Was a Section 501(c)(3) research nonprofit exempt from Virginia local BPOL tax?

Plain-English summary

Virginia concluded that the nonprofit's gross receipts were entirely exempt from local BPOL tax. The organization had IRS recognition under Section 501(c)(3), provided research services for the federal government, received service fees and federal grants, and said it had no unrelated business taxable income.

Virginia's BPOL statute prohibited localities from imposing the tax on a qualifying charitable nonprofit except to the extent it had receipts from an unrelated trade or business taxable under IRC § 511 and following provisions. Eligibility was determined by reference to the federal charitable-status rules.

Because the taxpayer qualified and reported no unrelated business taxable income, the Department did not need to decide whether its service fees and grant funds would otherwise be treated differently or whether economic and social-science research would use a particular service rate.

What this means for you

• Section 501(c)(3) recognition can support Virginia's charitable-nonprofit BPOL exemption.
• The exemption is not necessarily absolute: receipts producing unrelated business taxable income may be taxable locally.
• Keep IRS determination records and federal filings that establish both exempt status and the treatment of any unrelated activities.
• A nonprofit that begins generating unrelated business taxable income may need to obtain a local license and pay BPOL tax in the proper locality.

Common questions

Q: Did service fees and federal grants prevent the exemption?
A: No on the stated facts. The organization qualified under Section 501(c)(3) and reported no unrelated business taxable income.

Q: Was every future receipt automatically exempt?
A: No. The opinion warned that future activities producing unrelated business taxable income would require a license and BPOL payment.

Q: Did Virginia decide how research-service receipts would be classified if taxable?
A: No. Because the nonprofit was exempt, the Department did not reach the alternative classification and rate questions.

Citations and references

• Va. Code §§ 58.1-3700.1, 58.1-3701, 58.1-3703 C 18 a, and 58.1-3706 D 1.
• IRC §§ 170, 501(c)(3), and 511 et seq.
• 23 VAC 10-500-10 and 10-500-40 A 11.
• Virginia Public Documents 01-104, 08-12, and 97-192, discussed in the opinion.

Subject

Taxpayer is a charitable nonprofit organization exempt from the BPOL tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-218

Original ruling text

December 12, 2013

Re: Request for Advisory Opinion

Business, Professional and Occupational License tax

Dear *:

This is in response to your letter requesting an advisory opinion on behalf of your client, * (the "Taxpayer"), concerning whether it is exempt from the Business, Professional and Occupational License (BPOL) tax.

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 Laws, Rules and Decisions section of the Department's web site.

FACTS

The Taxpayer is a nonprofit organization exempt from federal income taxation under Internal Revenue Code (IRC) § 501(c)(3). The Taxpayer's primary business activity is providing research services for the federal government. The Taxpayer receives fees for performing its services, and federal grants provide an additional source of funding. In addition, the Taxpayer states that it has no unrelated business taxable income (UBTI).

The Taxpayer requests a ruling as to whether it qualifies for the BPOL tax exemption permitted for gross receipts of certain charitable nonprofit organizations. If the Department determines that it does not qualify for a nonprofit exemption, the Taxpayer also asks whether receipts derived from the performance of services would be taxed differently than grant funds and whether receipts attributable to economic or social sciences research would be taxed at the rate applicable to such services under Va. Code § 58.1-3706(D)(1).

OPINION

The BPOL tax is based on a taxpayer's gross receipts, which are defined in Va. Code § 58.1-3700.1 as "the whole entire total receipts, without deduction." Virginia Code § 58.1-3703 C 18 a, however, prohibits localities from imposing a BPOL tax on a charitable nonprofit organization unless the organization has receipts from an unrelated trade or business. Under the statute, a "charitable nonprofit organization" is:

an organization which is described in Internal Revenue Code § 501(c)(3) and to which contributions are deductible by the contributor under Internal Revenue Code § 170, except that educational institutions shall be limited to schools, colleges and other similar institutions of learning.

IRC § 501(c)(3) defines charitable nonprofit organization as:

Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual . . .

Under Title 23 of the Virginia Administrative Code (VAC) 10-500-10 and 10-500­40 A 11, the determination as to whether or not an organization is eligible for this exemption for BPOL taxation purposes is based solely by reference to the relevant provisions of the IRC. See also Public Document (P.D.) 01-104 (8/15/2001) and P.D. 08-12 (1/11/2008). If an organization meets these requirements, it is exempt from the imposition of a license fee or gross receipts tax unless it has UBTI. An otherwise exempt charitable nonprofit organization may be subject to BPOL tax on receipts resulting from UBTI as determined under IRC § 511, et seq . See P.D. 97-192 (4/21/1997) for a discussion of UBTI.

The Taxpayer indicates that it has been certified by the IRS as a nonprofit organization described in IRC § 501(c)(3). Accordingly, the Taxpayer would qualify for the exemption from BPOL tax for charitable nonprofit organizations under Va. Code § 58.1-3703 C 18 a. In addition, the Taxpayer states that it does not generate any UBTI. As such, the Taxpayer's gross receipts would be exempt from the BPOL tax entirely. The Taxpayer should be aware, however, that if it engages in activities in the future that result in UBTI, it would be required to obtain a license and pay the BPOL tax in the appropriate locality.

Because the Taxpayer is a charitable nonprofit organization exempt from the BPOL tax under Va. Code § 58.1-3703 C 18 a, there is no need for the Department to opine on the additional questions raised. If you have any questions regarding this opinion, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5464455743.M