Were a hotel's bank transfers, loans, and real-property rent all taxable BPOL gross receipts?

Plain-English summary

Virginia found that most disputed hotel deposits were internal bank transfers rather than BPOL gross receipts, but required more documentation before the city recalculated the assessment. The hotel admitted underreporting some business and room-rental receipts but disputed additional amounts that it identified as transfers, credit-line proceeds, an owner loan, real-property rent, and an interest refund.

The records were sufficient to substantiate most transfers between the hotel's checking and money-market accounts. The Department also said receipts from renting a parcel of real property to an unrelated party could be excluded from BPOL tax under the provision cited in the determination.

Other deposits remained unresolved. The hotel needed ledgers reconciling proceeds and payments to its income-tax return and bank documents supporting the claimed interest refund. It had 30 days to provide those records, after which the city was to review the BPOL assessments, make appropriate adjustments, and issue a new final local determination.

Virginia Tax did not decide the city's transient occupancy tax assessment. That tax was outside the Department's administrative appeal jurisdiction, and the ruling identified circuit court as the appeal route.

What this means for you

• Transfers between a business's own accounts and genuine loan proceeds are not automatically gross receipts, but they must be traceable.
• Reconcile every bank deposit to revenue, transfers, debt, owner funding, refunds, or other nontaxable sources.
• Keep signed leases, canceled checks, bank statements, general ledgers, tax returns, and debt records together for local audits.
• Separate BPOL appeals from transient occupancy tax disputes because the available forums differ.

Common questions

Q: Did Virginia accept every disputed deposit as nontaxable?
A: No. It accepted that most were internal transfers but required more proof for the remaining items.

Q: Could rent from unrelated real property be excluded from BPOL tax?
A: The determination said those receipts could be excluded under the provision it cited, subject to the city's review.

Q: What records were still needed?
A: Reconciliation ledgers and bank documents supporting items such as the claimed interest refund.

Q: Did Virginia decide the transient occupancy tax assessment?
A: No. The Department said it lacked jurisdiction over that local tax.

Citations and references

• Va. Code §§ 58.1-3700.1, 58.1-3703 C 7, 58.1-3109 6, 58.1-3703.1 A 9, 58.1-3983.1, and 58.1-3984 A.
• Va. Code § 58.1-3983.1 B 4, cited for the presumption that the local assessment was correct.

Subject

Underreported gross receipts and rental receipts

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-208

Original ruling text

November 8, 2013

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Business, Professional and Occupational License (BPOL) Tax

Dear *:

This final state determination is issued upon the application for correction filed 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 the 2008 through 2011 tax years.

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, 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 cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site.

FACTS

The Taxpayer operates a hotel in the City. Under audit, the City found that the Taxpayer had underreported gross receipts for BPOL tax purposes and room rental receipts subject to the transient occupancy tax.

The Taxpayer filed an appeal with the City. The Taxpayer concedes it underreported gross receipts and rental receipts, but asserts some of the receipts held taxable by the City were actually bank account transfers or loans to the business. In its final determination, the City made some adjustments to the assessment, but found that the Taxpayer had failed to provide sufficient documentation to account for all of the receipts at issue. The Taxpayer appeals to the Department, contending the City inappropriately included in the tax base receipts resulting from deposits to a money market account, transfers between bank accounts, withdrawals from two separate lines of credit, and a personal loan from the owner.

ANALYSIS

BPOL Tax

The BPOL tax is a gross receipts based tax imposed upon businesses, trades, professions, occupations, callings and the persons engaged therein for the privilege of conducting business in a local jurisdiction. Virginia Code § 58.1-3700.1 defines "gross receipts" as the "whole, entire, total receipts, without deduction." Pursuant to Va. Code § 58.1-3703 C 7, a locality may impose the BPOL tax upon any person, firm or corporation for engaging in the business of operating a hotel, motel, motor lodge, auto court, tourist court, travel trailer park, lodging house, rooming house and boardinghouses.

The Taxpayer contends the City included transfers between business tax accounts in the gross receipts subject to BPOL tax. The Taxpayer has at least two bank accounts, a money market savings account and a checking account. Documents provided include withdrawal slips, corresponding deposits and monthly disbursement journals. The City asserts the bank documents only show funds being transferred between the two accounts, and the documents fail to show the source of the deposits, and whether such deposits were reported in the gross receipts. The City further argues that if the Taxpayer had an increase in liabilities, i.e. , loans, then such loans should have been reported on the balance sheet section of the Taxpayer's income tax returns.

The Taxpayer asserts that the City included withdrawals from two lines of credit and a personal loan from the Taxpayer's owner in gross receipts. The Taxpayer provided copies of canceled checks from the lines of credit and reconciled the money market deposits subject to gross receipts with the amounts as reported to the City. The City has been unable to reconcile the Taxpayer's shareholder loan activity reported on the balance sheet of the federal income tax return. The Taxpayer argues that because these were transfers between two cash accounts owned by the Taxpayer, no change in liabilities or revenue would result.

In addition, the Taxpayer lists a number of disputed deposit transactions, which are identified as partial rental payments for a real property rental. The Taxpayer included a copy of a notarized lease agreement and canceled checks to support this statement. The lease indicates the Taxpayer rented a parcel of real property to an unrelated third party. The Taxpayer further indicates several deposits resulted from the refund of interest resulting from a loan that was refinanced; however, no documentation has been provided to support this assertion.

Virginia Code § 58.1-3109 6 grants local assessing officers the authority to require records and other information necessary to verify the accuracy of a taxpayer's BPOL tax returns. In addition, Va. 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 the documentation provided by a taxpayer is inconclusive, it is reasonable for the local assessing officer to request information sufficient to reconcile gross receipts to total gross receipts reported on financial statements or tax returns. Further, when such information is not provided, a local assessing authority must use the information available to determine gross receipts sitused within its jurisdiction.

Transient Occupancy Tax

Virginia Code §§ 58.1-3703.1 and 58.1-3983.1 authorize the Department 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: BPOL tax, BTPP tax, machinery and tools tax, merchant's capital tax, local mobile property tax and consumer utility tax.

The Department is not authorized to consider appeals of the local transient occupancy tax. Therefore, I cannot issue a determination regarding the validity of these assessments issued to the Taxpayer by the City.

The Taxpayer may appeal assessments of the transient occupancy 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.

DETERMINATION

As indicated above, an assessment issued by a locality is deemed to be prima facie correct. See Va. Code § 58.1-3983.1 B 4. As such, it is incumbent upon the Taxpayer to prove to the satisfaction of the local assessing officer that it properly reported the taxable gross receipts on its BPOL returns.

As such, I am returning this matter to the City. It is the Department's opinion that the Taxpayer has provided sufficient information to substantiate that the majority of the deposit transactions at issue were merely transfers between its bank accounts. In addition, the receipts for the rental of real property could be exempt from BPOL taxation under Va. Code § 58.1-3703.1 C 7. However, the Taxpayer will need to provide additional documentation to support the remaining deposits. These documents could include ledgers reconciling proceeds and payments to the Taxpayer's income tax return and documents from the bank evidencing the refunds of the interest amounts.

The additional documentation should be provided to the City within 30 days of the date of this letter. Upon receipt of all documents, the City will make a full review of the assessments and make adjustments as needed and issue a new final local determination in accordance with applicable laws, regulations and guidelines. If the Taxpayer does not agree with the final local determination, it may file an appeal with the Tax Commissioner as prescribed by law.

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/1-5378259137.D