Was an LLC that bought one house and hired a contractor to renovate it engaged in a county-licensable BPOL business?

Plain-English summary

Virginia found that the LLC's one-house investment involved enough business activity to be subject to BPOL licensing, but sent the contractor classification back to the county for reconsideration. The LLC bought a residential property, obtained a building permit, and hired a contractor to rehabilitate it for sale.

Although only one property had been purchased, the LLC was formed to pursue investments for profit. Searching for opportunities, negotiating purchases and contracts, obtaining permits, and managing renovation required time, attention, and labor beyond a passive or isolated receipt of income.

The LLC had no separate office, but one owner and registered agent lived in the county. The Department found that residence could serve as the definite place of business under the circumstances.

The available record supported the county's contractor classification because the only documented activity was improving the LLC's own property for resale. The case was nevertheless remanded so the LLC could document broader investment activities supporting a different classification. Without that evidence, the assessment would remain correct.

What this means for you

• A single renovation project can still constitute business activity when organized and pursued for profit.
• Forming an LLC and performing permits, contracting, research, and transaction work can support BPOL licensing.
• An owner's residence may become the definite place of business when the entity has no separate office.
• The taxpayer must document its actual activities to obtain a BPOL classification different from contractor.

Common questions

Q: Did one property automatically make the LLC a contractor?
A: Not automatically, but the documented improvement-for-resale activity supported that classification unless other evidence showed a different business.

Q: Was the LLC engaged in a licensable business?
A: Yes. The Department found sufficient time, attention, labor, and profit purpose.

Q: Was the assessment finally upheld?
A: The business and location findings stood, but classification was remanded for another documentation review.

Citations and references

• Va. Code §§ 58.1-3700.1, 58.1-3703, 58.1-3703.1, and 58.1-3706.
• 23 VAC 10-500-240 B.
• Virginia Public Documents 97-423, 99-9, 01-89, and 04-83.

Subject

Taxpayer engaged in a licensable business activity purchased a dwelling hired a contractor to rehabilitate the dwelling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-76

Original ruling text

May 23, 2013

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Business, Professional and Occupational License Tax

Dear *:

This final state determination is issued upon the application for correction filed on behalf of your client, * (the "Taxpayer"), with the Department of Taxation. The Taxpayer appeals an assessment of Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by the *** (the "County") for the 2012 tax year.

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, i.e. , 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, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.

FACTS

The Taxpayer is a limited liability company that purchased a residential dwelling in 2012. It hired a contractor to rehabilitate the dwelling. The Taxpayer does not have an office, but an owner who is the Taxpayer's registered agent resides in the County. The County audited the Taxpayer, determined it was engaged in a licensable business activity within its jurisdiction, and issued a BPOL tax assessment for the 2012 tax year.

The Taxpayer appealed the County's assessment. In its final determination, the County determined that the Taxpayer was subject to the BPOL tax as a contractor because it was engaged in the business of purchasing, renovating and selling homes. The Taxpayer filed an appeal with the Tax Commissioner, contending it was not engaged in a licensable business, did not have a definite place of business in the County, and should not be classified as a contractor.

ANALYSIS

Engaged in Business

The BPOL tax is a tax on the privilege of doing business within a locality. A local government body, by ordinance, may levy and provide for the assessment and collection of BPOL taxes on businesses, trades, professions, occupations and callings and upon persons, firms, and corporations engaged in business within the locality. See Va. Code § 58.1-3703. A business is defined in Va. Code § 58.1-3700.1 as a course of dealing which requires the time, attention and labor of the person so engaged for the purpose of earning a livelihood or profit. It implies a continuous and regular course of dealing, rather than an irregular or isolated transaction.

The Taxpayer contends that it was not engaged in a continuing course of business because it purchased, got a permit for, and renovated only one residence. In Public Document (P.D.), 99-9 (1/11/1999), the Department ruled that a limited liability company, like any other person, firm, or corporation, may be subject to BPOL taxation based on its activities at a definite place of business in Virginia. Under Va. Code § 58.1-3700.1, an activity that requires the filing of tax returns, schedules and other documents required only of entities engaged in a trade or business creates a rebuttable presumption that such entity is engaged in a business. Like other business organizations, which are not individuals, a limited liability company is required to file forms with the State Corporation Commission in order to establish itself as a legal entity. Further, in its articles of organization, the Taxpayer affirmed that it was formed to engage in any business, purpose, or activity permitted under Virginia law. Thus, by forming as a limited liability company, the Taxpayer must rebut the presumption that it is engaged in a trade or business.

In P.D. 01-89 (7/11/2001), the Department determined that a limited liability company that leased one commercial property was not engaged in business when its activities were limited to receiving monthly rent and applying the payments to its loan liability. However, the Virginia Supreme Court has held that when a taxpayer conducts activities that require some time, attention, and labor, it may be engaged in business. See City of Portsmouth v. Citizens Trust Company, Trustee , 219 Va. 903, 252 S.E.2d 339 (1979).

The Taxpayer believes its activities have not risen to the threshold of engaging in business. However, the determination as to whether a particular enterprise is engaged in a business must be analyzed in light of all the attendant facts and circumstances.

The Taxpayer states that it was formed for the purposes of making investments of various kinds. Absent any evidence to the contrary, the Taxpayer likely intends to make a profit on these investments. Thus, even though the Taxpayer may not be its members' primary source of livelihood, it is engaged in activities for the purpose of earning a profit. Further, the activity of making investments involves searching for and researching potential investment opportunities, and could require substantial time negotiating and executing transactions. Thus, while the Taxpayer has only purchased one residential property, it was presumably looking for other investment opportunities on a continuous basis.

In this case, the Taxpayer got a building permit and engaged a contractor to renovate the dwelling in order to make it more marketable for sale. These activities required the Taxpayer to apply for a building permit and negotiate a contract with the contractor. In addition, the Taxpayer was likely looking for other investment opportunities. Such activities generally require time, attention, and labor.

Definite Place of Business

Virginia Code § 58.1-3700.1 defines a "definite place of business" as an office or a location at which occurs a regular and continuous course of dealing for thirty consecutive days or more. The statute goes on to state that when an individual engaging in a business activity maintains no definite place of business, their residence is deemed to be the definite place of business. However, even if the Taxpayer did not have an office in the County, the residence of one of the Taxpayer's owners may be a definite place of business.

The Taxpayer asserts that it had no definite place of business because it has no office, no employees and does not hold itself out in any way as being engaged in business in the County. However, one of the Taxpayer's owners did have his residence in the County.

Classification

The BPOL tax is imposed on businesses and professionals for the privilege of doing business in a locality. T he tax is imposed at different rates according to the classification of an enterprise. See Va. Code § 58.1-3706. The classifications are explained under Title 23 of the Virginia Administrative Code (VAC) 10-500-10 et seq. Classification of a specific business must be determined based on consideration of all the facts and circumstances. Some of, the factors to be considered include:

What is the nature of the enterprise's business?

How the enterprise generates gross receipts.

Where the enterprise conducts its business.

Who are the enterprise's customers?

How the enterprise holds itself out to the public.

The enterprise's NAICS code.

The Taxpayer argues that it is not a contractor because it merely purchased one residence that was in disrepair and hired a contractor to make it habitable. The County contends that the Taxpayer should be classified as a contractor because it purchases real estate, hires a general contractor to improve the realty, and then sells the real property for profit.

Title 23 of the Virginia Administrative Code (VAC) 10-500-240 B provides that contractors include "persons who subdivide and improve real estate, and speculative builders who build houses or other buildings with the intention to offer the subdivided lots or completed buildings for sale." In addition, "a business making improvements to its own real estate with the intention of offering the real estate for sale, may be properly classified and subject to the tax as a contractor." See Public Document (P.D.) 04-83 (8/25/2004) and P.D. 97-423 (10/17/1997).

The Taxpayer asserts that P.D. 04-83 and P.D. 97-423 limit the contracting classification to entities that affirm that they are subdividing and improving real estate for sale to future home buyers. The Taxpayer argues that it has not affirmed that it is in the business of renovating real property for future resale. A taxpayer's classification for BPOL purposes; however, is based on a totality of the facts and circumstances, not merely on a taxpayer's affirmations or assertions.

While the Taxpayer contends that it should not be classified as a contractor, it offers no alternative as to how its business activities would be classified. It claims it was formed for the purpose of investing in various kinds of opportunities, but has only provided information concerning its investment in the residential property, for which it has obtained a building permit to rehabilitate and sell. Under the circumstances, the County can only make a determination based on the facts and circumstances that can be substantiated.

DETERMINATION

Based on the evidence provided, I find that the Taxpayer was engaged in sufficient time, attention, and labor to be considered to be a licensable business at a definite place of business in the County. Further, the Taxpayer has failed to provide any evidence that it should not be classified as a contractor for BPOL tax purposes. It is incumbent upon the Taxpayer to furnish documentation satisfactory to the County in order show its proper business classification.

I am, therefore, remanding this case back to the County with the instruction to reconsider the Taxpayer's appeal with regard to its business classification for the 2012 tax year. If the Taxpayer can provide the County with documentation regarding its investment activities beyond purchasing, renovating, and selling real estate, and the review of such documentation satisfies the County that the Taxpayer should be classified as a business other than a contractor, the County must adjust its assessment accordingly.

The County will contact the Taxpayer in order to set a mutually agreeable deadline for providing such documentation. If the documentation is not provided, the assessment will be considered to be correct as issued.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5305954454.B