Could the Tax Commissioner reduce estimated city BPOL and meals-tax assessments for a caterer with incomplete records?

Subject

Estimated catering receipts and limits on local-tax appeals

Plain-English summary

The Tax Commissioner could not review the city's meals-and-beverage tax, and the caterer had not yet supplied enough records to overturn the estimated BPOL assessments.

The caterer prepared weekly meals and also catered private events but filed neither local return. With incomplete records, the city estimated receipts using other local catering businesses. The taxpayer said the estimate greatly exceeded its small, intermittent operation, while the city had witness reports and audit observations suggesting more activity.

Virginia's administrative appeal statute did not authorize the Tax Commissioner to decide meals-and-beverage tax disputes. That issue had to follow the circuit-court remedy and deadlines described in the ruling.

For BPOL, advertising by flyer and the acknowledged filing duty showed a licensable business even if the owner called it a hobby and claimed no profit. Estimated assessments were permissible when adequate records were missing. The appeal returned to the city, giving the taxpayer 45 days to provide records sufficient to compute the correct receipts; without them, the estimates would stand.

What this means for you

• The Tax Commissioner's local administrative jurisdiction covers specified taxes and did not include this meals tax.
• A small or unprofitable activity can still be a BPOL business when it is regularly conducted and advertised.
• Missing records allow a locality to estimate gross receipts conservatively.
• The taxpayer bears the burden of replacing an estimate with evidence sufficient to calculate the correct tax.
• This determination did not finally decide the correct receipts; it created a 45-day documentation opportunity.

Common questions

Did the Commissioner decide the meals-tax assessment?

No. The Department lacked statutory authority to consider that appeal.

Was the catering activity a BPOL business?

Yes. The facts showed a regular activity advertised to the public.

Were the city's estimated receipts automatically accepted?

They would stand unless the taxpayer supplied adequate records within 45 days.

Did the taxpayer's own estimate prove the city wrong?

No. It relied on menus, recalled order counts, and claimed closures while other evidence suggested additional catering activity.

Citations and references

• Va. Code §§ 58.1-3700, 58.1-3700.1, 58.1-3703.1, 58.1-3903, 58.1-3981, 58.1-3983.1, and 58.1-3984.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-192

Original ruling text

November 21, 2007

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Business, Professional and Occupational License Tax

Meals and Beverage Tax

Dear *:

This final state determination is issued upon the application for correction filed by you on behalf of * (the "Taxpayer") with the Department of Taxation.

You appeal an assessment of Business, Professional and Occupational License (BPOL) taxes issued to the Taxpayer by the * (the "City") for tax years 2004, 2005 and 2006.

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 catering business that specializes in preparing and delivering meals to elderly residents of the City and an adjacent county on Monday evenings. The sole owner of the Taxpayer does all business purchases, meal preparation and delivery. The Taxpayer advertises only by flyer and by word of mouth.

The Taxpayer did not file BPOL or local food and beverage tax returns or pay the taxes for the tax years in question. Under review, the City discovered that the Taxpayer had engaged in catering special events and private parties in addition to the Monday meal business. The City requested the Taxpayer to provide records to support its gross receipts and sales in the City. When the Taxpayer did not provide complete information, the City issued assessments based on audit results of similar businesses located in the City.

The Taxpayer appeals the assessments of both the local food and beverage taxes and BPOL taxes to the Tax Commissioner. The Taxpayer asserts that the City's assessments are based on estimated receipts that far exceed the amount of actual receipts.

ANALYSIS

Local Food and Beverage Tax

Virginia Code §§ 58.1-3703.1 and 58.1-3983.1 authorize the Tax Commissioner to consider appeals of final local determinations of certain taxes. The ability to file an administrative appeal to the Department for a local tax is limited to the following: the BPOL tax, the business tangible personal property tax, the machinery and tools tax, the merchant's capital tax, the local mobile property tax and the consumer utility tax.

The Tax Commissioner is not authorized to consider appeals of the local food and beverage tax. Therefore, I cannot issue a determination regarding the validity of the food and beverage tax assessments issued to the Taxpayer by the City.

The Taxpayer may appeal assessments of the local food and beverage tax to the circuit court under the provisions of Va. Code § 58.1-3984 A. In the Taxpayer's case, such an appeal must be filed with the circuit court (1) within three years from the last day of the tax year for which the assessment is made, (2) within one year from the date of the assessment, or (3) within one year from the date of the local official's final determination under Va. Code § 58.1-3981, whichever is later.

BPOL Tax

The BPOL tax is a local option tax imposed upon businesses, professionals and other occupations for the privilege of doing business within a given jurisdiction. Virginia Code § 58.1-3700 states, "whenever the local governing body shall impose a license fee or levy a license tax on any business, employment or profession, it shall be unlawful to engage in such business, employment or profession without first obtaining the required license."

The Taxpayer states that the business was operated primarily as a hobby and did not generate a profit. 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." Acts that create a rebuttable presumption that a person is engaged in a business include: (1) advertising or holding oneself out to the public as being engaged in a particular business; or (2) filing tax returns that are required only of persons engaged in a trade or business. The facts presented indicate that the Taxpayer advertised its business through flyers. In addition, the Taxpayer concedes that tax returns should have been filed. Clearly, the Taxpayer is engaged in a business for BPOL tax purposes.

The BPOL tax is imposed on the gross receipts of a business. Virginia Code § 58.1-3700.1 defines gross receipts as "the whole, entire, total receipts, without deduction." The Taxpayer failed to produce sufficient records in order to determine the exact amount of gross receipts subject to BPOL tax. Absent such records, the City issued assessments in accordance with Va. Code § 58.1-3903. These assessments were based on information about gross receipts of other caterers located in the City.

The Taxpayer admits that it did not maintain complete and accurate records. Even so, the Taxpayer argues that the City's assessments grossly overstate the revenues actually received. The Taxpayer further asserts that the City has admitted estimating the assessments using the largest full-time catering operation in the City. The Taxpayer argues that its business was conducted only once a week and did not operate at all for almost one­third of the tax years at issue.

Virginia Code § 58.1-3703.1 A 9 requires taxpayers to keep sufficient records to enable the local taxing authority to verify the correctness of the tax paid for the license years assessable and determine the correct amount of tax assessable. When a business fails to do so, it is incumbent upon the local tax authority to take action to promote compliance. One method of inducement is to make estimated assessments. Such assessments are made in such a way as to protect the locality from the possibility of under assessing and persuade a taxpayer to provide the records necessary to make an accurate assessment.

Because its records are incomplete, the Taxpayer has submitted its "best estimate" of the actual monthly sales during the tax years at issue. Its estimate is based on average weekly gross sales for the Mondays that the Taxpayer operated during the tax years at issue. The average weekly sales are based on the Taxpayer's weekly menus for the period and a recollection of the number of orders received.

The Taxpayer's estimate also takes into account periods of time when the business did not operate. The Taxpayer claims that it shut down for almost 4 months when its kitchen was remodeled. The Taxpayer was also closed when the owner was on vacation and for a death in the family.

The City asserts the scope of the Taxpayer's activities was not limited to preparing dinners one night a week. The City has received statements from a number of witnesses in the community stating that the Taxpayer catered private parties during the assessment period. In addition, during the examination the City's auditor observed sufficient activity at the business that would indicate that the Taxpayer is conducting additional catering activity. Further, while the kitchen remodeling could show that the Taxpayer was not in operation during a portion of the tax years at issue, it could also have been a response to an increase in demand or to better handle other catering activities. The City argues that, without records of these other catering activities, the estimated assessments are justifiable.

Pursuant to Va. Code § 58.1-3703.1 A 5 a, an assessment of tax by a local tax authority is deemed prima facie correct. Absent sufficient records, the Department cannot determine the correct amount of gross receipts generated by the Taxpayer's business. The evidence shows that the Taxpayer may have been engaged in business to a greater extent than it has admitted. The fact the business did not operate for the full period at issue indicates that the estimated assessments could be overstated. It is, however, the obligation of the Taxpayer to show that the assessments made by the City are incorrect by providing sufficient evidence to compute the correct amount of tax due.

DETERMINATION

The Department is not authorized to consider appeals of the meals and beverage tax assessments. In regard to the BPOL tax assessments, the Taxpayer is engaged in a licensable business activity. The issue regarding the correct amount of gross receipts for the tax years in question is a factual matter. The Taxpayer has not furnished adequate evidence to prove the assessments made by the City are incorrect. I am returning this appeal to the City with the understanding that if the Taxpayer fails to comply with the requirements of Va. Code § 58.1-3703.1 A 9 within 45 days of the date of this letter, the BPOL tax assessments will stand.

If you have any questions regarding this determination, you may call * Office of Policy and Administration, Appeals and Rulings at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1378958896H