Are insurance-company payments to an affiliated pharmacy exempt from BPOL tax as transactions between members of an affiliated group?

Plain-English summary

A Virginia city asked the Department how the BPOL affiliated-entity exclusion applies to a health-care arrangement.

• The players. A retail pharmacy (an LLC with a definite place of business in the city) whose sole member is a hospital exempt under IRC § 501(c)(3); a health insurance company also affiliated with the hospital.
• The money. Customers buy drugs from the pharmacy, paying partly by co-pays and deductibles and partly through payments the insurance company makes to the pharmacy under the customers' insurance contracts.
• The question. Are those insurance-company payments exempt from BPOL tax as transactions between affiliated entities?

The Department opined that the insurance-company payments are exempt.

• The affiliated-group exclusion. Under Va. Code § 58.1-3703 C 10, receipts or purchases between members of an affiliated group (meeting a parent-subsidiary or brother-sister 80% ownership test) are excluded from BPOL tax.
• The "outside the group" limit is about who you deal with. The city argued the payments trace to purchases by unrelated customers. But the statute's carve-out for receipts "from outside the affiliated group" is interpreted by 23 VAC 10-500-50 B to mean only receipts or purchases conducted with nonaffiliated entities.
• Here the receipts are intra-group. The receipts at issue are payments from the affiliated insurance company to the pharmacy -- entities the city conceded are affiliated -- so they are exempt.

The Department expressed no opinion on any other exemption, including the nonprofit exclusion in Va. Code § 58.1-3703 C 18.

What this means for you

Look at who pays you, not who ultimately benefits. The affiliated-group exclusion turns on whether the payer is inside the affiliated group. Payments from an affiliate are excluded even if they ultimately fund purchases by unrelated customers.

Confirm the 80% affiliation first. The exclusion requires meeting the parent-subsidiary or brother-sister ownership test; here affiliation was conceded, but in practice you must document it.

Other exemptions are separate questions. This opinion resolved only the affiliated-group exclusion. Nonprofit or other exclusions (like § 58.1-3703 C 18) require their own analysis.

Common questions

Q: Why aren't the insurer's payments taxable if the drugs were bought by unrelated customers?

A: Because BPOL gross receipts are measured by who pays the taxpayer. The payer here is the affiliated insurance company, and the "outside the group" carve-out reaches only receipts from nonaffiliated entities (23 VAC 10-500-50 B).

Q: What makes entities an "affiliated group"?

A: Meeting a parent-subsidiary or brother-sister test built on at least 80% ownership of voting and nonvoting interests under § 58.1-3703 C 10.

Q: Does the hospital's nonprofit status matter here?

A: The Department did not decide that. It ruled only on the affiliated-group exclusion and expressly left the nonprofit exclusion (§ 58.1-3703 C 18) open.

Citations and references

• Va. Code § 58.1-3701 -- authorizes the Department to issue advisory opinions on local license tax questions
• Va. Code § 58.1-3703 C 10 -- excludes receipts/purchases between members of an affiliated group from BPOL tax
• Va. Code § 58.1-3703 C 18 -- separate nonprofit exclusion (not decided here)
• Title 23 VAC 10-500-50 B -- affiliated corporations are not exempt on receipts/purchases with nonaffiliated entities
• IRC § 501(c)(3) -- the hospital's federal tax-exempt status

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-203

Original ruling text

December 10, 2018

Re: Request for Advisory Opinion

Business, Professional and Occupational License (BPOL) tax

Dear *:

This will reply to your letter in which the * (the “City”) requests an advisory opinion regarding the affiliated entity exemption for purposes of 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 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 and regulation cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.

FACTS

A retail pharmacy (the “Pharmacy”) is organized as a limited liability company with a definite place of business in the City. A hospital (the “Hospital”) is a corporation exempt from federal income tax under Internal Revenue Code (IRC) § 501(c)(3). The Hospital is the sole member of the Pharmacy. A health insurance provider (the “Insurance Company”) is also affiliated with the Hospital.

Customers pay premiums to the Insurance Company for health insurance. These customers also purchase pharmaceutical products from the Pharmacy. The purchases are made partly by co-pays and deductibles paid directly by the customers to the Pharmacy, and partly by payments made by the Insurance Company to the Pharmacy pursuant to the customers’ insurance contracts with the Insurance Company.

The City requests an opinion regarding whether the payments made by the Insurance Company to the Pharmacy qualify for the exemption from gross receipts for transactions between affiliated entities under Virginia Code § 58.1-3703 C 10.

OPINION

Under the provisions of Virginia Code § 58.1-3703 C 10, receipts or purchases made by members of an affiliated group of entities from other members of the same affiliated group are exempt from the BPOL tax. There are two tests, the parent-subsidiary test and the brother-sister test, that a group of entities can satisfy in order to be considered an affiliated group.

A group of related entities may meet the parent-subsidiary test if:

one or more corporations subject to inclusion, other than the common parent, directly owns stock or other ownership interest possessing at least 80% of the voting power of all classes of interests and at least 80% of each class of the nonvoting interests of each of the related entities, and

the common parent entity directly owns interests possessing at least 80% of the voting power of all classes of ownership interests and at least 80% of each class of the nonvoting interests of at least one of the other corporations subject to inclusion.

The City suggests that the payments received by the Pharmacy from the Insurance Company may be taxable because they are ultimately attributable to purchases made from the Pharmacy by unrelated parties, the customers. The City cites Virginia Code § 58.1-3703 C 10, which provides in part that “[t]his exclusion shall not exempt affiliated entities from such license or other tax measured by receipts or purchases from outside the affiliated group.” The Department’s regulations, however, simply interpret this to mean that “[a]ffiliated corporations are not exempt from the license tax or fee from gross receipts or purchases conducted with nonaffiliated entities.” See Title 23 of the Virginia Administrative Code (VAC) 10-500-50 B.

In this case, the gross receipts at issue are attributable to payments being made by the Insurance Company to the Pharmacy, which the City concedes are affiliated entities for purposes of the exemption. Therefore, in the Department’s opinion, such gross receipts are exempt from BPOL tax under Virginia Code § 58.1-3703 C 10.

The Department expresses no opinion concerning the application of any other exemption provided under Virginia Code § 58.1-3703 to the preceding facts, including the exemption for gross receipts for nonprofit entities under Virginia Code § 58.1-3703 C 18.

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/1778.M