Tax Type
BPOL Tax
Local Taxes
Description
Businesses contracting activities; Real property leasing
Topic
Local Power to Tax
Date Issued
01-14-1999
January 14, 1999
Re: Request for Advisory Opinion
Business, Professional, & Occupational License (BPOL) Tax
Dear *****
This will respond to your facsimile requesting an advisory opinion regarding the license taxation of an individual who purchases and renovates buildings in your locality. 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 inform me that the individual in question purchases and renovates buildings in your locality for resale or to hold as rental property. You ask whether or not the individual may deduct the purchase price of these buildings from his gross receipts.
OPINION
Before answering your question, I will outline the law as it pertains to individuals purchasing and renovating real property for resale or to hold as rental property.
Taxation of Contracting Activities
Code of Virginia § 58.1-3714(B) defines a "contractor' to be a person who contracts to perform the activities listed in that code section, which include work on buildings requiring the use of building materials, paving and curbing work, excavation, sewer work, electrical work, plumbing and steam fitting. You indicate that the individual in question "renovates' properties, which, for purposes of this opinion, I assume includes the types of work listed above. Also included in the contractor's license tax classification are persons "constructing for their own account for sale.' Code of Virginia § 58.1-3706(A)(1). The BPOL Guidelines state that a person shall be classified as a contractor if he accepts contracts to perform or regularly performs, or engages others to perform, any of the work described in paragraph B of § 58.1-3714 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). 1997 BPOL Guidelines § 5.1 (A).
A person engaged in the business of (1) accepting contracts to perform, regularly performing, or engaging others to perform any of the work described in paragraph B of § 58.1-3714 or (2) constructing for their own account for sale is a contractor and is taxed accordingly. Some businesses renovating real estate they own and selling such real estate, however, are properly classified as real estate services businesses subject to a higher tax rate of $.58 per $100 of gross receipts. In determining whether a business renovating and selling its own real estate is subject to a BPOL tax as a contractor or a real estate services business, facts such as the number of houses a particular entity renovates each year and the significance of each renovation are useful in making this determination. Public Document 97-323. Finally, a person engaged in the business of purchasing and renovating real property for lease to others is not a contractor and perhaps not subject to license taxation as explained below.
Taxation of Real Property Leasing Activities
In limited circumstances, a locality may tax gross receipts derived from the rental of real property to others. The general rule is that no locality may impose a license fee or levy any license tax upon any person, firm or corporation for engaging in the business of renting, as the owner of such property, real property other than hotels, motels, motor lodges, auto courts, tourist courts, travel trailer parks, lodging houses, rooming houses and boardinghouses. Code of Virginia § 58.1-3703(C)(7).
The prohibition against assessing a BPOL tax on persons renting real property is not absolute. The tax prohibition of § 58.1-3703(C)(7) only extends to owners of real property. Additionally, § 58.1-3703(C)(7) is not applicable to the rental of hotels, motels, motor lodges, auto courts, tourist courts, travel trailer parks, lodging houses, rooming houses, and boardinghouses. Moreover, any locality which, on January 1, 1974, was assessing a license tax on owners of real property for the privilege of renting the real property they own is not subject to the § 58.1-3703(C)(7) prohibition.
The situs rules of § 58.1-3703.1 require gross receipts to be attributed to a definite place of business. Code of Virginia § 58.1-3703.1(A)(3)(a). For businesses engaged in the licensable privilege of renting real property, the physical property being rented is deemed to be a definite place of business. Code of Virginia § 58.1-3700.1. As a result gross receipts from the rental of real estate are attributed or sourced to the location of the real property being rented. Thus, a locality otherwise authorized to tax the business of renting real property can only impose a license tax on real estate rental receipts derived from real property within its jurisdiction. Code of Virginia § 58.1-3703(C)(19), 1997 BPOL Guidelines §1.
Although you inform me that your locality does not impose a license tax or fee on persons engaging in the business of renting real property to others (I assume you do not assess a BPOL tax on the owners of real property as well as non-owners such as sublessors), charges related to the rental of real property may still be subject to taxation in your jurisdiction, if such charges relate to the performance of a licensable business other than the rental of real property, as explained below.
Taxation of Businesses Engaging in Activities in More than One Category
A person is engaging in more than one business if his activities "involve separate business activities that could each be performed independently of the other.' 1994 Va. Op. Att'y Gen. 99, 104. Code of Virginia § 58.1-3703.1(A)(1) requires a person engaging in more than one business to have a license for each business (unless he elects to be taxed at the highest applicable license tax rate on all gross receipts). A person engaging in only one business which is composed of a primary activity and an ancillary activity which are not separated and are so integrated as to comprise a single business is required to have only one license and is subject to license taxation at the rate applicable to the primary activity on all receipts. Id.
Ordinarily, the rental of real property to others is a separate licensable business because the real property being leased to others is deemed a definite place of business pursuant to Code of Virginia § 58.1-3700.1, and the renting of real property is a business activity which can be performed independently of other business activities. Of course, real estate rental activities that constitute a separate licensable business must be considered in light of the prohibition of § 58.1-3703(C)(7) to determine if such activities may be lawfully assessed with a BPOL tax, as described above.
As you indicate that your locality does not impose a license tax or fee on persons engaging in the business of renting real property to others, your locality may not tax such persons unless the rental activity is ancillary to a primary business activity upon which your locality does impose license taxes. As an example, the 1997 Guidelines notes that ancillary real property rental receipts may arise in the situation of a contractor who temporarily leases real property intended for sale. "A person who would be otherwise classified as a contractor shall not lose such classification because real estate is temporarily leased until it can be sold, unless the leasing activity constitutes a separate licensable business. Any gross receipts from such leases shall be considered ancillary to the business of contracting.' 1997 BPOL Guidelines § 5.1 (B). The commentary to Guidelines § 5.1 reflects that "[real estate rental] activities that are deemed ancillary to the contracting business would be taxable by every locality imposing a BPOL tax on contractors.'
Deduction of Purchase Price
You ask whether or not the individual may deduct the purchase price of buildings sold from his gross receipts. Code of Virginia § 58.1-3700.1 defines gross receipts as "the whole, entire, total receipts, without deduction.' Section 1 of the Guidelines interprets the definition to mean 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.' A gross receipts tax is based upon receipts, not net income. Public Document 97-52. Chapter 37 of Title 58.1 which allows certain deductions from gross receipts subject to a BPOL tax, does not allow the deduction of the purchase price of realty from the seller's gross receipts. In my opinion, there is no legal authority for the individual in question to deduct from his gross receipts the purchase price of real property sold.
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
OTP13392D
Rulings of the Tax Commissioner