Could a law firm remove receipts generated by lawyers who left at year-end from the next year's local BPOL base?

Subject

City properly used full prior-year receipts for law firm's BPOL tax

Plain-English summary

Virginia upheld the law firm's 2009 BPOL tax based on its full 2008 gross receipts. Several lawyers left at the end of 2008, and the firm shifted business to offices in other localities, so it subtracted the departed lawyers' receipts from its license application.

The city ordinance measured a previously licensed business's current tax using receipts earned in the base year. Virginia law defined the preceding calendar year as the base year unless the local ordinance selected another period.

Localities had broad authority within statutory limits to set rates, fees, thresholds, and measurement rules. The city's use of 2008 receipts was consistent with its ordinance and the accepted base-year method. The fact that some income would not recur in 2009 did not authorize the firm's adjustment.

What this means for you

• BPOL often uses prior-year receipts rather than current-year income.
• Personnel departures or future revenue changes do not automatically reduce the base year.
• Review the locality's ordinance for its exact measurement period.
• Local BPOL assessments begin with a presumption of correctness on appeal.

Common questions

Which receipts did the city use?

All of the firm's 2008 gross receipts.

Why could the firm not remove departed lawyers' receipts?

They were earned during the ordinance's base year.

Was the 2009 assessment upheld?

Yes.

Citations and references

• Va. Code §§ 58.1-3700.1, 58.1-3703, 58.1-3703.1, and 58.1-3706.
• 23 VAC 10-500-20(A).
• Commonwealth v. County Board, 217 Va. 558 (1977), as cited in the ruling.
• Virginia Public Documents 99-210, 99-229, 00-147, and 04-82.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-36

Original ruling text

April 8, 2010

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Business, Professional and Occupational Licenses Tax

Dear *:

This state determination is issued upon the application for correction filed by * (the "Taxpayer") with the Department of Taxation. You appeal an assessment of Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by the *** (the "City") for the 2008 tax year. I apologize for the delay in the Department's response.

The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct. That is, the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.

FACTS

The Taxpayer is a law firm that has operated continuously in the City since 1983. At the end of the 2008 calendar year, several lawyers left the firm and started their own firm within the City. Another lawyer left the firm to take a position in another locality. At the same time, the Taxpayer made the decision to shift much of its business to offices located in other localities.

The Taxpayer timely applied for its 2009 BPOL license in the City. It calculated the BPOL tax due by reducing its 2008 base year gross receipts by the gross receipts generated by the three lawyers that had left the firm. The City issued an assessment for the 2009 tax year based on the Taxpayer's entire gross receipts for 2008. The Taxpayer contests the assessment and contends its method of determining taxable gross receipts is reasonable, while the City's method imposes a tax on income that will not be received by the Taxpayer.

ANALYSIS

The City's municipal code provides in pertinent part:

The license tax of every business who was licensed for the previous full license year shall be computed for the current license year on the amount of gross receipts, gross sales, gross purchases or gross commissions as may be applicable, which the licensee earned in the base year

The Taxpayer contends that Code of Virginia does not give the City the authority to calculate its tax liability for the license year using its base year gross receipts.

Virginia follows the Dillon Rule of strict construction, which provides that "municipal corporations have only those powers expressly granted, those necessarily or fairly implied therefrom, and those that are essential and indispensable." Commonwealth v. County Bd. , 217 VA. 558 (1977) (quoting Bd. Of Supvrs. V. Home , 216 Va. 113 (1975)). (Emphasis added.) Additionally, the powers of local governments "are fixed by statute and are limited to those conferred expressly or by necessary implication." Id . See A.G. Opinion 06/22/1995.

Virginia Code § 58.1-3703 authorizes localities to enact an ordinance levying a local license (BPOL) tax or a fee, or both for issuing a license. Every ordinance adopted or maintained by a locality that levies a license tax is required to be substantially similar to the provisions in Va. Code § 58.1-3703.1. Further, Va. Code §§ 58.1-3703 and 58.1-3706 set statutory maximums for license rates and fees. Localities may choose not to require a license or impose fees, or localities may assess rates and fees that are less than the maximums stated in the statute. See Title 23 of the Virginia Administrative Code (VAC) 10-500-20 A. As such, Va. Code §§ 58.1-3703 and 58.1-3706 are permissive statutes that allow localities a wide latitude to set rates and establish gross receipt thresholds within the statutory maximum amounts.

Thus, while Va. Code § 58.1-3700.1 defines "gross receipts" as the whole, entire, total receipts, without deduction, it does not limit localities to assessing BPOL tax on gross receipts generated during the license year. In fact, common practice has been to assess the BPOL tax based on gross receipts from the calendar year immediately preceding the tax year for which the license is required. Virginia Code § 58.1-3700.1 defines the calendar year preceding the license year as the "base year" unless a locality's ordinance provides a different period for measuring gross receipts. This practice has been recognized and accepted in prior determinations by the Department. See Public Documents 99-210 (07/28/1999), 99-229 (08/10/1999), 00-147 (08/09/2000) and 04-82 (08/25/2004).

DETERMINATION

The City imposes a license tax on base year gross receipts. Its ordinance does not provide for a different period for measuring gross receipts. The City assessed the BPOL tax in a manner consistent with state law and its local ordinance. Accordingly, I find that the City properly determined the Taxpayer's 2009 license tax based on 2008 gross receipts. As such, the City's assessment issued to the Taxpayer for the 2009 tax year is upheld.

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

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3687116180.B