Does a 501(c)(6) nonprofit's revenue from originating, processing, and servicing SBA 504 commercial real estate loans qualify for Virginia's BPOL tax exemption for nonprofit organizations?

Plain-English summary

A Virginia city asked the Department of Taxation for an advisory opinion about whether a nonprofit company was exempt from the local Business, Professional and Occupational License (BPOL) tax. The Company is exempt from federal income tax under IRC § 501(c)(6), and its main business is providing commercial real estate financing on behalf of the U.S. Small Business Administration (SBA) under the SBA's 504 loan program. It earns processing and closing fees for originating those loans and servicing fees for servicing them on the SBA's behalf.

The Tax Commissioner explained that BPOL tax applies to a taxpayer's total gross receipts unless an exemption applies. Virginia Code § 58.1-3703 C 18 a exempts "charitable nonprofit organizations" from BPOL tax entirely (except for receipts from an unrelated trade or business), but that term is defined narrowly to mean organizations exempt under IRC § 501(c)(3) or § 501(c)(19) whose contributions are tax-deductible. Because the Company is exempt under § 501(c)(6) instead, it does not qualify as a "charitable nonprofit organization" and cannot claim this full exemption.

A separate, narrower exemption in Va. Code § 58.1-3703 C 18 b covers other IRC § 501-exempt nonprofits, but only for the portion of their gross receipts that comes from gifts, contributions, and membership dues. Under this provision and 23 VAC 10-500-10, activities the nonprofit performs for consideration that resemble services for-profit businesses also sell for consideration are presumed to be taxable business activity. The ruling found that the Company's loan origination, processing, and closing activities for both nonprofit and for-profit entities are similar to services for-profit commercial lenders provide, so gross receipts from those activities are subject to BPOL tax. The ruling also noted that even if the activities weren't similar to for-profit services, the fees still would not qualify as gifts, contributions, or membership dues, so they would remain taxable either way.

The bottom line is a mixed, receipt-by-receipt answer: to the extent the Company's gross receipts are gifts, contributions, or membership dues, they may be exempt; but its loan origination, processing, and servicing fees are taxable BPOL gross receipts because they are earned for consideration in a manner similar to for-profit lending businesses.

What this means for you

For nonprofit organizations

If your organization is exempt from federal income tax under a subsection other than IRC § 501(c)(3) or § 501(c)(19) (here, § 501(c)(6)), you do not automatically qualify as a "charitable nonprofit organization" for full BPOL exemption purposes. You may still exclude gross receipts that are genuinely gifts, contributions, or membership dues, but fee-for-service revenue -- especially where the service resembles something a for-profit company also sells -- is likely taxable, even if the buyer is another nonprofit or a government-affiliated program like the SBA.

For localities and BPOL administrators

Local commissioners of the revenue who administer BPOL tax can look to whether an organization's IRC exemption falls under § 501(c)(3)/§ 501(c)(19) (potential full exemption as a "charitable nonprofit organization") versus other § 501 categories (potential partial exemption limited to gifts, contributions, and dues under Va. Code § 58.1-3703 C 18 b and 23 VAC 10-500-10). Where an organization's activities are conducted for consideration and resemble for-profit business activity, those receipts are presumed taxable regardless of the organization's nonprofit status.

Common questions

Q: Is every nonprofit organization automatically exempt from BPOL tax?
A: No. Full exemption as a "charitable nonprofit organization" under Va. Code § 58.1-3703 C 18 a is limited to organizations exempt under IRC § 501(c)(3) or § 501(c)(19) whose contributions are deductible under IRC § 170. Nonprofits exempt under other subsections, like § 501(c)(6), do not qualify for this full exemption.

Q: What if a nonprofit doesn't qualify as a "charitable nonprofit organization"?
A: It may still exclude from BPOL gross receipts any amounts attributable to gifts, contributions, and membership dues under Va. Code § 58.1-3703 C 18 b, as long as it is exempt from federal income tax under some subsection of IRC § 501.

Q: Why were the Company's loan fees taxable even though it's a nonprofit?
A: Because the fees were earned for originating, processing, closing, and servicing loans -- activities similar to what for-profit commercial lenders do for consideration. Under 23 VAC 10-500-10, such fee-for-service activity is presumed subject to BPOL tax, and the fees were not gifts, contributions, or membership dues either.

Q: Does it matter that the Company was working with the SBA and served nonprofit entities too?
A: No. The ruling notes the Company served both nonprofit and for-profit entities, and the SBA affiliation did not change the character of the origination, processing, and closing fees as consideration for services similar to for-profit lending activity.

Citations and references

• Va. Code § 58.1-3701 -- Department's authority to issue local license tax guidelines and advisory opinions
• Va. Code § 58.1-3700.1 -- definition of "gross receipts" for BPOL tax purposes
• Va. Code § 58.1-3703 C 18 -- BPOL exemption provisions for nonprofit organizations
• Va. Code § 58.1-3703 C 18 a -- definition and exemption for "charitable nonprofit organization"
• Va. Code § 58.1-3703 C 18 b -- exemption for other § 501 nonprofits limited to gifts, contributions, and membership dues
• 23 VAC 10-500-10 -- regulation addressing nonprofit gross receipts and activities conducted for consideration

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-152

Original ruling text

September 1, 2020

Re: Request for Advisory Opinion

Business, Professional and Occupational License (BPOL) Tax

Dear *:

This is in response to your letter in which you request an advisory opinion on behalf of the * (the “City”) concerning whether the business activity of a nonprofit company (the “Company”) as described below is exempt from the Business, Professional and Occupational License (BPOL) tax.

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 fact presented to the Department summarized below. Any change in these facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and regulation 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 Company is a nonprofit organization exempt from federal income taxation under Internal Revenue Code (IRC) § 501(c)(6). The Company’s primary business activity is providing commercial real estate financing on behalf of the United States Small Business Association (SBA) and is authorized to transact their 504 loan program. The Company receives revenue from processing and closing fees for originating 504 loans and servicing fees for servicing the loans on behalf of the SBA. The City requests guidance as to whether the taxpayer qualifies for the BPOL tax exemption under Virginia Code 58.1-3703 C 18 for certain gross receipts of nonprofit organizations.

OPINION

The BPOL tax is based on a taxpayer’s gross receipts, which are defined in Virginia Code § 58.1-3700.1 as “the whole entire total receipts, without deduction.” Virginia Code § 58.1-3703 C 18 a, however, prohibits localities from imposing a BPOL tax on a charitable nonprofit organization unless the organization has receipts from an unrelated trade or business. Under the statute, a “charitable nonprofit organization” is:

An organization which is described in Internal Revenue Code § 501(c)(3) or 501(c)(19), and to which contributions are deductible by the contributor under Internal Revenue Code § 170, except that educational institutions exempt from federal income tax under IRC § 501(c)(3) shall be limited to schools, colleges and other similar institutions of learning.

If the Company has been certified by the IRS as a nonprofit organization under IRC § 501(c)(6), it would not be a charitable nonprofit organization exempt under this provision.

Virginia Code § 58.1-3703 C 18 b provides an exemption to other nonprofit organizations to the extent gross receipts are on or measured by gifts, contributions and membership dues. Such organizations must still be exempt from federal income tax under § 501 of the IRC. See Title 23 of the Virginia Administrative Code (VAC) 10-500-10. Based on the facts as described, the Company’s gross receipts could be exempt to the extent that they are attributable to gifts, contributions and membership dues.

Under the provisions of Virginia Code § 58.1-3703 C 18 b and Title 23 VAC 10-500-10, however, activities conducted for consideration that are similar to activities that are conducted for consideration by for-profit businesses may be presumed to be activities that are subject to licensure. The City indicates that the Company collaborates with the SBA originating, processing and closing commercial real estate loans for both nonprofit and for-profit entities. The originating, processing and closing of commercial real estate loans are similar to activities conducted for consideration by for-profit businesses. Therefore, to the extent the Company has gross receipts derived from such activities, they would be subject to BPOL tax. Even if the activities were not similar to activities conducted for consideration by for-profit businesses, these gross receipts were not attributable to gifts, contributions and membership dues and thus would remain taxable.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3383.A