Tax Type
BPOL Tax
Local Taxes
Description
Specific Types of Local License Taxes
Topic
Local Power to Tax
Date Issued
09-24-1999
September 24, 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 an application for correction of BPOL taxes assessed by the Commissioner of the Revenue of the ***** (the "City'). This appeal was filed by ***** (the "Firm') with the Department of Taxation pursuant to Code of Virginia Sec. 58.1-3703.1(A)(5)(c). I apologize for the delay in responding to your application for correction.
The local license fee and tax are imposed and administered by local officials. Section 58.1-3701 of the Code of Virginia authorizes the department to promulgate guidelines and issue advisory opinions on local license tax issues. Additionally, Sec. 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 Sec. 58.1-3701. The following determination has been made subject to the facts presented on appeal to the department, as summarized below.
This determination addresses the question of whether or not an architectural firm is entitled to deduct from its gross receipts the costs of subcontracted services which it passes on to its clients. Copies of cited sources are enclosed.
Code of Virginia Sec. 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 Firm, a professional corporation composed of licensed architects, provides its clients with complete planning and design services for specific construction projects. These services may require engineering and other services which the Firm does not provide in-house.
You have submitted representative contracts1 to illustrate the typical services that the Firm provides to its clients and the typical contractual obligations associated with the provision of these services. The contracts submitted include a 1987 Edition AIA Document B141 "Standard Form of Agreement between Owner and Architect' (the "Owner's Agreement') and a 1987 Edition AIA Document C141 "Standard Form of Agreement between Architect and Consultant' (the "Consultant's Agreement') for a substantial government construction project.
The Owner's Agreement reflects that the parties anticipate that the Firm will subcontract out engineering and other services. The Firm, however, is responsible for the work of the consultants. "The Architect's services shall be performed as expeditiously as is consistent with professional skill and care and the orderly progress of the Work.' Owner's Agreement at 1.1.2. "The Architect's services consist of those services performed by the Architect, Architect's employees and Architect's consultants.' Id. at 1.1.1.
The Owner's Agreement provides that the Firm will be compensated on a fixed price basis with monthly progress payments to be made in proportion to the services performed. Id. at 10.3.2. The consultants are not parties to this agreement and it does not indicate the amount to be paid to the consultants.
The Consultant's Agreements provide that the Firm alone is responsible for the fees of the consultants. Consultant's Agreement at 11.1. The owner is not a party to the Consultant's Agreements.
The City has informed me that it has determined, through an audit of the Firm's records, that the Firm treats payments to consultants as part of its gross income for federal income tax purposes. This information has not been contradicted by the Firm.
Historically, the Firm has deducted amounts paid to subcontracting professionals from its taxable gross receipts. As a result of an audit, the City has disallowed these deductions and assessed additional BPOL taxes to the Firm for license years 1994 through 1997. You challenge the assessment on three bases. First, you argue that the assessment violates the situs rules set forth in Code of Virginia Sec. 58.1-3703.1(A)(3) which mandate that gross receipts be attributed to a definite place of business. Second, you argue that the assessment violates the requirement of Code of Virginia Sec. 58.1-3703.1(A)(3) that "the gross receipts included in the taxable measure shall only be those gross receipts attributed to the exercise of a privilege subject to licensure.' Finally, you contend that impermissible double taxation will result if the Firm is subject to license taxation on gross receipts associated with the performance of subcontracted services because the subcontractors will also be subject to license taxation on the receipts associated with these services.
Effective January 1, 1997, the General Assembly revised the BPOL statutes to add the situs rules set forth in Code of Virginia Sec. 58.1-3703.1(A)(3). Your appeal concerns license years both prior, 1994-96, and subsequent, 1997, to the introduction of the situs rules. Your first and second arguments are based on the situs rules and are not applicable to license years 1994-96. Your third argument, however, applies to all license years on appeal, 1994-97, as it does not rely on the new situs rules. I will address each argument in the order presented.
ANALYSIS
Argument One-Gross Receipts Associated with Subcontracted Services Should Be Attributed to the Subcontractor's Definite Place of Business
You argue that the assessment for license year 1997 violates the situs rules set forth in Code of Virginia Sec. 58.1-3703.1(A)(3). These situs rules mandate that gross receipts be attributed to a definite place of business. You state that the engineers and other subcontractors maintain their own offices, which are definite places of business. You contend that the Firm's gross receipts derived from the performance of subcontracted services should be attributed, and taxed, to the subcontractors' offices and not to the Firm's office. For the reasons set forth below, I cannot agree.
Code of Virginia Sec. 58.1-3703.1 sets forth uniform ordinance provisions which must be included in every local ordinance levying a license tax pursuant to Chapter 37 of Title 58.1 of the Code of Virginia. Among the uniform ordinance provisions are situs rules, set forth in Code of Virginia Sec. 58.1-3703.1(A)(3), which determine whether or not a locality may tax specific gross receipts. The general situs rule is that:
This general rule is reiterated in the specific situs rule concerning gross receipts from the performance of services which provides that:
Your argument that gross receipts associated with the performance of subcontracted services should be attributed to the subcontractor's definite place of business rests upon the idea that the gross receipts of one business can be attributed to another business. This application of the situs rules is contrary to the purpose of the situs rules, which is to govern the attribution of a business' gross receipts to (or between) its definite place(s) of business. As the receipts of one business entity cannot be attributed to another business entity in this manner, I conclude that the assessment for license year 1997 does not err on these grounds.
Argument Two-A Licensed Professional Is Not Subject to License Taxation on Receipts Associated with the Performance of Other Licensed Professions
You also argue that the assessment for license year 1997 violates the mandate of Code of Virginia Sec. 58.1-3703.1(A)(3) that "the gross receipts included in the taxable measure shall only be those gross receipts attributed to the exercise of a privilege subject to licensure.' You note that the architects working for the Firm are licensed by the Commonwealth as architects and are not authorized to perform services restricted to other licensed professions. You contend that the only "privilege subject to licensure' exercised by the Firm is that of providing architectural services. Accordingly, you believe that the Firm is only subject to license taxation for exercising the licensable privilege of performing architectural services and cannot be taxed on gross receipts associated with engineering and other professional services. For the reasons set forth below, I cannot agree with this argument.
Code of Virginia Sec. 58.1-3732 provides that "[g]ross receipts for license tax purposes shall not include any amount not derived from the exercise of the licensed privilege to engage in a business or profession in the ordinary course of business (emphasis added).' This code section reflects that it is the privilege of engaging in business transactions which occur or are required in the ordinary course of business which is licensed by the locality, not the privilege of practicing a particular profession. The licensed privilege of a professional which is subject to taxation is not limited to those services delineated by the state professional licensing board, but encompasses all those associated with the business activity. A business may be taxed on gross receipts associated with the practice of a particular profession without being licensed by the applicable state board to practice that profession. For example, it is not necessary for an engineer to have been issued a regulatory license by the state in order to be classified as a professional for BPOL tax purposes. 1994 Op. Va. Att'y Gen. 99.
The contracts submitted reflect that the Firm holds itself out to the public as a business which can supply a turn-key design and planning service, including the architectural, engineering and other activities necessary to complete a project. The contracts reflect that the Firm alone is responsible to the client for providing this complete design and planning service. If the contractually agreed-upon design and specifications are not provided, the Firm, not its subcontractors, is responsible to the client for any resulting liability. Receipts associated with activities other than architecture are derived from the taxable privilege of engaging in the business of providing a complete design and planning service and may not be excluded from gross receipts. Accordingly, I conclude that the assessment for license year 1997 does not err on these grounds.
Argument Three-Taxation of Pass Through Costs is Impermissible Double Taxation
Finally, you argue that the assessments for license years 1994-97 are incorrect as impermissible double taxation will result if the Firm is subject to license taxation on gross receipts associated with the performance of subcontracted services because the subcontractors will also be subject to license taxation on these funds. For the reasons set forth below, I cannot agree with this argument. Although some of the authority cited below was issued subsequent to the revision of the BPOL tax effective January 1, 1997, it is based on and reflective of the BPOL law as it existed in the period 1994-96.
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 Sec. 58.1-3700.1. Guidelines Sec.1 expands the statutory definition to clarify that gross receipts are:
The lawfulness of a BPOL tax on costs passed through to consumers is discussed in Public Document 97-52. In that opinion, a funeral home, as part of the services it provided, contracted with others to provide goods and services to its customers such as casket sprays, opening and closing graves and placing obituaries in the newspaper. The funeral home, not the customer, contracted for these services and paid for the services. The funeral home passed on the costs of these services, without markup, to the consumer. Paying for these services "up front' was determined to be a cost of doing business or an expense of the ultimate service provided by the funeral home. Because these services are a necessary expense of doing business as a funeral home, the receipts from such activities are derived from the exercise of a licensed privilege to do business and are included in the funeral home's gross receipts.3 A gross receipts tax is based upon receipts, not net income. Id.
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 Attorney General has applied the Morrison-Williams Associates, Inc. holding to facts substantially similar to that in the present case. In that opinion, a design-build contractor sought to exclude payments made by it for design services and equipment purchases from its license tax basis. The Attorney General opined that:
The Firm acts unlike an agent in other ways. For example, the Firm treats the cost of subcontracted services as part of its gross income for federal income tax purposes. An agent does not account for the receipt and disbursal of trust funds on an income tax return. These funds are not trust funds, but taxable gross receipts. The Firm is not an agent of its clients in this capacity. Payments received by the Firm from its clients on account of subcontracted services are attributable to the licensable privilege of providing architectural services and must be included in gross receipts. For these reasons, it is my determination that the assessments for license years 1994-97 do not err on the grounds of double taxation.
Local License Taxation of Professional Corporations and their Shareholders
Although not raised as grounds for error in the application for correction, the license years 1994-97 assessments were not properly calculated. Chapter 7 of Title 13.1 of the Code of Virginia ( Sec.13.1-542 et seq.) governs professional corporations, which are corporations organized under that chapter to provide enumerated professional services, including those of professional architects. Code of Virginia Sec.13.1-543. Code of Virginia Sec.13.1-554 provides that the shareholders of a professional corporation, not the professional corporation itself, are subject to local license taxation:
As each shareholder of a professional corporation is required to have a license, each shareholder is entitled to the benefit of the license tax thresholds introduced as part of the 1996 revisions of Code of Virginia Sec. 58.1-3706 (A):
CONCLUSION
I am returning this matter to the City for a re-determination and correction of the license years 1994-97 assessments consistent with this opinion. The City shall make this determination within ninety days after the date of this final state determination. The Firm has not shown sufficient proof that the assessments made by the City for license years 1994-97 are incorrect on any other grounds. 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
1The submitted contract and all attachments will be treated as highly confidential information and will not be subject to publication or distribution.
2A 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 Sec. 58.1-3732(B)(2). 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 Sec.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.
3Subsequent to the issuance of Public Document 97-52, Code of Virginia Sec. 58.1-3732.3 was enacted to provide an exclusion from the gross receipts of funeral homes for the reimbursement of certain business expenses.
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 an application for correction of BPOL taxes assessed by the Commissioner of the Revenue of the ***** (the "City'). This appeal was filed by ***** (the "Firm') with the Department of Taxation pursuant to Code of Virginia Sec. 58.1-3703.1(A)(5)(c). I apologize for the delay in responding to your application for correction.
The local license fee and tax are imposed and administered by local officials. Section 58.1-3701 of the Code of Virginia authorizes the department to promulgate guidelines and issue advisory opinions on local license tax issues. Additionally, Sec. 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 Sec. 58.1-3701. The following determination has been made subject to the facts presented on appeal to the department, as summarized below.
This determination addresses the question of whether or not an architectural firm is entitled to deduct from its gross receipts the costs of subcontracted services which it passes on to its clients. Copies of cited sources are enclosed.
Code of Virginia Sec. 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 Firm, a professional corporation composed of licensed architects, provides its clients with complete planning and design services for specific construction projects. These services may require engineering and other services which the Firm does not provide in-house.
You have submitted representative contracts1 to illustrate the typical services that the Firm provides to its clients and the typical contractual obligations associated with the provision of these services. The contracts submitted include a 1987 Edition AIA Document B141 "Standard Form of Agreement between Owner and Architect' (the "Owner's Agreement') and a 1987 Edition AIA Document C141 "Standard Form of Agreement between Architect and Consultant' (the "Consultant's Agreement') for a substantial government construction project.
The Owner's Agreement reflects that the parties anticipate that the Firm will subcontract out engineering and other services. The Firm, however, is responsible for the work of the consultants. "The Architect's services shall be performed as expeditiously as is consistent with professional skill and care and the orderly progress of the Work.' Owner's Agreement at 1.1.2. "The Architect's services consist of those services performed by the Architect, Architect's employees and Architect's consultants.' Id. at 1.1.1.
The Owner's Agreement provides that the Firm will be compensated on a fixed price basis with monthly progress payments to be made in proportion to the services performed. Id. at 10.3.2. The consultants are not parties to this agreement and it does not indicate the amount to be paid to the consultants.
The Consultant's Agreements provide that the Firm alone is responsible for the fees of the consultants. Consultant's Agreement at 11.1. The owner is not a party to the Consultant's Agreements.
The City has informed me that it has determined, through an audit of the Firm's records, that the Firm treats payments to consultants as part of its gross income for federal income tax purposes. This information has not been contradicted by the Firm.
Historically, the Firm has deducted amounts paid to subcontracting professionals from its taxable gross receipts. As a result of an audit, the City has disallowed these deductions and assessed additional BPOL taxes to the Firm for license years 1994 through 1997. You challenge the assessment on three bases. First, you argue that the assessment violates the situs rules set forth in Code of Virginia Sec. 58.1-3703.1(A)(3) which mandate that gross receipts be attributed to a definite place of business. Second, you argue that the assessment violates the requirement of Code of Virginia Sec. 58.1-3703.1(A)(3) that "the gross receipts included in the taxable measure shall only be those gross receipts attributed to the exercise of a privilege subject to licensure.' Finally, you contend that impermissible double taxation will result if the Firm is subject to license taxation on gross receipts associated with the performance of subcontracted services because the subcontractors will also be subject to license taxation on the receipts associated with these services.
Effective January 1, 1997, the General Assembly revised the BPOL statutes to add the situs rules set forth in Code of Virginia Sec. 58.1-3703.1(A)(3). Your appeal concerns license years both prior, 1994-96, and subsequent, 1997, to the introduction of the situs rules. Your first and second arguments are based on the situs rules and are not applicable to license years 1994-96. Your third argument, however, applies to all license years on appeal, 1994-97, as it does not rely on the new situs rules. I will address each argument in the order presented.
ANALYSIS
Argument One-Gross Receipts Associated with Subcontracted Services Should Be Attributed to the Subcontractor's Definite Place of Business
You argue that the assessment for license year 1997 violates the situs rules set forth in Code of Virginia Sec. 58.1-3703.1(A)(3). These situs rules mandate that gross receipts be attributed to a definite place of business. You state that the engineers and other subcontractors maintain their own offices, which are definite places of business. You contend that the Firm's gross receipts derived from the performance of subcontracted services should be attributed, and taxed, to the subcontractors' offices and not to the Firm's office. For the reasons set forth below, I cannot agree.
Code of Virginia Sec. 58.1-3703.1 sets forth uniform ordinance provisions which must be included in every local ordinance levying a license tax pursuant to Chapter 37 of Title 58.1 of the Code of Virginia. Among the uniform ordinance provisions are situs rules, set forth in Code of Virginia Sec. 58.1-3703.1(A)(3), which determine whether or not a locality may tax specific gross receipts. The general situs rule is that:
-
- the gross receipts included in the taxable measure shall be only those gross receipts attributed to the exercise of a privilege subject to licensure at a definite place of business within this jurisdiction. In the case of activities conducted outside of a definite place of business, such as a visit to a customer location, the gross receipts shall be attributed to the definite place of business from which such activities are initiated, directed or controlled. Id.
This general rule is reiterated in the specific situs rule concerning gross receipts from the performance of services which provides that:
-
- [t]he gross receipts from the performance of services shall be attributed to the definite place of business at which the services are performed or, if not performed at any definite place of business, then to the definite place of business from which the services are directed or controlled.
- [t]he gross receipts from the performance of services shall be attributed to the definite place of business at which the services are performed or, if not performed at any definite place of business, then to the definite place of business from which the services are directed or controlled.
Your argument that gross receipts associated with the performance of subcontracted services should be attributed to the subcontractor's definite place of business rests upon the idea that the gross receipts of one business can be attributed to another business. This application of the situs rules is contrary to the purpose of the situs rules, which is to govern the attribution of a business' gross receipts to (or between) its definite place(s) of business. As the receipts of one business entity cannot be attributed to another business entity in this manner, I conclude that the assessment for license year 1997 does not err on these grounds.
Argument Two-A Licensed Professional Is Not Subject to License Taxation on Receipts Associated with the Performance of Other Licensed Professions
You also argue that the assessment for license year 1997 violates the mandate of Code of Virginia Sec. 58.1-3703.1(A)(3) that "the gross receipts included in the taxable measure shall only be those gross receipts attributed to the exercise of a privilege subject to licensure.' You note that the architects working for the Firm are licensed by the Commonwealth as architects and are not authorized to perform services restricted to other licensed professions. You contend that the only "privilege subject to licensure' exercised by the Firm is that of providing architectural services. Accordingly, you believe that the Firm is only subject to license taxation for exercising the licensable privilege of performing architectural services and cannot be taxed on gross receipts associated with engineering and other professional services. For the reasons set forth below, I cannot agree with this argument.
Code of Virginia Sec. 58.1-3732 provides that "[g]ross receipts for license tax purposes shall not include any amount not derived from the exercise of the licensed privilege to engage in a business or profession in the ordinary course of business (emphasis added).' This code section reflects that it is the privilege of engaging in business transactions which occur or are required in the ordinary course of business which is licensed by the locality, not the privilege of practicing a particular profession. The licensed privilege of a professional which is subject to taxation is not limited to those services delineated by the state professional licensing board, but encompasses all those associated with the business activity. A business may be taxed on gross receipts associated with the practice of a particular profession without being licensed by the applicable state board to practice that profession. For example, it is not necessary for an engineer to have been issued a regulatory license by the state in order to be classified as a professional for BPOL tax purposes. 1994 Op. Va. Att'y Gen. 99.
The contracts submitted reflect that the Firm holds itself out to the public as a business which can supply a turn-key design and planning service, including the architectural, engineering and other activities necessary to complete a project. The contracts reflect that the Firm alone is responsible to the client for providing this complete design and planning service. If the contractually agreed-upon design and specifications are not provided, the Firm, not its subcontractors, is responsible to the client for any resulting liability. Receipts associated with activities other than architecture are derived from the taxable privilege of engaging in the business of providing a complete design and planning service and may not be excluded from gross receipts. Accordingly, I conclude that the assessment for license year 1997 does not err on these grounds.
Argument Three-Taxation of Pass Through Costs is Impermissible Double Taxation
Finally, you argue that the assessments for license years 1994-97 are incorrect as impermissible double taxation will result if the Firm is subject to license taxation on gross receipts associated with the performance of subcontracted services because the subcontractors will also be subject to license taxation on these funds. For the reasons set forth below, I cannot agree with this argument. Although some of the authority cited below was issued subsequent to the revision of the BPOL tax effective January 1, 1997, it is based on and reflective of the BPOL law as it existed in the period 1994-96.
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 Sec. 58.1-3700.1. Guidelines Sec.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] 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 lawfulness of a BPOL tax on costs passed through to consumers is discussed in Public Document 97-52. In that opinion, a funeral home, as part of the services it provided, contracted with others to provide goods and services to its customers such as casket sprays, opening and closing graves and placing obituaries in the newspaper. The funeral home, not the customer, contracted for these services and paid for the services. The funeral home passed on the costs of these services, without markup, to the consumer. Paying for these services "up front' was determined to be a cost of doing business or an expense of the ultimate service provided by the funeral home. Because these services are a necessary expense of doing business as a funeral home, the receipts from such activities are derived from the exercise of a licensed privilege to do business and are included in the funeral home's gross receipts.3 A gross receipts tax is based upon receipts, not net income. Id.
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 Attorney General has applied the Morrison-Williams Associates, Inc. holding to facts substantially similar to that in the present case. In that opinion, a design-build contractor sought to exclude payments made by it for design services and equipment purchases from its license tax basis. The Attorney General opined that:
-
- [w]hile [the payments] involve goods or services purchased from others, in both instances, they represent payments received by licensed businesses; they must, therefore, be included as a part of the gross receipts of those businesses... In these circumstances, it is irrelevant that the contract provides for some services that, standing alone, may not fall within the statutory definition of services provided by a "contractor'... It is my opinion, therefore, that the license tax in the facts you present should be calculated on the "lump sum turn-key amount' due under the contract. 1991 Op. Att'y Gen. 257 (Citations omitted).
- [w]hile [the payments] involve goods or services purchased from others, in both instances, they represent payments received by licensed businesses; they must, therefore, be included as a part of the gross receipts of those businesses... In these circumstances, it is irrelevant that the contract provides for some services that, standing alone, may not fall within the statutory definition of services provided by a "contractor'... It is my opinion, therefore, that the license tax in the facts you present should be calculated on the "lump sum turn-key amount' due under the contract. 1991 Op. Att'y Gen. 257 (Citations omitted).
-
[n]o exemption exists for instances where a contractor enters into an agreement for completion of an entire project and subsequently agrees with a subcontractor for the latter to perform a part of the work on the project. Consequently the ... contractor and his subcontractor each must determine the amount owed as a license fee on the gross amount of the contracts accepted by him during the prior year. 1976-77 Op. Att'y Gen. 272, 272.
The Firm acts unlike an agent in other ways. For example, the Firm treats the cost of subcontracted services as part of its gross income for federal income tax purposes. An agent does not account for the receipt and disbursal of trust funds on an income tax return. These funds are not trust funds, but taxable gross receipts. The Firm is not an agent of its clients in this capacity. Payments received by the Firm from its clients on account of subcontracted services are attributable to the licensable privilege of providing architectural services and must be included in gross receipts. For these reasons, it is my determination that the assessments for license years 1994-97 do not err on the grounds of double taxation.
Local License Taxation of Professional Corporations and their Shareholders
Although not raised as grounds for error in the application for correction, the license years 1994-97 assessments were not properly calculated. Chapter 7 of Title 13.1 of the Code of Virginia ( Sec.13.1-542 et seq.) governs professional corporations, which are corporations organized under that chapter to provide enumerated professional services, including those of professional architects. Code of Virginia Sec.13.1-543. Code of Virginia Sec.13.1-554 provides that the shareholders of a professional corporation, not the professional corporation itself, are subject to local license taxation:
-
- Chapter 37 ( Sec. 58.1-3700 et seq.) of Title 58.1, requiring a separate revenue license for each member of a Firm or company of persons practicing any profession or calling which is regulated by the laws of this Commonwealth, shall be applicable to shareholders of professional corporations; and no state or local revenue license shall be required of any professional corporation as prerequisite to the rendering of professional services in this Commonwealth, or any county, city or town therein; provided, however, that if any such county, city or town requires a revenue license for the privilege of practicing any of the professions to which this chapter applies and such license is measured by gross receipts, the gross receipts of a shareholder in a professional corporation shall consist of (1) his salary and (2) such part of the gross receipts of the corporation remaining after the payment of salaries to all the licensed employees as bears the same ratio to all such remaining gross receipts as his ownership in the corporation bears to the ownership therein of all the shareholders.
- Chapter 37 ( Sec. 58.1-3700 et seq.) of Title 58.1, requiring a separate revenue license for each member of a Firm or company of persons practicing any profession or calling which is regulated by the laws of this Commonwealth, shall be applicable to shareholders of professional corporations; and no state or local revenue license shall be required of any professional corporation as prerequisite to the rendering of professional services in this Commonwealth, or any county, city or town therein; provided, however, that if any such county, city or town requires a revenue license for the privilege of practicing any of the professions to which this chapter applies and such license is measured by gross receipts, the gross receipts of a shareholder in a professional corporation shall consist of (1) his salary and (2) such part of the gross receipts of the corporation remaining after the payment of salaries to all the licensed employees as bears the same ratio to all such remaining gross receipts as his ownership in the corporation bears to the ownership therein of all the shareholders.
As each shareholder of a professional corporation is required to have a license, each shareholder is entitled to the benefit of the license tax thresholds introduced as part of the 1996 revisions of Code of Virginia Sec. 58.1-3706 (A):
-
- Except as specifically provided in this section and except for the fee authorized in Sec. 58.1-3703, no local license tax imposed pursuant to the provisions of this chapter ... shall be imposed on any person whose gross receipts from a business, profession or occupation subject to licensure are less than: (i) $100,000 in any locality with a population greater than 50,000; or (ii) $50,000 in any locality with a population of 25,000 but no more than 50,000.
- Except as specifically provided in this section and except for the fee authorized in Sec. 58.1-3703, no local license tax imposed pursuant to the provisions of this chapter ... shall be imposed on any person whose gross receipts from a business, profession or occupation subject to licensure are less than: (i) $100,000 in any locality with a population greater than 50,000; or (ii) $50,000 in any locality with a population of 25,000 but no more than 50,000.
CONCLUSION
I am returning this matter to the City for a re-determination and correction of the license years 1994-97 assessments consistent with this opinion. The City shall make this determination within ninety days after the date of this final state determination. The Firm has not shown sufficient proof that the assessments made by the City for license years 1994-97 are incorrect on any other grounds. 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
1The submitted contract and all attachments will be treated as highly confidential information and will not be subject to publication or distribution.
2A 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 Sec. 58.1-3732(B)(2). 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 Sec.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.
3Subsequent to the issuance of Public Document 97-52, Code of Virginia Sec. 58.1-3732.3 was enacted to provide an exclusion from the gross receipts of funeral homes for the reimbursement of certain business expenses.
Rulings of the Tax Commissioner