Could a securities broker exclude commissions passed to independent representatives from BPOL gross receipts?

Subject

Independent-representative commissions generally stayed in BPOL receipts

Plain-English summary

Virginia said the securities broker generally had to include the entire customer fee in BPOL gross receipts, including the commission remitted to an independent representative. The special real-estate-broker exclusion did not extend to a similar business model.

The commission could be excluded only if the broker proved a qualifying agency relationship: contracts with both client and third party, segregated or fiduciary accounting for pass-through receipts, and no reporting of those costs on the broker's federal income-tax return.

What this means for you

• Industry-specific BPOL exclusions are narrowly applied.
• Ordinary business costs paid from customer receipts remain gross receipts.
• A true agency pass-through requires all stated contractual, accounting, and reporting safeguards.

Citations and references

• Va. Code §§ 58.1-3700.1, 58.1-3701, and 58.1-3732.2.
• P.D. 97-52 and 01-38.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-48

Original ruling text

April 27, 2009

Re: Request for Advisory Opinion

Business, Professional and Occupational License Tax

Dear *:

This is in response to your letter in which you request an advisory opinion regarding the applicability of the Business, Professional and Occupational License (BPOL) tax to security and commodity brokers and services.

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 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 on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.

FACTS

The Taxpayer is a registered security and commodity broker/dealer with a definite place of business in the * (the "City"). The Taxpayer utilizes a network of independent representatives to provide investment advice and financial services. These representatives are responsible for obtaining a BPOL license in the locality where they operate.

Sales proceeds from the investment products, including a fee, are remitted to the Taxpayer by a client. The Taxpayer retains a portion of the fee and remits the remainder as a commission to the independent representative that made the sale..

For BPOL tax purposes, the Taxpayer has asserted that it should be assessed only upon those receipts attributed to the portion of the fee it keeps and not the gross commission from a transaction to eliminate double taxation among localities. The Taxpayer believes it should be treated in a manner similar to real estate brokers. The City avers that the Taxpayer's gross receipts should include the entire fee. The City and the Taxpayer have agreed to request this advisory opinion to clarify the matter.

OPINION

For purposes of the BPOL tax, gross receipts means "the whole, entire, total receipts, without deduction." See Va. Code § 58.1-3700.1. In determining the BPOL tax, however, the Code of Virginia does provide a number of exemptions and exclusions from gross receipts.

For example, Va. Code § 58.1-3732.2 provides for the exclusion of desk fees and overhead costs from the gross receipts of a real estate broker whose agent: (1) receives full commission from a sale minus adjustment for the business license tax paid by the broker, and (2) pays the broker a desk fee. It is well established that exclusions or exemptions must be narrowly construed against the taxpayer. See DKM Richmond Associates v. City of Richmond , 249 Va. 401 (1995). As such, even though the Taxpayer in this case may operate in a manner similar to a real estate broker, the exemption under Va. Code § 58.1-3732.2 does not apply to the Taxpayer.

Further, the lawfulness of a BPOL tax on costs passed through to consumers is discussed in Public Document (P.D.) 97-52 (2/10/1997). In that opinion, a taxpayer, as part of the services it provided, contracted with other business entities to provide goods and services to its customers. The taxpayer, not the customer, contracted for these services and paid for the services. The taxpayer passed on the costs of these services, without markup, to the consumer. Paying for these services was determined to be a cost of doing business or an expense of the ultimate service provided by the taxpayer. Because these services were a necessary expense of doing business, the receipts from such activities were derived from the exercise of a licensed privilege to do business and were included in the taxpayer's gross receipts. The BPOL tax is based upon gross receipts, not net income.

As such, a business that is not the legal agent of its customer may not exclude from its BPOL taxable gross receipts monies it receives from its customer as payment for costs incurred by the business with others who have no contractual relationship with the customer. See Alexandria v. Morrison- Williams Associates, Inc. , 223 Va. 349 (1982). Certain monies, however, received by an agent for reimbursement of costs incurred on behalf of a principal are not included in the agent's gross receipts. See 1985-1986 Op. Att'y Gen . 281.

However, in some instances, an agency relationship meeting specific criteria enables a taxpayer to exclude certain receipts from the calculation of gross receipts. These criteria, established in P.D. 01-38 (4/12/2001), are: (1) there must be a contractual relationship between a taxpayer and both the client and the contracted third party; (2) the taxpayer cannot commingle its funds with all other sources; it must have a separate accounting system or a fiduciary account where the pass through receipts are recorded; and (3) the taxpayer does not report these "pass through costs" on its federal income tax return. For BPOL tax purposes, all of the monies that pass through the Taxpayer to the independent representative constitute the Taxpayer's gross receipts unless the Taxpayer can meet the criteria set forth in P.D. 01-38.

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

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3248924738.o