Could a business use 2008 receipts for its final BPOL year instead of the prior year's base receipts merely by saying it had ceased operations?

Subject

City used prior-year receipts, but business could still prove a cessation date

Plain-English summary

Virginia held that the city correctly based the 2008 BPOL tax on the business's 2007 gross receipts, but sent the case back for evidence of when operations permanently ceased. The taxpayer argued that its final license year should use current-year receipts and that the statutory result was unfair.

The BPOL base year was generally the calendar year before the license year. The historical proration rule refunded the portion of a paid annual license tax after permanent cessation, but the prorated amount still came from base-year receipts rather than current-year receipts.

The key unresolved issue was the date the business stopped operating for livelihood or profit. Disposing of assets, shutting off phones, and receiving no business income could indicate cessation. Formal dissolution, final tax payments, or keeping a bank account for deferred bills could instead be winding-up activity after cessation.

The taxpayer had provided no facts establishing the date. Virginia remanded the case and allowed 30 days to submit evidence to the city. Without it, the 2008 assessment would be correct.

What this means for you

• Final-year BPOL generally still uses the locality's base-year receipts.
• Permanent cessation can support monthly proration, but the date must be proved.
• Separate profit-seeking operations from later winding-up tasks.
• Preserve asset-disposition, income, staffing, phone, license, bank, and dissolution records.

Common questions

Could the business simply substitute 2008 receipts?

No. Virginia said 2007 was the base year for the 2008 license tax.

Was proration impossible?

No. It depended on proof of the permanent cessation date.

How long did the business have to provide evidence?

Thirty days.

Citations and references

• Va. Code §§ 58.1-3700.1, 58.1-3703.1(A)(5), and 58.1-3710.
• Vaughn Realty of Front Royal, Inc. v. Town of Front Royal, 29 Va. Cir. 135 (1992).
• Virginia Public Document 97-166.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-61

Original ruling text

May 7, 2010

Re: Appeal of Assessment: Final Local Determination

Taxpayer: *

Locality Assessing Tax: *

Business, Professional and Occupational License (BPOL) Tax

Dear *:

This final state determination is issued upon the application for correction filed by you with the Department of Taxation pursuant to Va. Code § 58.1-3703.1. You appeal a final local determination upholding an audit assessment of BPOL tax made by the * (the "City") for tax year 2008.

The local license fee and tax are imposed and administered by local officials. Virginia Code § 58.1-3703.1 (A) (5) authorizes the Department to issue determinations on taxpayer appeals of certain 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 has been made subject to the facts presented to the Department summarized below. The Code of Virginia sections, regulations, and public documents cited are available on-line in the Tax Policy Library section of the Department's web site located at www.tax.virginia.gov.

FACTS

The Taxpayer states that it ceased operations in 2008. The City audited the Taxpayer for the 2006 through 2008 tax years issued a BPOL tax assessment. The largest portion of the assessment resulted from the 2008 tax year.

The Taxpayer believed that it would have an overpayment for the 2008 year. However, the City assessed BPOL tax based on the Taxpayer's entire 2007 gross receipts.

The Taxpayer appealed the assessment to the City, citing a lack of fairness in calculating the final year of BPOL tax that is radically different from the initial year. In its final determination, the City found that the Taxpayer had provided no evidence that it had concluded operations prior to December 31, 2008, and upheld the assessment.

In its appeal, the Taxpayer asks the Tax Commissioner to find that it is entitled to use current year (2008) gross receipts as the basis for the BPOL tax because 2008 is the final year of business. The Taxpayer also argues that the City's application of the rules for the final year of a business result in the Taxpayer being taxed at a rate exceeding 160% of other businesses. The Taxpayer further states that the statute is inconsistent in its treatment of first year and last year licensees.

ANALYSIS

Proration

Virginia Code § 58.1-3710, states:

In the event a person, firm or corporation ceases to engage in a business, trade, profession or calling within a county, city or town during a year for which a license tax based on gross receipts has already been paid, the taxpayer shall be entitled upon application to a refund for that portion of the license tax already paid, prorated on a monthly basis so as to ensure that the licensed privilege is taxed only for that fraction of the year during which it is exercised within the county, city or town.

In Public Document (P.D.) 97-166 (4/11/1997), the Department confirmed that any prorated refund issued to a business that ceases to engage in business must be derived from the base year gross receipts, not the current year gross receipts even if the current year gross receipts do not exceed the tax threshold. Under Va. Code § 58.1-3700.1, a taxpayer's base year is "the calendar year preceding the license year, except for contractors subject to the provisions of § 58.1-3715, or unless the local ordinance provides for a different period for measuring the gross receipts of a business."

For purposes of proration, 'the Warren County Circuit Court of Virginia concluded that a taxpayer that permanently ceases doing business does so when it discontinues business operations "for the purpose of earning a livelihood or profit." See Vaughn Realty of Front Royal, Inc. v. Town of Front Royal , 29 Va. Cir. 135, Not Reported in S.E.2d (1992). Some of the activities the circuit court associated with the permanent cessation of business included the disposition of assets, turning off telephone service, and receiving no business income.

The circuit court also set forth some activities conducted by a taxpayer that would be "incident to its winding up its business" and would not require a taxpayer to get a business license in a locality. Examples of such activities include surrendering a professional license, paying final taxes, formally termination of corporate existence, and maintaining a bank account to hold cash for deferred payables.

The circuit court further stated that a decision as to whether or not a business has permanently ceased to do the business is a determination of fact. Thus, although the activities cited by the circuit court might be indicative of the cessation of a business, all facts and circumstances must be considered. In this case, the Taxpayer has provided no factual information concerning the cessation of its business operations.

DETERMINATION

Based on statutory requirements, the City correctly used the Taxpayer's 2007 gross receipts to determine its 2008 BPOL tax. Further, because the permanent cessation of a business is a factual matter, the Taxpayer must provide sufficient evidence to the City to show when such cessation occurred. Accordingly, I am remanding this case back to the City in order to review any evidence the Taxpayer can provide concerning its permanent cessation of operations. Such evidence must be provided within 30 days of the date of this letter. If no evidence is provided, the assessment of the 2008 tax year will be deemed correct.

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

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3534591140.C