How did Virginia classify a wireless LLC for BPOL tax when an FCC-licensed affiliate supplied the licenses needed to operate?

Subject

An agreement between the Taxpayer and its sister affiliate effectively grants the Taxpayer licenses required by the FCC

Plain-English summary

Virginia classified the wireless-service LLC as a telephone company because its agreement with an FCC-licensed sister affiliate effectively gave it the licenses required to operate. Being organized as an LLC rather than a corporation did not prevent that classification.

The taxpayer operated the wireless system while the affiliate formally held the FCC licenses. Their agreement required operation under the licensee's policies and federal communications rules. The Commissioner agreed with the city that this relationship satisfied the telephone-company definition.

Once classified as a telephone company, the taxpayer could not separate its retail-store sales into a second BPOL business. The statutory gross-receipts definition included service revenue and incidental operations, making the store sales ancillary to the telephone business.

The city could not, however, apply its grandfathered 3% rate. The 1972 ordinance protected by the grandfather clause covered local telephone exchange service—described in the ruling as landline service—not later-added wireless or cellular service. The city could apply the statutory one-half-of-one-percent rate instead.

The city also could tax only gross receipts attributable to business in the city. Because the parties disputed the taxpayer's average-revenue-per-user method, the Commissioner remanded that issue for them to develop a reasonable jurisdictional allocation.

What this means for you

• Operational rights supplied through an affiliate agreement can affect BPOL classification even when the operating entity lacks a license in its own name.
• Entity form alone does not control whether a business is a telephone company.
• Retail activity incidental to regulated communications service may remain in the primary business classification.
• A grandfathered local rate cannot automatically expand beyond the services covered by the historical ordinance.
• Localities must exclude receipts attributable to definite places of business elsewhere.

Common questions

Was the taxpayer subject to BPOL as a telephone company? Yes.

Could it separately classify its retail stores? No. Those sales were ancillary to the telephone business.

Did the city's 3% rate apply? No. The grandfathered rate covered local exchange landline service, not this wireless service.

Was the final city receipts amount decided? No. Allocation was remanded for a reasonable method.

Citations and references

• Va. Code §§ 58.1-3703.1, 58.1-3731, 58.1-2600, 58.1-3708(B), 13.1-620(F), and 56-1.
• 1972 Va. Acts ch. 858.
• P.D. 04-6 and P.D. 04-138 (September 16, 2004).
• Op. Va. Att'y Gen. 03-005 (February 18, 2003) and 1995 Op. Va. Att'y Gen. 277.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-21

Original ruling text

February 29, 2008

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 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 2002 through 2004.

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 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 limited liability company that provides wireless telephone service through an agreement with a separate entity that is authorized by the Federal Communications Commission (the "FCC") to provide commercial mobile telephone service to its customers.

The Taxpayer itself is not authorized by the FCC to provide such service to its customers, nor does it hold a certificate of convenience and necessity from the State Corporation Commission (the "SCC"). Because it is organized as a limited liability company, it does not have articles of incorporation or a charter prescribing its organizational purpose. It is, however, subject to annual assessment as a personal communications service ("PCS") by the SCC under the provisions of Va. Code 56-1 et seq.

The Taxpayer classified itself as engaged in two separate business activities for purposes of the BPOL tax: a business service providing wireless communications, and a retail sales business operating sales outlet stores. On December 30, 2003, the City changed the Taxpayer's self-classifications to the single classification of a public service, or telephone company. This classification change effectively changed the rate of assessment applied to the Taxpayer's gross receipts from $.36 per $100 (business service) and $.20 per $100 (retail sales) to 3% (public service company under the grandfather clause). The City assessed the Taxpayer with additional BPOL taxes, including penalties and interest. The City maintained its classification of the Taxpayer in tax year 2004, which resulted in additional taxes owed by the Taxpayer.

The Taxpayer appeals the City's determination. The City asserts it properly reclassified the Taxpayer as a telephone company, that it had the statutory authority to apply a grandfathered tax rate of 3% to the gross receipts of telephone companies and that as a telephone company, the Taxpayer could not segregate its retail sales activities from its primary purpose.

The Taxpayer also asserts that it is due a refund for those taxes paid on gross receipts attributed to its business done in other jurisdictions. While the City agrees with this, it disputes the methodology the Taxpayer utilized in determining the gross receipts attributed to business done in other localities.

ANALYSIS

Virginia Code § 58.1-3731 provides that, for purposes of the BPOL tax, public service companies, including telephone companies, are to be taxed as follows:

Every county, city or town is hereby authorized to impose a license tax, in addition to any tax levied under Chapter 26 (§ 58.1-2600 et: seq.) of this title, on (i) telephone and telegraph companies . . . at a rate not to exceed one-half of one percent of the gross receipts of such company accruing from sales to the ultimate consumer in such county, city or town. However, in the case of telephone companies, charges for long distance telephone calls shall not be included in gross receipts for purposes of license taxation.

Limited Liability Company

The Taxpayer maintains that because it is a limited liability company (LLC) and not a corporation, it cannot be taxed under the provisions of Va. Code § 58.1-3731. Virginia Code § 13.1-620 F provides that entities authorized by the FCC to provide commercial mobile service are not required to incorporate as public service companies. Furthermore, the Attorney General has found that a LLC could be a telephone company. See Op. Att'y. Gen. 03-005 (02/18/2003). The Department agrees with the City in its determination that the fact that the Taxpayer is a LLC does not exclude it from the provisions of Va. Code § 58.1-3731.

What is a Telephone Company?

Virginia Code § 58.1-2600 defines a "telephone company" as:

1. a person holding a certificate of convenience and necessity granted by the State Corporation Commission authorizing telephone service; or

2. a person authorized by the Federal Communications Commission to provide commercial mobile service as defined in § 332(d)(1) of the Communications Act of 1934, as amended, where such service includes cellular mobile radio communications services or broadband personal communications services; or

3. a person holding a certificate issued pursuant to § 214 of the Communications Act of 1934, as amended, authorizing domestic telephone service and belonging to an affiliated group including a person holding a certificate of convenience and necessity granted by the State Corporation Commission authorizing telephone service . . . .

The Department addressed the question of the taxation of telephone companies in Public Document (P.D.) 04-6. In that opinion, the Tax Commissioner found that a company that meets none of the above requirements should be classified as a "business service" for purposes of the BPOL tax. If, however, a taxpayer meets any one of the three requirements, it should be classified as a telephone company subject to the provisions of Va. Code § 58.1-3731.

The Taxpayer asserts that it does not meet any of these three conditions. The Taxpayer, however, has entered into an agreement with a sister affiliate that is licensed by the FCC under the provisions of the Communications Act of 1934. The sister affiliate holds the licenses issued by the FCC necessary to operate wireless telecommunications systems, and the Taxpayer is the operating entity providing the services. The purpose of the agreement is to ensure that, through its relationship with the affiliate, the Taxpayer manages the operation of the! wireless system "in accordance with the policies established by licensee and in accordance with the Communications Act of 1934, as amended and the rules regulations and policies promulgated thereunder by the FCC."

The City contends because the Taxpayer could riot operate the wireless service in Virginia without a license from the FCC, the agreement between the Taxpayer and its sister affiliate effectively grants the Taxpayer the license and, therefore, it meets one of the conditions set forth in Va. Code § 58.1- 2600. I agree with the City. It is my opinion that the Taxpayer is a telephone company subject to the provisions of Va. Code § 58.1­3731.

Separate Businesses

The Taxpayer claims that it provides a business service. Having established that the Taxpayer is a telephone company subject to the provisions of Va. Code § 58.1­3731, the question of whether the Taxpayer's retail sales constitute a second business is moot. The gross receipts of telephone companies are defined in Va. Code § 58.1­2600 as:

the total of all revenue derived in the Commonwealth, including but not limited to income from the provision or performance of a service or the performance of incidental operations not necessarily associated with the particular service performed, without deductions for expenses or other adjustments.

This issue has previously been addressed by the Department in P.D. 04-138 (09/16/2004) and the Attorney General in Op. Att'y. Gen. at 277 (1995). As a telephone company, the Taxpayer's sales must be considered as ancillary to its primary business as a telephone company, and its gross receipts attributed to its retail sales may not be segregated for a separate rate of taxation.

Grandfather Provision

In 1972, the General Assembly amended Va. Code § 58-578 (recodified at Va. Code § 58.1-3731) to authorize localities to impose a BPOL tax on the gross receipts of telephone and telegraph companies at a rate not to exceed ½ of 1%. Certain localities were permitted to continue to impose the BPOL tax on public service corporations or companies at the rate they imposed the tax prior to the 1972 amendment under an enactment clause included in the bill. See 1972 Acts of Assembly, Chapter 858. The clause states, "Nothing contained herein shall prohibit any city, town or county from continuing to impose any gross receipts tax upon public service corporations at rates no greater than those in effect on January 1, 1972."

As such, certain localities are permitted to impose the BPOL tax on public service corporations at the same rate they imposed prior to the 1972 legislation. In 1972, the City imposed a local license tax on the gross receipts "accruing from sales" of telephone companies, as defined in the City's ordinances in 1972, at the rate of 3%.

The City contends that this provision applies to its current ordinance. Section 98-635 of the City's current ordinance reads in pertinent part:

Except as may be specifically otherwise provided by this article or other law . . . Any person with gross receipts greater than $100,000.00 will be liable for business license taxes at the applicable rate set forth as follows for the class of enterprise listed or as otherwise provided in this article:

16) For telephone companies, three percent of the gross receipts from all local telephone service within the city. [Emphasis added.] (Code 1993, § 27-315).

The definition of telephone service in the City's ordinance in effect in 1972 was far more restrictive than is the definition in the City's current ordinance, however. The City ordinance as of January 1, 1972, read in pertinent part as follows:

Every person engaged in the telephone business, for the privilege of doing business in the city, but not including any business done to or from points without the state . . . shall pay an annual license tax for such privilege of three percent of the gross receipts from local telephone exchange service within the city . . . [Emphasis added.]

A "local telephone exchange service" is different than "all local telephone service." Virginia Code § 56-1 defines local exchange telephone service as:

telephone service provided in a geographical area established for the administration of communication services and consists of one or more central offices together with associated facilities which are used in providing local exchange service. Local exchange service, as opposed to interexchange service, consists of telecommunications between points within an exchange or between exchanges which are within an area where customers may call at rates and charges specified in local exchange tariffs filed with the Commission.

The Taxpayer contends that even if it is a public service corporation, it is subject to the ½ of 1% of gross receipts rate used for public service corporations, not the City's grandfathered 3% rate because it does not operate "a local telephone exchange service" within the City.

The grandfather provision allows the 3% rate to apply to those businesses and services listed in the ordinance as of January 1, 1972. It is my determination that this language restricts the application of the grandfather clause to local telephone exchange services, which are commonly known as "landline telephone services." The broadening of the ordinance caused by subsequent amendment cannot allow additional persons to be subject to the grandfather rate. The Taxpayer is a cellular telephone company providing PCS. It does not provide local telephone exchange service. As such, the 3% grandfather rate does not apply to the Taxpayer.

In this case, the City has adopted an ordinance that does not conflict with the definition of "telephone company" that is referenced in Va. Code § 58.1-2600. Therefore, for purposes of BPOL taxation, the City may apply the ½ of 1% rate to the gross receipts of wireless or cellular telephone companies.

Calculation of Gross Receipts

Virginia Code § 58.1-3708 B provides that:

Where a local license tax imposed by any locality is measured by volume, the volume on which the tax may be computed shall be the volume attributable to all definite places of business . . . in such locality. All volume attributable to any definite places of business . . . in any other locality shall be deductible from the base in computing any local license tax measured by volume imposed on him by the locality in which the first-mentioned definite place is located.

The Taxpayer and the City agree that the Taxpayer's gross receipts attributed to business in other jurisdictions should not be included in the City's assessment. At issue is the methodology the Taxpayer used in calculating its gross receipts attributable to its business in the City. The City states that while the Taxpayer provided a list of subscribers in the City, it failed to report the actual gross; receipts attributed to each subscriber. Rather, it used a variable of "average revenue per user" and multiplied that variable by the number of subscribers in the City.

Correspondence between the Taxpayer and the City indicates that the City and Taxpayer had originally agreed to a methodology proposed by the City. I am remanding this issue to the City with instructions to work with the Taxpayer to determine the best method of allocating the Taxpayer's gross receipts by jurisdiction.

DETERMINATION

It is my determination that the management agreement between the Taxpayer and its sister affiliate effectively grants the Taxpayer licenses required by the FCC of all wireless operating companies, thus making the Taxpayer a "telephone company" under the provisions of Va. Code § 58.1-2600. As such, all of the Taxpayer's gross receipts are subject to BPOL taxation under the provisions of Va. Code § 58.1-3731. Based on the City's ordinance in effect at the time the grandfather clause was enacted, and because the Taxpayer is not engaged in "local telephone exchange service" as required by the ordinance as of January 1, 1972, the grandfathered rate of 3% does not apply to the Taxpayer. Finally, the City may only assess those gross receipts attributed to the City. The City and the Taxpayer must determine a reasonable method of apportioning the Taxpayer's receipts attributed to business in the City and to business done in other jurisdictions.

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/1-546886401H