Does a new company owned by the same person as an existing affiliated business still qualify for a locality's new-business BPOL tax break?

Plain-English summary

One individual owned three separate businesses in the City of Chesapeake: an existing registered investment advisor (Business C), plus two newly formed companies -- a third-party administrator for retirement plans (Business A) and a public accounting firm doing tax and bookkeeping work (Business B). Chesapeake, like many Virginia localities, offers new businesses a break on the BPOL (business license) tax: just a $50 flat fee for their first two years, with no BPOL tax otherwise due. The city's own staff told the two new businesses they qualified, and they filed accordingly.

On review, though, the city reversed course: because Businesses A and B were owned by the same person as the pre-existing Business C, the city treated them as part of one "affiliated group" and denied them new-business status, reasoning their formation was really just a "change in business form" of the existing operation rather than a genuinely new business. Under the city's own ordinance, a new entity in an affiliated group only loses new-business eligibility if it conducts activities similar to another member of the group -- if its activities are substantially different, it still counts as new.

The Department sided with the taxpayers, using Virginia's own statewide BPOL service-classification categories as the yardstick for "similar" versus "substantially different." Business C (the pre-existing company) bought and sold securities on commission and was SEC-regulated -- squarely "financial services." Business B, a public accounting firm, fell under the separate "professional services" category (CPAs are expressly listed there). Business A, the retirement-plan administrator, didn't provide investment advice or accounting services at all -- it handled plan design, documentation, and administration -- so it fell into neither of those two categories and landed instead in the BPOL catch-all category, "repair, personal, business and other services." Because all three businesses fell into different classification buckets, that was strong evidence they were substantially different businesses, not just a reorganized version of the same one. The Department was careful to note this isn't a rigid, automatic rule (a law firm and a doctor's office are both "professional services" yet obviously different businesses) -- but here, the classification mismatch supported letting both new businesses keep their new-business tax break, and the city was ordered to abate the assessments.

What this means for you

Entrepreneurs launching a new business alongside an existing one you (or a family member) already own

Being part of an "affiliated group" with an existing business doesn't automatically disqualify your new venture from a locality's new-business incentive. What matters is whether your new business's actual activities are substantially different from what the existing affiliated business does -- and Virginia's own statewide BPOL service classifications (financial services, professional services, and the catch-all "repair, personal, business and other services") are a useful reference point for making that case.

Businesses appealing a "similar business" denial of a new-business incentive

Point to the different BPOL classification categories your business and any affiliated business fall under, and document the actual services each performs. This ruling shows the Department treating a classification mismatch as meaningful (though not automatically dispositive) evidence of a substantive difference.

Localities and their commissioners of the revenue administering similar incentive ordinances

The Department explicitly declined to set a bright-line rule equating "different BPOL classification" with "substantially different business" -- a law firm and a physician's practice are both "professional services" yet clearly distinct businesses. All the facts and circumstances of the specific businesses still need to be weighed.

Common questions

Q: Does owning multiple businesses automatically disqualify a new one from a new-business BPOL tax break?
A: Not by itself. What matters under Chesapeake's ordinance (and similar local incentive programs) is whether the new business's activities are substantially different from an existing affiliated business's activities, not simply common ownership.

Q: How do you measure whether businesses are "similar" or "substantially different"?
A: The Department looked to Virginia's own statewide BPOL service classifications -- financial services, professional services, and the catch-all "repair, personal, business and other services" category -- as a helpful (though not automatically controlling) reference for comparing businesses.

Q: Is a third-party retirement plan administrator the same as an investment advisor for BPOL purposes?
A: No, according to this ruling -- a plan administrator that doesn't give investment advice or do accounting work doesn't fit the "financial services" definition and instead falls into the general "repair, personal, business and other services" category, distinct from an SEC-regulated investment advisory business.

Q: Does this ruling apply to my locality's new-business incentive program?
A: Only if your locality has a similar ordinance; Chesapeake's specific "change in business form" and "affiliated group" definitions in its local code drove this analysis, though Virginia Code § 58.1-3703 D's underlying "qualifying business" standard (first-time location in the locality, not via merger/acquisition/name change/business-form change) applies statewide to any locality offering this kind of incentive.

Citations and references

• Va. Code § 58.1-3703 (local BPOL incentive program authority)
• Va. Code § 58.1-3703.1 (Department authority over BPOL appeals)
• Va. Code § 58.1-3700.1 (definition of "financial services")
• Va. Code § 58.1-3706; 23 VAC 10-500-10 et seq., 10-500-480 (BPOL classification regulations)
• City of Chesapeake Code § 18-3(e)(4), § 18-2 (new-business incentive; "change in business form")

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-95-0

Original ruling text

September 25, 2024

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Business, Professional and Occupational License Tax

Dear *:

This final state determination is issued upon the administrative appeal filed on behalf of * (Business A), and (Business B), (collectively, the “Taxpayers”), with the Department of Taxation. You appeal assessments of the Business, Professional, and Occupational License (BPOL) tax issued to the Taxpayers by ** (the “City”) for the 2021 through 2023 tax years.

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 and regulations cited are available online at law.lis.virginia.gov.

FACTS

The Taxpayers were separate legal entities with their principal offices in the City. Business A, organized in January 2021, provided third-party administration for qualified retirement plans. Business B, organized in January 2022, was a public accounting firm that provided tax and bookkeeping services. The Taxpayers were owned by the same individual that owned * (Business C), a registered investment advisor that operated in the City prior to the formation of the Taxpayers.

The Taxpayers consulted with representatives from the City regarding their business license obligations and were advised that they qualified for a special licensing provision for new businesses by which they would only be charged a $50 license fee for each of the businesses’ first two years and otherwise be exempt from the BPOL tax for those years. Based on this information, the Taxpayers filed business license applications with the City as new businesses for each of their first two tax years.

Under review, the City determined that the Taxpayers did not qualify for the BPOL tax relief for new businesses and issued assessments. The Taxpayers appealed to the City. In its final determination, the City concluded that the Taxpayers were not qualified because they were affiliated with Business C, an existing business, and conducted similar activities as Business C. As a result, the assessments were upheld. The Taxpayers appealed to the Department, contending that they were qualified businesses because they performed activities unrelated to the business of Business C.

ANALYSIS

Virginia Code § 58.1-3703 authorizes localities to enact an ordinance levying a local license tax or a fee, or both, for issuing a license. This tax or fee is imposed on businesses and professionals for the privilege of doing business in a locality.

Virginia Code § 58.1-3703 D provides that localities may establish incentive programs for qualifying businesses. A qualifying business is defined as “a business that locates for the first time in the locality . . . . A business shall not be deemed to locate in such locality for the first time based on merger, acquisition, similar business combination, name change, or a change in business form .” [Emphasis added.]

The City has adopted an incentive program that provides for a $50 license fee for the first two years in which a qualifying business locates within the City. Otherwise, the business is exempt from BPOL tax for those years. See Chapter 18, Article I, § 18-3(e)(4) of the Code of Ordinances , City of Chesapeake , Virginia (the “ City of Chesapeake Code ”). City of Chesapeake Code § 18-2 defines a change in business form for purposes of a qualified business to mean a change in the organization of an existing business, including:

[A] new business entity that meets the definition of “affiliated group,” . . . and such business conducts activities that are similar to one or more of the affiliated businesses. However, a new business entity that meets the definition of “affiliated group” but undertakes a business that conducts substantially different business activities shall not be treated as a change in business form.

Businesses A, B, and C were members of an affiliated group because they were each owned by the same individual. The determination as to Business A’s and Business B’s statuses as qualifying businesses thus turns on whether they conducted similar or substantially different business activities from other members of the affiliated group. In its final determination, the City held that they provided similar services, namely financial services, and thus were not qualified businesses for purposes of the BPOL tax relief for new businesses. On the other hand, the Taxpayers believe that they each provided substantially different services from each other and from those provided by Business C.

The terms “similar” and “substantially different” are not defined for purposes of determining whether a business is a qualifying business. The Department believes it is appropriate, therefore, to consult other provisions of the BPOL statutory framework which address the classification of businesses.

The BPOL tax is imposed at different rates according to the classification of an enterprise. See Virginia Code § 58.1-3706. These classifications are regulated under Title 23 of the Virginia Administrative Code (VAC) 10-500-10 et seq . Classification of a specific business must be determined based on a consideration of all the facts and circumstances. There are two separate classifications of services: “financial, real estate, and professional services,” and “repair, personal, business and other services.” All services not clearly identified as financial, real estate, or professional services fall under the classification of “repair, personal, business and other services.” See Title 23 VAC 10-500-480.

Virginia Code § 58.1-3700.1 defines “financial services” as “the buying, selling, handling, managing, investing, and providing of advice regarding money, credit, securities, or other investments.” Business C is a financial services business because it bought and sold stocks on a commission basis and was regulated by the Securities and Exchange Commission.

Business B, on the other hand, was a public accounting firm. Certified public accountants are expressly included in the definition of “professional services” in Virginia Code § 58.1-3700.1.

Third-party plan administrators, such as Business A, are not included in either list. Business A provided a broad range of services, including plan design and document preparation and daily and annual administration services. Importantly, Business A did not provide any investment advice or accounting services. Absent any evidence to the contrary, Business A would be classified as a provider of “repair, personal, business and other services.”

DETERMINATION

For the reasons discussed above, each of the Taxpayers and Business C would be classified as different types of service providers under the BPOL statutes and regulations. This fact is strong evidence that they were providing substantially different services. Accordingly, in the Department’s opinion, the Taxpayers were qualifying businesses for purposes of the City’s BPOL tax relief for new businesses.

Taxpayers and localities should be aware that in making this determination, the Department is not using BPOL tax classifications to create a “bright-line” test to determine whether or not a business is similar or substantially different for purposes of determining if it was a qualified business. A law firm and a physician’s office, for example, both provide professional services, but they clearly provide substantially different services. Ultimately, all relevant facts and circumstances must be considered in any given case in order to make such determination.

We are remanding the case back to the City to abate the BPOL tax assessments issued to Business A for the 2021 and 2022 tax years and Business B for the 2022 and 2023 tax years, consistent with their status as new businesses under City of Chesapeake Code § 18-3(e)(1).

If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at (804) ***.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/4807.X