For Virginia BPOL purposes, did converting a sole proprietorship into a single-member LLC create a new business owing a full-year license fee?

Subject

Change in the Taxpayer's legal status created a new and separate business

Plain-English summary

Virginia upheld the city's BPOL license fee because the newly formed single-member LLC was a business entity separate from the owner's sole proprietorship. The owner had operated the same activity as a sole proprietor and continued using the old business license after the LLC began operating in March 2009.

The Tax Commissioner treated the LLC as a beginning business for 2009. The city therefore properly imposed its license fee even though the underlying business activity and owner remained the same.

Virginia also rejected the request to prorate the fee. Although the cited statute could allow a refund of part of a BPOL tax in some fractional-year situations, it expressly did not require a locality to refund any part of a flat fee or minimum flat tax.

The taxpayer's financial-hardship request did not change the assessment. The ruling explained that local officials could consider a written offer in compromise when full collection was substantially doubtful and compromise served the locality's interests, but acceptance was solely within the local official's discretion.

What this means for you

• A change from sole proprietorship to LLC can create a new BPOL taxpayer even when ownership and operations stay the same.
• Do not assume an existing sole-proprietor license automatically carries over to the new entity.
• A locality did not have to prorate the flat license fee addressed in this ruling.
• Financial hardship could support a written compromise request, but the local assessing official controlled that decision.

Common questions

Did alleged incorrect advice from the city cancel the fee?

No. The Tax Commissioner upheld the fee based on the LLC's separate legal status and the governing law.

Did Virginia order the city to accept a payment compromise?

No. The ruling only identified the locality's discretionary compromise authority.

Citations and references

• Va. Code §§ 58.1-3701, 58.1-3703, 58.1-3706, 58.1-3710, and 58.1-3994.
• P.D. 99-237.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-27

Original ruling text

February 28, 2011

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Business, Professional and Occupational License (BPOL) Tax

Dear *:

This state determination is issued upon the application for correction filed by * (the "Taxpayer") with the Department of Taxation. You appeal an assessment of a Business, Professional and Occupational License (BPOL) fee issued to the Taxpayer by the *** (the "City"), for the 2009 tax year. I apologize for the delay in the Department's response.

The local BPOL fee and tax are imposed and administered by local officials. Virginia Code § 58.1-3701 authorizes the Department to issue determinations on taxpayer appeals of BPOL fee and tax assessments. On appeal, a BPOL fee or 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, 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, a single member limited liability corporation, began operating in the City in March 2009. Prior to establishing the Taxpayer, the single owner operated the same business as a sole proprietorship. The Taxpayer continued to operate under the original business license issued to the sole proprietorship during 2009.

As the result of an audit, the City issued a license fee to the Taxpayer for the 2009 tax year based on the City's finding that the Taxpayer was a new business. The Taxpayer appealed the assessment to the City, contending inaccurate information was received from the City concerning the change in legal status. The Taxpayer also claimed that the license fee should have been prorated based on the number of months it was in operation during 2009. In its final determination, the City upheld the assessment, concluding that the change in the Taxpayer's legal status created a new and separate business, and Virginia law does not provide for the proration of license fees.

In its appeal of the final local determination, the Taxpayer offers the same arguments presented in its appeal to the City. In addition, the Taxpayer requests the fee be waived due to personal and financial hardship.

ANALYSIS

Under Va. Code § 58.1-3706, localities may assess a BPOL tax on businesses that exceed certain minimum gross receipt thresholds. For businesses that do not meet the threshold, a locality may impose a fee in accordance with the limitations established under Va. Code § 58.1-3703.

Virginia Code § 58.1-37031.1 provides that "[e]very person shall apply for a license for each business or profession when engaging in a business..." Because the Taxpayer, a limited liability company, is an entity different from a sole proprietorship, it must be regarded as a beginning business in 2009 and subject to a license tax or fee for the 2009 tax year. See Public Document (P.D.) 99-237 (8/23/1999).

Under certain conditions, a business may be entitled to a refund for a prorated portion of the BPOL tax paid for tax year in which such business exercised its licensable privilege for only a fraction of the year. See Va. Code § 58.1-3710. The statute, however, further states, "In no event shall a county, city or town be required to refund any part of a flat fee or minimum flat tax."

DETERMINATION

Based on the evidence provided, I find that the Taxpayer was a new business entity in tax year 2009. The City properly imposed a license fee, in a manner consistent with state law and city ordinances. As such, the City's assessment issued to the Taxpayer for the 2009 taxable year is upheld.

As to the claim by the Taxpayer that it is unable to pay the additional fee, the provisions of Va. Code § 58.1-3994 permit local taxing authorities to accept offers in compromise from taxpayers who have failed to comply with the provisions of the tax law. This authority may be used to settle past liabilities whenever the collection of the entire amount is in substantial doubt and the best interests of the locality would be served by such a compromise. All such offers must be submitted in writing and are accepted solely at the discretion of the commissioner of the revenue or other local assessing official.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4443577806.D