Tax Type
BPOL Tax
Local Taxes
Description
Employee leasing company
Topic
Local Power to Tax
Date Issued
11-29-1999
November 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 an application for correction of BPOL taxes assessed by the Commissioner of the Revenue of the ***** (the "County'). This appeal was filed by ***** (the "Taxpayer') with the department pursuant to Code of Virginia § 58.1-3703.1(A)(5)(c). 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 with the exception of those appeals in which a local ordinance is relevant to the appeal of an assessment. 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.
This determination addresses the question of whether or not a professional employer organization which passes on the cost of its employees to its clients is entitled to exclude these amounts from its gross receipts. Copies of cited sources are enclosed *****
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 Taxpayer states that it is a professional employer organization or employee leasing company. The Taxpayer "co-employs' its client's employees and leases the employees back to the clients. This arrangement allows the clients to outsource their payroll functions and provide the employees with better benefits.
The Taxpayer has submitted a typical "Client Service Agreement' and related forms to illustrate the services that it provides and the contractual obligations associated with the provision of these services. The employees are not parties to the Client Service Agreement.
The Client Service Agreement provides that:
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- [The Taxpayer] shall have sufficient authority so as to maintain a right of direction and control over leased employees assigned to Client's location, and shall retain authority to hire, terminate, discipline and reassign leased employees, as directed by client... Client retains such sufficient direction and control over the leased employees as is necessary to conduct the Client's business... Additionally, [the Taxpayer] assumes responsibility for the payment of wages to the leased employee without regard to payment by the Client and assumes full responsibility for the payment of taxes and collection of taxes from payroll on leased employees. (Emphasis added)
- [The Taxpayer] shall have sufficient authority so as to maintain a right of direction and control over leased employees assigned to Client's location, and shall retain authority to hire, terminate, discipline and reassign leased employees, as directed by client... Client retains such sufficient direction and control over the leased employees as is necessary to conduct the Client's business... Additionally, [the Taxpayer] assumes responsibility for the payment of wages to the leased employee without regard to payment by the Client and assumes full responsibility for the payment of taxes and collection of taxes from payroll on leased employees. (Emphasis added)
The Taxpayer deposits the Service Fee into its operating account. The Taxpayer deposits the Employee Benefit funds in a "co-mingled trust account.' However, the Taxpayer has not identified any law imposing on it a fiduciary duty.
You have also submitted copies of the Taxpayer's 1996 and 1997 federal income tax returns. On these returns, the Taxpayer recognizes the monies it receives for Employee Benefits as income and takes a deduction for its payment to, or for the benefit of, its employees.
Historically, the Taxpayer has excluded the Employee Benefits payments from its taxable gross receipts.1 As a result of an audit, the County has disallowed this exclusion and assessed additional license taxes for license year 1997.
The Taxpayer contends that it is a disbursing agent with regard to the Employee Benefits payments. Accordingly, these payments are trust funds which should be excluded from its gross receipts. The Taxpayer filed this appeal when its argument was rejected by the County in the final local determination.
ANALYSIS
"Gross receipts' means "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
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- 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.
- 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.2 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 gross receipts monies it receives from its customer as payment for costs incurred by the business. Alexandria v. Morrison-Williams Associates, Inc. 223 Va. 349 (1982).
The Taxpayer is obligated to pay the Employee Benefits to, or for the benefit of, the employees as their employer, not as a disbursing agent. On its federal income tax return, the Taxpayer recognizes the monies it receives for Employee Benefits as income and takes a deduction for its payment to, or for the benefit of, its employees. An agent does not account for the receipt and disbursal of trust funds on an income tax return.
The Attorney General has opined that an employee leasing company may not exclude client payments representing employee salaries and other expenses from its gross receipts. 1985-1986 Op. Att'y Gen. 287. The only fact distinguishing the present appeal from the Attorney General opinion is that the Taxpayer and its clients "co-employ' the employees. However, the liability of a party other than the Taxpayer for these costs does not alter the fact that the Taxpayer is directly liable to the employees for the Employee Benefits as an employer. This liability exists even if the funds are not received from the client.
The Employee Benefits are a cost of doing business. Payments received by the Taxpayer from its clients on account of the Employee Benefits are attributable to the licensable privilege of engaging in business and must be included in gross receipts. Accordingly, it is my determination that the license year 1997 assessment is correct.
CONCLUSION
As the Taxpayer has not shown sufficient proof that the assessment made by the County 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/20994D
1Effective July 1, 1998, the General Assembly enacted Code of Virginia § 58.1-3732.4, which provides an exclusion much like that asserted by the Taxpayer. The present appeal, however, concerns license year 1997 and is governed by prior law.
2Subsequent to the issuance of Public Document 97-52, Code of Virginia § 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