Which worker-benefit payments could a staffing firm exclude from BPOL gross receipts when workers received Forms W-2 or 1099?

Subject

Staffing-firm benefit exclusion depended on employee classification

Plain-English summary

Virginia said the staffing firm's BPOL exclusion depended on whether the worker was an employee or a true independent contractor. The statute excluded specified employee benefits paid to contract employees during qualifying client assignments, including wages, salaries, payroll taxes, deductions, workers' compensation, and similar expenses.

Benefits paid to W-2 employees were excluded. The opinion also treated benefits paid to workers the firm called employees but issued Forms 1099 as excluded on the stated facts. Payments to true Form 1099 independent contractors generally did not qualify because they were not employee benefits.

Localities could rely on federal payroll-tax classification unless the staffing firm proved that classification erroneous or inapplicable under the common-law factors, including control and who furnished materials. The ruling said it would be unlikely for a worker classified as an independent contractor under the same federal common-law principles to qualify as an employee for this Virginia exclusion.

What this means for you

• Worker labels alone do not control; classification follows the common-law facts.
• Maintain contracts, control evidence, payroll records, benefit details, and federal reporting for each worker category.
• W-2 employee benefits fit the exclusion described in the opinion.
• Payments to true independent contractors generally remain in BPOL gross receipts.

Common questions

Did every Form 1099 payment remain in gross receipts?

No. The opinion distinguished workers treated as employees despite a Form 1099 from true independent contractors.

Could a locality rely on federal classification?

Yes, unless the taxpayer demonstrated that it was erroneous or inapplicable.

Who administers BPOL tax?

Virginia local officials impose and administer it; the Department issued this advisory opinion.

Citations and references

• Va. Code §§ 58.1-3701 and 58.1-3732.4(A).
• 23 VAC 10-500-130.
• P.D. 01-53; IRS Publication 15.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-29

Original ruling text

March 30, 2009

Re: Request for Advisory Opinion

Business, Professional and Occupational License Tax

Dear *:

This is in response to your letter in which you request clarification regarding the application of the Business, Professional and Occupational License (BPOL) tax to staffing firms.

The local license fee and tax are imposed and administered by local officials. Virginia Code § 58.1-3701 authorizes the Department to promulgate guidelines and issue advisory opinions on local license tax issues. The following opinion has been made subject to the facts presented to the Department summarized below. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulations and public documents cited are available online at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.

FACTS

The Taxpayer is a staffing firm whose professional workers include independent contractors that are issued a Form 1099, employees that are issued a Form 1099, and employees that are issued a Form W-2. An opinion is requested as to how such a staffing firm determines the basis for its BPOL tax.

OPINION

Virginia Code § 58.1-3732.4 A provides that the gross receipts of a staffing firm do not include employee benefits paid to a contract employee "for the period of time that the contract employee is actually employed for the use of the client company pursuant to the terms of a PEO services contract or temporary help services contract." The term "employee benefits" is defined by the statute to include "wages, salaries, payroll taxes, payroll deductions, worker's compensation costs, benefits, and similar expenses." The benefits listed are types of payments made to an employee under federal payroll tax rules.

Under Title 23 of the Virginia Administrative Code (VAC) 10-500-130, "The determination as to whether a person is an employee or an independent contractor is based on common law principles and is affected by factors such as control, who furnishes materials, and other factors." Further, localities may rely on an individual's classification as an employee or independent contractor for federal payroll tax purposes unless the taxpayer demonstrates that such classification is erroneous or inapplicable. See Public Document (P.D.) 01-53 (4/30/01).

Based on the facts presented, the benefits paid to the Taxpayer's employees that receive a Form W-2 and employees treated as nonemployees who are issued a Form 1099 would not be included in the Taxpayer's gross receipts. See Internal Revenue Service (IRS) Publication 15.

Benefits paid to independent contractors that receive a Form 1099 do not appear to be the type of benefits that would qualify for the exclusion under Va. Code § 58.1-3732.4. These benefits could only be excluded if the Taxpayer can demonstrate that the classification of the independent contractors is erroneous or inapplicable under Title 23 VAC 10-500-130. However, because both the IRS and Virginia rely on the common law principles to determine whether an individual is an independent contractor or an employee, it is unlikely that the Taxpayer can show that the independent contractors under IRS rules are employees for the purposes of Va. Code § 58.1-3732.4.

If you have any questions regarding this opinion, you may call * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2866760173.B