Although, the BPOL tax is a local tax that is imposed and administered by local officials, the Department of Taxation is authorized to promulgate guidelines and issue advisory opinions. The Department, however, is not required to interpret local ordinances.
This response is intended to provide advisory guidance only and does not constitute a formal or binding ruling. Copies of pertinent, cited sources are enclosed for your review.
FACTS
When a personal injury attorney receives a settlement amount, the attorney is required by Bar rules to deposit the money in a trustee account. From that account, the attorney collects a fee and pays the rest to the client. Based on new federal reporting requirements, any business that makes payments to attorneys or law firms must report such payments to the Internal Revenue Service (I.R.S.) and notify the attorneys or law firms of such reported amounts.(Taxpayer Relief Act of 1997, P.L. 105-34 Sec.1021(a) (8/5/97))***** is concerned that the gross income reported to the I.R.S. will be subject to BPOL tax without deducting any settlement amounts that are paid to clients of such attorneys or law firms. In his letter, ***** references a case in which the Supreme Court of Virginia did not allow any deductions for ``media buys or other expenses' from the gross receipts of an advertising agency. Alexandria v. ***** Morrison-Williams Assoc., 223 Va. 349, 288 S.E.2d 482 (1982).
Regardless of the federal reporting changes and the cited case, settlement amounts are not part of an attorney's or law firm's taxable gross receipts under the BPOL tax law because these amounts are not part of an attorney's or law firm's business receipts. If an attorney or law firm, as an agent of a client, receives any settlement amounts from a claim, such as for personal injury, then these amounts must be placed in a trust account and not be commingled with the attorney's or firm's money according to Bar rules. Because the attorney or law firm cannot use the funds as business proceeds, these funds are not part of the taxable gross receipts of the attorney or firm. Only the fee earned from representing the client is subject to taxation under BPOL tax law. This response is based on the following analysis.
ANALYSIS
Generally, a locality may impose a BPOL fee or tax on a business's gross receipts from activities performed within such locality. Code of Virginia Sec. 58.1-3703. Specifically, taxable gross receipts are only those receipts derived from ``the exercise of the licensed privilege to engage in a business or profession in the ordinary course of business.' Code of Virginia Sec. 58.1-3732(A). The BPOL law does not base such taxable gross receipts on any designated federal income tax amounts.
The Guidelines for Business, Professional, and Occupational License Tax Imposed by City, County, and Town Ordinances provides several examples of which gross receipts are not considered part of the ``ordinary course of business.' Department of Tax'n, (Jan.1, 1997) [hereinafter Guidelines]. Funds that are advanced by a client to an attorney to pay legal filing fees or to purchase a piece of real estate are not part of taxable gross receipts. Id. at 28-29. A Bar rule requires that attorneys who receive settlements for their clients must deposit the amount in a trustee account and cannot commingle these funds with the attorneys' operating funds. Code of Professional Responsibility Canon 9, D.R. 9-102, D.R. 9-103 (1997). Only the fee received by the attorney for providing legal services is subject to BPOL tax. Guidelines, at 29. In a situation in which a taxpayer, as agent or fiduciary for another, ***** receives and disburses money on behalf of such person or entity, then these amounts are not taxable as gross receipts for BPOL tax purposes. P.D. 97-292.
In the case cited by ***** the Court determined that the advertising agency was taxable on total gross receipts because the agency could not show that it received and disbursed money as the legal agent of its clients. Morrison-Williams Assoc., 223 Va. at 351, 288 S.E.2d at 484. The advertising agency commingled the funds it received from clients with the agency's other income sources and had the use of such funds for its own purposes. Id. at 350, 288 S.E.2d at 483. The Court found that the agency was not merely handling clients' funds for the clients but used the funds for the agency's purposes, which did not require the clients' consent. Id. at 352-53, 288 S.E.2d at 485. Therefore, the agency was subject to BPOL tax on total receipts without deduction since these receipts were derived from its business activities.
In the situation presented by the Bar, the attorney or law firm is the agent of the client for purposes of the settlement funds. When the settlement funds are received, they are deposited by the firm directly into a trust account and kept separate from the firm's money. When the funds are disbursed, two checks are written - one to the attorney or law firm as payment for legal services rendered and one to the client for the balance of the settlement from the client's legal claim. In this case, the attorney or law firm has the legal authority to receive and disburse the funds to the client, but cannot use these funds for the attorney's or firm's own purposes. Consequently, the settlement funds are not part of the attorney's or law firm's gross receipts that are subject to BPOL tax. The legal fees, however, are subject to BPOL tax since they reflect payment for business activities rendered.
I trust that this analysis answers your question. If not, please call me.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner