Rulings of the Tax Commissioner

Re: Request for Advisory Opinion
Business, Professional, & Occupational License (BPOL) Tax


Dear ****

This is in reply to your letter of June 4, 1998, in which you request an advisory opinion regarding the license taxation of a person whom you describe as an independent sales representative of a local company. I apologize for the delay in responding to your request.

Although the BPOL tax is a local license tax that is imposed and administered by local officials, the Virginia Department of Taxation may promulgate guidelines and issue advisory opinions on a limited basis according to Virginia statute. The Department, however, is not required to interpret local ordinances.

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. Copies of cited sources are enclosed for your review.
FACTS

You state that the sales representative works part time selling furniture and furnishings on a commission basis for a local company. In order to show the merchandise to customers, the sales representative brings customers to the company's local showroom and also travels in and outside of Virginia making sales by catalogue. You also state that the sales representative does not maintain an inventory or take title to the goods sold. The company treats the sales representative as an independent contractor, not an employee, for federal payroll tax purposes. Finally, you indicate that the sales representative works out of his residence, which is in your locality, on a regular and continuous course of dealing for thirty consecutive days or more and maintains no other definite place of business.

OPINION

Generally

Subject to limits set forth in Code of Virginia § 58.1-3703(C), localities may charge a fee for issuing BPOL licenses or may levy a license tax on a business for the privilege of engaging in business at a definite place within the locality. Code of Virginia '§ 58.1-3700 and 58.1-3703(A). Business means "a course of dealing which requires the time, attention and labor of the person so engaged for the purpose of earning a livelihood or profit. It implies a continuous and regular course of dealing, rather than an irregular or isolated transaction." Code of Virginia § 58.1-3700.1. A definite place of business means "an office or a location at which occurs a regular and continuous course of dealing where one holds one's self out or avails one's self to the public for thirty consecutive days or more, exclusive of holidays and weekends." 1997 BPOL Guidelines, page 4.

Employee vs. Independent Contractor

The first issue presented is whether or not the sales representative is "engaging in a business" independent of that of the local company (I will note that there is no issue that the local company has a definite place of business in the locality and is subject to local license taxation). An independent contractor may be engaging in a business but an employee generally is not. Employees are hired and work to further the business of the employer who hires them. Employees performing duties within the scope of employment are performing their employer's business. The BPOL statute imposes a license requirement on the business itself, not the employees of the business. Therefore, a license obtained by the employer generally covers the activities of any employee. Guidelines § 37.1 and Public Document 98-50. However, there is some historical basis for taxing professional employees.

For purposes of assessing local license taxes

(t)he determination as to whether a person is an employee or an independent contractor is based on common law principles and is affected by factors such as control, who furnishes materials, and other factors . . . (I)ocalities are entitled to rely upon the classification of a person as an employee or independent contractor for federal payroll tax purposes unless the taxpayer demonstrates that the classification for federal payroll tax purposes is erroneous or inapplicable.

Guidelines § 37.2 B and C. I am enclosing a copy of IRS Publication 937 which explains this determination for federal payroll tax purposes. As you inform me that the sales representative is treated as an independent contractor for federal payroll tax purposes, you may treat him as an independent contractor potentially subject to local license taxation, unless he demonstrates that the federal payroll tax treatment is erroneous or inapplicable.

Jurisdiction to Impose Tax

The next issue presented is whether or not the sales representative maintains a definite place of business in your jurisdiction making him subject to license taxation. As the sales representative is compensated on a commission basis and does not take title to the goods sold, he is engaged in the business of performing services. The gross receipts from the performance of services are attributed to the definite place of business where the services are rendered. When the services are not performed at any definite place of business, the gross receipts are attributed to the definite place of business from which the services are directed or controlled. Code of Virginia § 58.1-3703.1(A)(3)(a)(4), 1997 BPOL Guidelines § 3.8.5. Code of Virginia § 58.1-3700.1 provides that "(a) person's residence shall be deemed a definite place of business if there is no definite place of business maintained elsewhere and the person is not subject to licensure as a peddler or itinerant merchant." The sales representative is not a peddler as defined by Code of Virginia § 58.1-3717(A) because he does not carry merchandise from place to place, as required of a peddler in that subsection. The sales representative is not an itinerant merchant as defined in Code of Virginia § 58.1-3717(B) because he does not occupy locations for the purpose of transacting transient business, as required of an itinerant merchant in that subsection. As you indicate that the sales representative maintains his residence in your jurisdiction and maintains no definite place of business elsewhere, his residence is deemed to be a definite place of business under Code of Virginia § 58.1-3700.1. As a result, he is subject to license tax in your jurisdiction.

Gross Receipts - Apportionment

If a business has only one definite place of business then all gross receipts are properly attributable to that definite place of business. Code of Virginia § 58.1-3703.1 (A)(3)(a)(4) and 1997 BPOL Guidelines§ 3.8.5. A business, however, is entitled to deduct from its gross receipts any gross receipts attributable to business conducted in another state or foreign country in which the business is liable for an income or other tax based on income. Code of Virginia § 58.1-3732(B)(2). Because the sales representative maintains no definite place of business other than in your jurisdiction, all of his gross receipts are subject to license taxation in your jurisdiction, unless he is entitled to a deduction under Code of Virginia § 58.1-3732(B)(2) for receipts attributable to business conducted in another state or foreign country in which he is liable for an income or other tax based upon income. A taxpayer is liable for an income or other tax based on income if the taxpayer files a return for such tax in another state or country. 1997 BPOL Guidelines § 3.3.4. Thus in order to take the deduction, the taxpayer must be required by the laws of another state or foreign country to file an income tax return or other return for a tax based on income.

Business Classification

The final issue presented concerns the correct business classification of the sales representative. As discussed above, the peddler or itinerant merchant license tax classification does not appear proper for the sales representative. Based on the information provided, it is my opinion that the sales representative is properly classified as a "commission merchant" which is defined as

(a)ny person engaged in the business of selling merchandise on commission by sample, circular or catalogue for a regularly established retailer, who has no stock or inventory under his control other than floor samples held for demonstration or sales and owned by the principal retailer. . .

Code of Virginia § 58.1-3733. A commission merchant is subject to local license taxation only on commission income, not on the gross sales price of the merchandise sold. Id. (The local company which owns the goods being sold by the sales representative is subject to license taxation on the total sales price of retail sales made by the sales representative and may not deduct the commissions it has paid to the sales representative from its gross receipts. Guidelines § 6.5 and Public Document 98-041).

I hope that the above information will be beneficial to you. Although I believe this letter conforms with the requirements of the law, it is written only for your guidance. If you have other questions, please do not hesitate to contact ***** at *****.

Sincerely,


Danny M. Payne
Tax Commissioner

OTP16048D

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¹The comment to §3.7.1 of the 1997 BPOL Guidelines indicates that former state license tax law required every practitioner of certain professions to have a separate state tax license in addition to any regulatory license. This requirement was repealed in 1982 when the state license tax was abolished, although the authority of localities to continue imposing local license tax on professionals was not intended to be affected by the repeal. While localities may be authorized to require an employee who is also a practitioner of a professional to have a license separate from the employer's license when professional services are rendered to the public within the scope of employment, the department recommends taxing professional gross receipts under the employer's license and not requiring employees to obtain licenses. For the same reason, the license of a partnership, limited liability company, or other business entity should cover the receipts generated by the activities of partners, members, and similar individuals.

Rulings of the Tax Commissioner