Tax Type
BPOL Tax
Local Taxes
Description
Asset sales included in gross receipts
Topic
Local Power to Tax
Date Issued
07-29-1999
July 29, 1999
Re: Taxpayer: Locality Assessing Tax: Final State Determination
Appeal of Business, Professional and Occupational License (BPOL) Tax
Dear**************
This final state determination is issued upon the application for correction filed by you with the Department of Taxation pursuant to Code of Virginia § 58.1-3703.1 (A)(5)(c). You appeal a final local determination upholding an audit assessment of BPOL taxes issued to ***** ("the Taxpayer') by the Commissioner of the Revenue of the ***** ("the City'). I apologize for the delay in responding to your application for correction.
The local license tax and fee are imposed and administered by local officials. Code of Virginia § 58.1-3701 authorizes the department to promulgate guidelines and issue advisory opinions on local license tax issues. Additionally, Code of Virginia § 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 is based on the facts presented to the department by the Taxpayer and the City 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.
This determination addresses the question of whether or not a contractor is entitled to an exclusion for receipts associated with the sale of assets in connection with a restructuring of its business. Copies of cited sources are enclosed.
FACTS
The Taxpayer is a corporation which has engaged in business as a contractor since 1971. It is owned by two brothers (the "Owners'). As part of a restructuring of its business in preparation for the retirement of the Owners, the Taxpayer sold certain lot and construction inventory (the "Assets') in 1996. The Assets were sold at book value to a limited liability company owned by several children of one of the Owners.
When it applied for its 1997 license, the Taxpayer excluded the proceeds from the sale of the Assets from its taxable volume (i.e., its 1996 gross receipts). The City audited this return and assessed additional license taxes on account of the excluded proceeds. The Taxpayer sought correction of this assessment at the local level and filed this appeal after the City rejected its arguments.
As the Taxpayer buys, improves and sells real estate in the ordinary course of its business, proceeds from these sales are included in its gross receipts. The Taxpayer argues, however, that its decision to restructure its business altered the character of the sale of the Assets. The Taxpayer contends that the sale of the Assets did not occur in the ordinary course of business and, accordingly, the proceeds are excluded from its gross receipts.
ANALYSIS
"Gross receipts' means the whole, entire, total receipts, without deduction.' Code of Virginia § 58.1-3700.1. Guidelines §1 explains that gross receipts are:
In order for the Taxpayer to exclude the return of principal from the sale of the Assets under Code of Virginia § 58.1-3732(A)(5), the Assets must be capital assets. In order for the
Taxpayer to exclude the proceeds under Code of Virginia § 58.1-3732(A)(7), the Assets must not be inventory. As noted above, the Assets consisted of lot and construction inventory. The Assets cannot qualify for exclusion under Code of Virginia § 58.1 -3732(A)(5) or (7) unless the decision to restructure the business changed the purpose for which the Taxpayer held the Assets, thereby converting them from inventory to capital assets.
This issue was addressed by the United States Tax Court in Tollis v. Commissioner, Tax Court Memo 1993-63. The Court recognized that a "liquidation rule' existed which provided that "[a]ssets being held for sale to customers in the ordinary course of business do not become capital assets because of intent to liquidate, followed by the disposition of an entire business or a portion thereof.' Id. at 283.
Under the liquidation rule set forth in Tollis, the Taxpayer's decision to restructure its business did not alter the purpose for which the Taxpayer held the Assets. As the Assets retained their character as inventory and did not become capital assets, the specific exclusions set forth in Code of Virginia § 58.1-3732(A)(5) and (7) do not apply. Moreover, the purpose for which the Taxpayer held the Assets, sale to customers in the ordinary course of business, was unchanged. Accordingly, the Assets were sold in the ordinary course of business and the general exclusion set forth in Code of Virginia § 58.1-3732(A) does not apply. It is my determination that there is no legal authority for the Taxpayer to exclude from its gross receipts the proceeds of the sale of the Assets.
CONCLUSION
As the Taxpayer has not shown sufficient proof that the assessment made by the locality for license year 1997 is incorrect, the assessment stands, as is. If you have other questions, please do not hesitate to contact ***** Tax Policy Analyst, in my Office of Tax Policy, at **********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20254D
Re: Taxpayer: Locality Assessing Tax: Final State Determination
Appeal of Business, Professional and Occupational License (BPOL) Tax
Dear**************
This final state determination is issued upon the application for correction filed by you with the Department of Taxation pursuant to Code of Virginia § 58.1-3703.1 (A)(5)(c). You appeal a final local determination upholding an audit assessment of BPOL taxes issued to ***** ("the Taxpayer') by the Commissioner of the Revenue of the ***** ("the City'). I apologize for the delay in responding to your application for correction.
The local license tax and fee are imposed and administered by local officials. Code of Virginia § 58.1-3701 authorizes the department to promulgate guidelines and issue advisory opinions on local license tax issues. Additionally, Code of Virginia § 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 is based on the facts presented to the department by the Taxpayer and the City 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.
This determination addresses the question of whether or not a contractor is entitled to an exclusion for receipts associated with the sale of assets in connection with a restructuring of its business. Copies of cited sources are enclosed.
FACTS
The Taxpayer is a corporation which has engaged in business as a contractor since 1971. It is owned by two brothers (the "Owners'). As part of a restructuring of its business in preparation for the retirement of the Owners, the Taxpayer sold certain lot and construction inventory (the "Assets') in 1996. The Assets were sold at book value to a limited liability company owned by several children of one of the Owners.
When it applied for its 1997 license, the Taxpayer excluded the proceeds from the sale of the Assets from its taxable volume (i.e., its 1996 gross receipts). The City audited this return and assessed additional license taxes on account of the excluded proceeds. The Taxpayer sought correction of this assessment at the local level and filed this appeal after the City rejected its arguments.
As the Taxpayer buys, improves and sells real estate in the ordinary course of its business, proceeds from these sales are included in its gross receipts. The Taxpayer argues, however, that its decision to restructure its business altered the character of the sale of the Assets. The Taxpayer contends that the sale of the Assets did not occur in the ordinary course of business and, accordingly, the proceeds are excluded from its gross receipts.
ANALYSIS
"Gross receipts' means the whole, entire, total receipts, without deduction.' Code of Virginia § 58.1-3700.1. Guidelines §1 explains 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. (Emphasis added).
- 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. (Emphasis added).
In order for the Taxpayer to exclude the return of principal from the sale of the Assets under Code of Virginia § 58.1-3732(A)(5), the Assets must be capital assets. In order for the
Taxpayer to exclude the proceeds under Code of Virginia § 58.1-3732(A)(7), the Assets must not be inventory. As noted above, the Assets consisted of lot and construction inventory. The Assets cannot qualify for exclusion under Code of Virginia § 58.1 -3732(A)(5) or (7) unless the decision to restructure the business changed the purpose for which the Taxpayer held the Assets, thereby converting them from inventory to capital assets.
This issue was addressed by the United States Tax Court in Tollis v. Commissioner, Tax Court Memo 1993-63. The Court recognized that a "liquidation rule' existed which provided that "[a]ssets being held for sale to customers in the ordinary course of business do not become capital assets because of intent to liquidate, followed by the disposition of an entire business or a portion thereof.' Id. at 283.
Under the liquidation rule set forth in Tollis, the Taxpayer's decision to restructure its business did not alter the purpose for which the Taxpayer held the Assets. As the Assets retained their character as inventory and did not become capital assets, the specific exclusions set forth in Code of Virginia § 58.1-3732(A)(5) and (7) do not apply. Moreover, the purpose for which the Taxpayer held the Assets, sale to customers in the ordinary course of business, was unchanged. Accordingly, the Assets were sold in the ordinary course of business and the general exclusion set forth in Code of Virginia § 58.1-3732(A) does not apply. It is my determination that there is no legal authority for the Taxpayer to exclude from its gross receipts the proceeds of the sale of the Assets.
CONCLUSION
As the Taxpayer has not shown sufficient proof that the assessment made by the locality for license year 1997 is incorrect, the assessment stands, as is. If you have other questions, please do not hesitate to contact ***** Tax Policy Analyst, in my Office of Tax Policy, at **********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20254D
Rulings of the Tax Commissioner