As a locality, can we tax nonprofit hospital-affiliated wellness centers, physical therapy clinics, home health agencies, and diagnostic labs under BPOL, business personal property, or real property tax just because they compete with for-profit businesses doing the same thing?

Plain-English summary

A Virginia city asked the Department for an advisory opinion on how three local taxes -- the BPOL (business license) tax, business tangible personal property (BTPP) tax, and local real property tax -- apply to a range of nonprofit healthcare-related entities affiliated with a hospital: wellness centers/fitness gyms open to the public, outpatient physical therapy centers, home health agencies, outpatient labs, and diagnostic centers. Several of these entities offer services similar to, and compete for the same customers as, ordinary for-profit businesses (private gyms, PT clinics, labs). The city wanted to know whether that competitive overlap changed the tax analysis.

The core rule: a genuine 501(c)(3) is exempt from BPOL, full stop, unless it has UBTI. Virginia law flatly prohibits localities from imposing BPOL tax on the gross receipts of an organization described in IRC § 501(c)(3) (or § 501(c)(19)) UNLESS that organization has unrelated business taxable income (UBTI) under federal tax rules -- income from a trade or business not substantially related to the organization's exempt charitable/educational purpose. Competing with for-profit businesses, or performing activities that look just like what a for-profit competitor does, does NOT by itself create UBTI or otherwise open the door to local taxation -- Virginia's Supreme Court has held that when a statute's language is plain, it must be followed as written, and this statute's language doesn't carve out an exception for competitive overlap.

Localities can't "look behind" valid 501(c)(3) status. Even where a nonprofit conducts activities for money that look identical to a for-profit competitor's business, a local tax official cannot second-guess or override the IRS's own § 501(c)(3) determination -- eligibility for the BPOL exemption is based SOLELY on whether the organization actually holds that federal designation, not on how "business-like" its operations appear. The only thing a local official CAN independently determine is whether specific receipts constitute UBTI under IRC §§ 511-513.

Each separate legal entity must independently qualify -- exemption doesn't automatically transfer. If a hospital's nonprofit parent corporation also operates, say, a convalescent or retirement center as its OWN separate legal entity, that center must independently hold 501(c)(3) (or similar) status to get the BPOL exemption -- it can't simply borrow the parent's nonprofit status. And it doesn't matter whether a qualifying facility sits ON the main hospital campus or somewhere else entirely -- location isn't a factor once the entity itself has valid exempt status.

BTPP and real property tax turn on local classification/designation, not the federal 501(c)(3) test directly. For property taxes, Virginia's Constitution requires exemptions to be established by classification or designation (pre-2003 rules) or by local ordinance (post-2003, under Va. Code § 58.1-3651) -- so whether these healthcare entities' PROPERTY is exempt depends on whether the city has actually granted that exemption through one of those mechanisms, not simply on 501(c)(3) status alone. The Department flagged, however, that it lacks authority to issue a BINDING opinion specifically on local real property tax (as distinct from BPOL and BTPP), even while describing how the relevant exemption framework would likely apply.

What this means for you

Nonprofit hospital systems operating wellness centers, PT clinics, home health agencies, labs, or diagnostic centers

Competing with for-profit businesses for the same customers doesn't cost you your BPOL exemption -- as long as your entity genuinely holds IRC § 501(c)(3) (or § 501(c)(19)) status and the specific receipts at issue aren't UBTI, a locality cannot tax your gross receipts just because your services resemble a for-profit competitor's.

Localities/Commissioners of the Revenue evaluating nonprofit healthcare affiliates

You cannot look behind a valid § 501(c)(3) determination to tax an entity's BPOL receipts based on how "commercial" its activities look -- your independent authority is limited to determining whether specific receipts constitute UBTI under federal law; competitive overlap with for-profit businesses isn't itself a basis for taxation.

Hospital systems structuring related nonprofit entities (parent corporations, affiliated centers)

Each separately incorporated entity needs its OWN valid tax-exempt determination -- a subsidiary or affiliate (like a convalescent/retirement center) can't simply inherit the parent's 501(c)(3) status for BPOL exemption purposes, and for property tax exemption, check whether the LOCALITY has actually classified, designated, or (post-2003) passed an ordinance exempting that specific entity's property.

Common questions

Q: Does it matter if our nonprofit healthcare facility is located on the hospital campus or somewhere else in the city?
A: No -- once the entity itself holds valid IRC § 501(c)(3) status, its physical location relative to the main hospital campus doesn't affect BPOL exemption eligibility.

Q: Can a locality tax a nonprofit's receipts just because it performs the same kind of paid services as a for-profit competitor?
A: No -- the exemption turns on the organization's actual 501(c)(3)/(c)(19) status and whether specific receipts are UBTI, not on how similar its activities look to a for-profit business's.

Q: Who decides whether a nonprofit's receipts count as unrelated business taxable income (UBTI)?
A: The LOCAL taxing official makes that determination, but only by applying the federal UBTI rules under IRC §§ 511 et seq. -- it isn't a broader discretionary call about how "business-like" the activity seems.

Citations and references

• DKM Richmond Associates, L.P. v. City of Richmond, 249 Va. 401, 407, 457 S.E.2d 76, 80 (1995) -- tax exemption statutes are strictly construed against the taxpayer and in favor of the taxing authority
• Shelor Motor Co. v. Miller, 261 Va. 473, 479, 544 S.E.2d 345, 348 (2001) -- when statutory language is plain and unambiguous, courts (and the Department) are bound by its plain meaning
• Department of Taxation v. Wellmore Coal Corp., 228 Va. 149, 320 S.E.2d 509 (1984) -- property tax exemptions must be strictly construed under Va. Const. Art. X, § 6(7)(f)
• Attorney General Opinion 09-43 (2009) -- the nonprofit BPOL exemption does not extend to a for-profit entity wholly owned by a nonprofit organization
• Public Document 01-104 (8/15/2001) -- BPOL nonprofit exemption eligibility is determined solely by reference to IRC provisions
• Public Document 08-12 (1/11/2008) -- cited alongside P.D. 01-104 and P.D. 97-192 on the nonprofit healthcare BPOL exemption
• Public Document 97-192 (4/21/1997) -- confirms non-hospital medical/healthcare services by § 501(c)(3) organizations are BPOL-exempt absent UBTI
• Public Document 13-176 (10/3/2013) -- the BPOL exemption does not carry over to receipts of related entities regardless of their own profit status
• Public Document 13-218 (12/12/2013) -- cited on the nonprofit healthcare BPOL exemption and UBTI
• Public Document 15-17 (2/4/2015) -- cited regarding the Department's lack of authority over local real property tax opinions, while property/BPOL exemption statutes may still apply in parallel
• Public Document 18-138 (7/12/2018) -- confirms post-2003 local-ordinance property tax exemptions under Va. Code § 58.1-3651 exempt both BTPP and real property

Subject

Exemptions : Organization - Nonprofit; Tangible Property : Exemption - Organization, Nonprofit; Real Property - Authority to Issue Rulings

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-55

Original ruling text

May 4, 2021

Re: Request for Advisory Opinion

Business, Professional & Occupational License (BPOL) Tax

Business Tangible Personal Property (BTPP) Tax

Local Real Property Tax

Dear *:

This will reply to your letter in which the city of * (the “City”) requests an advisory opinion regarding whether certain not for profit medical service business are exempt from the Business, Professional & Occupational License (BPOL) Tax, Business Tangible Personal Property (BTPP) Tax and the local real property tax.

The local license fee and tax are imposed and administered by local officials. Virginia Code § 58.1-3701 authorizes the Department to issue advisory opinions on local license tax issues. The BTPP tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue advisory opinions on local business tax matters. The following opinion has been made subject to the facts 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, regulations and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.

FACTS

A local taxing official has requested an advisory opinion as to whether the exemption from BPOL tax for nonprofit organizations is applicable to facilities and entities providing health care related services and whether such facilities would also be exempt from taxes on BPOL and real property.

OPINION

1) Are non-hospital medical and healthcare services provided by IRC § 501(c)(3) organizations exempt from the local business tax under Virginia Code § 58.1-3703 C 18 a?

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 nonprofit organization unless the organization has receipts from an unrelated trade or business. Under the statute, a “nonprofit organization” is:

an organization which is described in Internal Revenue Code § 501(c)(3) and to which contributions are deductible by the contributor under Internal Revenue Code § 170, except that educational institutions shall be limited to schools, colleges and other similar institutions of learning.

IRC § 501(c)(3) defines nonprofit organization as:

Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual . . .

By reason of their character as legislative grants, statutes relating to exemptions allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See DKM Richmond Associates, L.P. v. City of Richmond , 249 Va. 401, 407, 457 S.E.2d 76, 80 (1995). Under Title 23 of the Virginia Administrative Code (VAC) 10-500-10 and 10-500-¬40 A 11, the determination as to whether or not an organization is eligible for this exemption for BPOL taxation purposes is based solely by reference to the relevant provisions of the IRC. See also Public Document (P.D.) 01-104 (8/15/2001) and P.D. 08-12 (1/11/2008).

If an organization meets these requirements, it is exempt from the imposition of a license fee or gross receipts tax unless it has unrelated business taxable income (UBTI). The exemption, however, does not apply to a for-profit entity that is wholly owned by a nonprofit organization. See Attorney General Opinion 09-43 (2009). Further, an otherwise exempt nonprofit organization may be subject to BPOL tax on receipts resulting from UBTI as determined under IRC § 511, et seq .

Pursuant to IRC § 513, UBTI is gross income derived from any unrelated trade or business. Unrelated trade or business means any trade or business the conduct of which is not substantially related to the exercise or performance by such organization of its charitable, educational or other purpose or function constituting the basis for its exemption under IRC § 501. Unrelated trade or business income does not include any trade or business: i) in which substantially all of the work in conducting such trade or business is carried on for the organization by another person or organization without compensation, ii) where the activity is carried on for the organization's members, or iii) where the activity is the selling of merchandise received by the organization as gifts.

Accordingly, non-hospital medical and healthcare services provided by IRC § 501(c)(3) organizations are exempt from the BPOL tax unless it has UBTI. An otherwise exempt medical and healthcare services provider may be subject to the BPOL tax on receipts resulting from UBTI. See P.D. 97-192 (4/21/1997), P.D. 08-12 and P.D. 13-218 (12/12/2013).

2) Are other facilities operated by a nonprofit hospital’s parent corporation, such as a convalescent or retirement center, exempt under Virginia Code § 58.1-3703 C 18 a?

Virginia Code § 58.1-3703 C 18 a permits an exemption from BPOL taxation for the receipts of a “nonprofit organization” described in IRC § 501(c)(3) or § 501(c)(19). The exemption does not apply to receipts from UBTI. In addition, the exemption would not carryover to the receipts of related entities, whether or not such entities are conducted for profit or not. See P.D. 13-176 (10/3/2013).

Generally, each separate entity must be designated as an exempt entity under in IRC § 501(c)(3) or § 501(c)(19). In this situation, if a convalescent or retirement center is a separate legal entity and can establish that it is an organization described by IRC § 501(c)(3), it will be exempt from the BPOL.

3) With regard to the exemptions from BPOL, can a distinction be made as to whether the facilities are located on-site or off-site of a parent hospital or medical center campus?

If the entities at issue have the IRC § 501(c)(3) status, then the location of their facilities does not matter for purposes of the exemption allowed by Virginia Code § 58.1-3703 C 18 a.

4) Is the determination of whether a nonprofit organization has UBTI made by the local taxation official?

Pursuant to Title 23 VAC 10-500-10, local officials may only determine whether a nonprofit organization has UBTI pursuant to § 511 et seq . of the IRC.

5) Is it reasonable to conclude that activities conducted by IRC § 501(c)(3) entities for consideration, which are similar to activities conducted for consideration by for-profit businesses are not related to the basis for their exemption under IRC § 501(c)(3)? To what extent can a local tax official look behind the IRC § 501(c)(3) status?

In Shelor Motor Co. v. Miller , 261 Va. 473, 479, 544 S.E.2d 345, 348 (2001), the Court stated, “It is well settled that when the language of a statute is plain and unambiguous, we are bound by the plain meaning of that language.” The plain language of Virginia Code § 58.1-3703 C 18 a clearly prohibits localities from imposing a BPOL tax on a nonprofit organization unless the organization has receipts from an unrelated trade or business. The fact that it receives receipts from performing the same activities as for-profit entities does not allow a local tax official to circumvent the statute. As such, a local tax official cannot “look behind” an entity’s IRC § 501(c)(3) status.

6) How are the BPOL, real, and personal property tax applied to the following nonprofit businesses that conduct activities for consideration similar to activities conducted for consideration by for-profit businesses and compete for the same customers?

Wellness centers and fitness gyms, affiliated with a nonprofit hospital or medical center, offering memberships and classes to the general public;

Outpatient physical therapy centers, to which patients are usually but not always referred by a physician;

Home health agencies, offering products for sale and certain in-home services;

Outpatient laboratories which collect samples, which then may be sent to another facility for testing. The results are sent to the patients physician for diagnosis;

Outpatient diagnostic centers which may conduct a variety of tests, the results of which are usually sent to the patient’s physician for diagnosis. Some diagnostic centers may also provide treatments or procedures.

BPOL Tax

Virginia Code § 58.1-3703 C 18 a, prohibits localities from imposing a BPOL tax on a nonprofit organization unless the organization has receipts that are UBTI. If the nonprofits listed above meet the definition of a nonprofit organization, then their receipts are exempt from the BPOL tax with the exception of those receipts that are UBTI regardless as to whether their activities are the same as for-profit businesses.

BTPP and Real Property Taxes

Article X, § 4 of the Constitution of Virginia provides that all real and tangible personal property shall be segregated for local taxation in such a manner as the General Assembly provides by law. Article X, § 6 of the Constitution of Virginia exempts certain types of property from state and local taxation. Such exemptions must be provided for by classification or designation and subject to such restrictions and conditions as provided by general law. Article X, § 6 (7)(f) of the Constitution of Virginia states that exemptions of property from taxation as authorized under § 6 must be strictly construed. This provision has been consistently enforced in Virginia Supreme Court decisions. See, for example, Department of Taxation v. Wellmore Coal Corp. , 228 Va. 149, 320 S.E.2d 509 (1984).

As authorized by the Constitution of Virginia , the General Assembly established a number of exemptions by classification and designation from real and personal property taxes. Although the Department does not have authority to issue opinions on local real property tax matters, it appears that the exemption statutes would apply to both the real and tangible personal property of the entities at issue. See P.D. 15-17 (2/4/2015).

Prior to January 1, 2003, the Constitution authorized the General Assembly to exempt from local taxation real and personal property owned by certain nonprofit organizations and used for religious, charitable, patriotic, benevolent, cultural or public park or playground purposes by classification or by designation by a three-fourths vote in each house. Virginia Code §§ 58.1-3600 through 3650.1 list the organizations that may claim an exemption from real and personal property tax by either classification or designation, prior to January 1, 2003.

The constitutional amendment that took effect on January 1, 2003 allows local governing bodies to grant by ordinance exemptions from local property taxation, subject to restrictions and conditions provided by general law enacted by the General Assembly. Although the constitutional amendment eliminated the General Assembly’s authority to exempt such property, it allows the General Assembly to impose by general law restrictions and conditions on the localities’ authority to exempt such property.

As such, Virginia Code § 58.1-3651 was passed during the 2003 session of the General Assembly. Virginia Code § 58.1-3651 A provides that:

Pursuant to subsection 6 (a)(6) of Article X of the Constitution of Virginia, on and after January 1, 2003, any county, city, or town may by designation or classification exempt from real or personal property taxes, or both, by ordinance adopted by the local governing body, the real or personal property, or both, owned by a nonprofit organization that uses such property for religious, charitable, patriotic, historical, benevolent, cultural, or public park and playground purposes.

Accordingly, if any of the health care entities listed by the City fall within the classification as exempt or designated as exempt from the local and real property taxes, prior to January 1, 2003, then their personal and real property is exempt from the BTPP and real property taxes provided any other statutory requirements are met. In addition, if the City has exempted the property of any of the listed health care organizations from local and real property taxation by ordinance on or after January 1, 2003, then such personal property is exempt from the BTPP and real taxation. See P.D. 18-138 (7/12/2018).

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/3580.B

Related Documents

97-192

01-104

08-12

13-176

13-218

15-17

18-138