99-114 | Virginia Tax

Tax Type

BPOL Tax

Local Taxes

Description

Business classifications

Topic

Local Power to Tax

Date Issued

05-17-1999

May 17, 1999

Re: Locality Assessing Tax: Final State Determination
Appeal of Business. Professional and Occupational License (BPOL) Tax

Dear******************

This final state determination is issued upon an application for correction filed by you with the department pursuant to Code of Virginia § 58.1-3703.1 (A)(5)(c). You are appealing a final local determination made by the *************** (the "City') upholding its assessment of BPOL taxes to ***** ("the Business').

The local license fee and tax are imposed and administered by local officials. § 58.1-3701 of the Code of Virginia authorizes the department to promulgate guidelines and issue advisory opinions on local license tax issues. Additionally, § 58.1-3703.1(A)(5) authorizes the department to receive taxpayer appeals of certain local license tax assessments and to issue determinations on such appeals. However, in no case is the department required to interpret any local ordinance. Code of Virginia § 58.1-3701. The following determination has been made subject to the facts presented on appeal to the department, as summarized below.

- Code of Virginia § 58.1-3703.1(A)(5)(a) provides that, on appeal, a BPOL tax assessment is deemed prima facie correct. In other words, the local assessment will stand unless the taxpayer proves that it is incorrect.

FACTS

The City performed an audit of the Business in the fall of 1996, and on December 30, 1996 assessed the Business with BPOL taxes, penalty, and interest in the amount of *****. The City maintains that the Business was operating without a license for the license years 1993 through 1996, and assessed the Business for unreported license taxes.

After discussing the assessment with the Business, the City issued a second assessment in January 1997. This second assessment was sent by facsimile to the Business on January 17, 1997 with the following notation appearing on the first page of the facsimile:

- the initial assessment will be cancelled. I will review the delivery receipts and advise you prior to the payment of the new assessment, which should be paid by Wednesday, January 22, 1997. Please call me if you have any questions. [Emphasis added.]

The message line of the facsimile also contained the words "Re: New Assessment Due to Classification Change.' The City does not dispute these facts.

The amount of the second assessment was *****. The difference between the assessments resulted from a change in the City's local license tax classification for the Business. The Business was classified as a "Restaurant' under City code section 27435 for purposes of the December 1996 assessment and was assessed at a tax rate of $.43 per $100 of gross receipts. The Business was reclassified as a "Retail Merchant § Food' under City code section 27-407 for purposes of the January 1997 assessment, and was assessed at a lower tax rate when compared to the December assessment. I will note that these tax rates are above the generally prescribed maximum rates for these types of businesses set forth in Code of Virginia § 58.1-3706(A). The City claims, and the Business does not contend otherwise, that the City may assess license tax rates above the generally prescribed maximum rates under the authority of Code of Virginia § 58.1-3706(B). (This subsection permits certain localities to impose license tax rates above the maximum rates generally prescribed.)

The Business made a written appeal to the City on February 27, 1997 contesting the January 1997 assessment on several grounds. The City responded by letter on April 2, 1997. On January 30, 1998, the City issued a "Review of Final Local Determination' clarifying this response. The January 30, 1998 letter concluded by informing the Business that "[t]his is our final response and ends the City's administrative and appeals process for both the meals tax assessment and the BPOL assessment. No additional correspondence will be forthcoming from this office.' On April 27, 1998, the department received a letter from the Business appealing the City's determination.

DETERMINATION

I. JURISDICTION

1. Litigation Pending on December 30, 1996 Meals Tax Assessment

At the time of the issuance of this determination, an action is pending in the circuit court of the City for relief of a meals tax assessment also issued on December 30, 1996 to the Business. The audit done by the City in 1996 resulted in a ***** meals tax assessment and a ***** BPOL assessment for a total 1996 assessment of *****. In paragraph 28 of the Business's Motion for Judgment, the Business stipulates that it is not contesting the "license tax assessment in this Motion for Judgment.' Based upon this stipulation, the department believes that in rendering this determination, there will be no conflict with the proceedings in the circuit court of the City with respect to the meals tax assessment.

2. Was the Assessment Made after January 1, 1997?

The City asserts that the Business may not appeal to the department as the department is authorized to render determinations only on appeals of assessments made on and after January 1, 1997. Code of Virginia § 58.1-3703.1(B)(2). The City maintains that the assessment of BPOL tax in question was actually made on December 30, 1996. The City contends that its second assessment of January 17, 1997 was merely an adjustment of the December 30, 1996 assessment and, therefore, not a new assessment made after January 1, 1997 which may be appealed to the department. The Business disagrees.

When a locality and a taxpayer disagree as to whether an assessment can be appealed to the department, the department will consider this issue before it proceeds to the merits of the case. Thus, before considering the merits of the Business's appeal, the department must find that it has the legal authority to do so pursuant to Code of Virginia § 58.1-3703.1A(5).

In general, if a local assessing officer ascertains that a taxpayer has not remitted the amount of tax required by law, the local assessing officer can only assess tax for the current tax year and the three preceding tax years. Code of Virginia § 58.1-3903. However, if a local assessing officer obtains a taxpayer's written consent to extend the period in which an assessment can be made, the local assessing officer may be able to assess tax beyond the three-year period established in § 58.1-3903. Code of Virginia § 58.1-3903.1.

The City audited the Business in the fall of 1996 and assessed the Business with tax for license years 1993, 1994, 1995, and 1996. This is consistent with Code of Virginia § 58.1-3903. The City then made a second assessment on January 17, 1997. In making this second assessment, the City assessed tax for tax years 1996, 1995, 1994, and 1993 (the four preceding tax years). However, there is no evidence that the City obtained a waiver from the Business agreeing to the assessment of tax beyond the three-year period established in § 58.1-3903.

Moreover, while the City claims that its assessment was made in 1996, in issuing its January 17, 1997 assessment, the City stated that the 1996 assessment would be cancelled and the Business's delivery receipts would be reviewed and, in several places, described the 1997 assessment as a new assessment. Because the City evidently failed to obtain a waiver from the Business, and based upon the City's statements accompanying its January 17, 1997 assessment, it is my conclusion that the December 30, 1996 assessment was in fact cancelled and replaced by the assessment issued on January 17, 1997. Most importantly for purposes of this opinion, the January 17, 1997 assessment was made as a result of an audit and issued after January 1, 1997. Such assessments may properly be appealed to the department under Code of Virginia §58.1-3703.1(A)(5).

I will next turn to the merits of the Business's appeal.

II. SUBSTANTIVE MATTERS

1. Notice of Change in City's Local Ordinance

The Business contends that the entire assessment should be invalidated because it is repugnant to both the Equal Protection Clause of the Fourteenth Amendment of the United States Constitution and Article X, Section I of the Virginia Constitution. The relevant part of the Fourteenth Amendment states that "[no State] shall deny to any person within its jurisdiction the equal protection of the laws.' The relevant part of Article X, Section I states that "a]ll taxes ... shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax.' The Business has argued that the City violated both these provisions by: (1) not informing the Business of the procedures that must be carried out in appealing an assessment; (2) taking an "unreasonable' amount of time to respond to the Business's appeal at the local level; and (3) not informing the Business of a change in the City's local BPOL ordinances

As a general rule, the department will not comment on the administrative review processes in place in a particular locality. The local administrative review process generally is a matter between a taxpayer and the locality. What is important for purposes of this determination is that the Business made an appeal at the local level and the City responded to this appeal several times, including letters of April 2, 1997 and January 30, 1998, both of which set forth the City's determination on the Business's appeal. [The January 30, 1998 letter was a "Review of Final Local Determination' and informed the Business of its right to appeal that determination to the department. This letter set in motion the Business's appeal to the department.]

The Business suggests that the City had a responsibility to inform it of a change in its local BPOL ordinances before assessing BPOL taxes. While not clearly explained in the Business's appeal, the City changed Section 28-420 of its local ordinance in 1990 to make manufacturers selling at retail subject to the local BPOL tax. This change does not conflict with Code of Virginia § 58.1-3703(C)(4) which only prohibits localities from assessing a local license tax or fee "[o]n a manufacturer for the privilege of manufacturing and selling goods, wares, and merchandise at wholesale at the place of manufacture' (emphasis added). Apparently, this change was the basis for the City's assessment of BPOL taxes as the Business makes sales to individual consumers. Prior to 1996, the Business had not been assessed with BPOL tax.

Requiring a locality to personally notify every taxpayer or citizen of a change in a local ordinance as the Business suggests would create a tremendous burden upon localities which could severely hinder local government operations. It is axiomatic that responsibility for knowledge of a jurisdiction's laws falls upon a taxpayer in the same manner as it does for every other citizen.

For the reasons stated above, I find no infirmity in the notice that was provided to the Business. (I note that the department expresses no opinion as to whether the Business is a manufacturer, a restaurant, or whether there has been any significant change in the business over time. The department merely addresses the question of sufficient notice which has been raised by the Business.)

2. Assessment for Tax Year 1993

The Business has also contended that the City's assessment for tax year 1993 runs afoul of Code of Virginia § 58.1-3903. I agree. As discussed above, the 1996 assessment was cancelled, leaving the 1997 assessment as the only relevant assessment for purposes of this appeal. This assessment was limited to tax years 1997, 1996, 1995, and 1994, i.e., the current tax year and the three preceding tax years. Unless the City obtained a written waiver from the Business agreeing to the assessment of tax for tax years prior to 1994, the City was then precluded from assessing BPOL tax for 1993. There is no evidence that a written waiver was obtained by the City. Pursuant to Code of Virginia §§ 58.1-3703.1(A)(5)(c) and 58.1-1822, absent a written waiver, I find that the City's assessment must be adjusted to eliminate any tax, interest, and penalty relating to tax year 1993.

3. Deduction for Delivery Charges

The Business next argues that certain delivery services charged to customers with no mark-up are not gross receipts subject to the BPOL tax.

The Supreme Court of Virginia has determined that "[t]he words gross receipts mean whole, entire, total receipts.' Savage v. Commonwealth, 186 Va. 1012, 1018 (1947). The General Assembly subsequently codified this holding when it defined gross receipts to be "the whole, entire, total receipts, without deduction.' Code of Virginia § 58.1-3700.1. Guidelines §1 expands the statutory definition to clarify that gross receipts are the:

- whole, entire, total receipts, of money or other consideration received by the taxpayer as a result of transactions with others besides himself and which are derived from the exercise of a licensed privilege to engage in a business..., without deduction or exclusion except as provided by law.

The determinative question is whether or not receipts are derived from transactions with others and from the exercise of a licensable privilege. Public Document 97-167.

Certain monies received by an agent for reimbursement of costs incurred on behalf of a principal are not included in the agent's gross receipts. 1985-1986 Op. Att'y Gen. 281. However, a business which is not the legal agent of its customer may not exclude from its BPOL taxable gross receipts monies it receives from its customer as payment for costs incurred by the business with others who have no contractual relationship with the customer. Alexandria v. Morrison-Williams Associates, Inc., 223 Va. 349 (1982).

The Business hires a delivery service to deliver its goods to customers. The customer pays for the goods and the delivery service with one check made payable to the Business. At the end of a typical day, the Business deposits these checks into its own bank account. At the end of the month, the Business writes a check made payable to the delivery service for services rendered for the month. The Business asserts that no mark-up is charged to its customers for delivery of the goods.

Under these facts, it is clear that the Business is not acting as an agent of its customers when it receives payment for delivery services. The Business's customers have no contractual relationship with the delivery service and would not be required to pay for the delivery services but for the fact that the Business passes on its delivery service charges to its customers. It is clear that the Business is passing on its cost of doing business, delivering its goods, to its customers. In short, the Business asks for a deduction from its gross receipts for an expense it incurs in doing business. Because the BPOL tax is based on gross receipts, any allowable deduction must be specifically provided for in the Code of Virginia or in case law. I can find no deduction for delivery service charges for this particular type of Business.

For these reasons, I find that the City acted properly in including in taxable gross receipts monies received by the Business for delivery services.

4. Penalty for Past Due Taxes

Finally, the Business argues that the City improperly assessed it with penalty for the failure to file license tax returns for the tax years in question. Code of Virginia § 58.1- 3703.1(A)(2)(d) states that:

- [a] penalty of ten percent of the tax may be imposed upon the failure to file an application or the failure to pay the tax by the appropriate due date. Only the late filing penalty shall be imposed by the assessing official if both the application and payment are late... If the failure to file or pay was not the fault of the taxpayer, the penalties shall not be imposed, or if imposed, shall be abated by the official who assessed them. In order to demonstrate lack of fault, the taxpayer must show that he acted responsibly and that the failure was due to events beyond his control. "Acted responsibly' means that: (i) the taxpayer exercised the level of reasonable care that a prudent person would exercise under the circumstances in determining the filing obligations for the business and (ii) the taxpayer undertook significant steps to avoid or mitigate the failure...

The Business states that it has been cooperating with the City and there was no intent not to comply with the City's local ordinances. While that may be true, the test to be applied in abating any penalty is a lack of fault on the part of a taxpayer. To demonstrate a lack of fault, the Business had to show that it acted responsibly and exercised the level of reasonable care of a prudent person. As discussed in Section 11(1) above, the Business is at fault for its failure to file license tax returns. The Business, like any other citizen, had the legal responsibility to know the laws of its jurisdiction and any changes made to those laws. The Business cannot use its lack of knowledge of a change in the City's local ordinances as a rationale for not filing a license tax return.

III. SUMMARY

In summary, pursuant to Code of Virginia §§ 58.1-3703.1(A)(5)(c) and 58.1=1822, I uphold the City's 1997 assessment in part and reverse in part. The City must adjust its 1997 assessment to eliminate any tax, penalty, and interest relating to tax year 1993. For the reasons discussed above, the remainder of the City's 1997 assessment has been levied in accordance with the law.

If you have other questions, please do not hesitate to contact ***** Policy Analyst, in my Office of Tax Policy, at *****.

Sincerely,

Danny M. Payne
Tax Commissioner
OTP/13854

Rulings of the Tax Commissioner