Is a bank board member's director compensation subject to the local BPOL (business license) tax?

Plain-English summary

A Virginia city asked the Department whether an individual who sits on a bank's board of directors is conducting a business -- and so is subject to the local BPOL (Business, Professional and Occupational License) tax -- on the fees he receives.

The Department advised that, on these facts, the director can be treated as engaged in a licensable business.

• The old "directors aren't in business" rule predates the modern statute. A 1984-85 Attorney General opinion said corporate directors are not normally conducting a business for BPOL purposes, even when their pay is substantial. But that opinion interpreted former Va. Code § 58.1-266.1, before the General Assembly enacted a statutory definition of "business" in 1996.
• The 1996 definition changes the analysis. Va. Code § 58.1-3700.1 defines "business" as a course of dealing requiring a person's time, attention, and labor for livelihood or profit, implying a continuous and regular -- not isolated -- course of dealing. It creates a rebuttable presumption that a person is in business if they (i) hold themselves out as engaged in a business, or (ii) file tax returns, schedules, or documents required only of a trade or business.
• The director's federal reporting triggers the presumption. He received fees reported on a federal Form 1099 and a Schedule C, consistent with independent-contractor status. Localities may rely on the federal employee-versus-contractor classification (Title 23 VAC 10-500-130) unless the taxpayer shows it is wrong. His monthly meetings with preparation showed a continuous, regular course of dealing.

The Department did not decide how the receipts should be classified or where they are sitused, and the presumption can still be rebutted.

What this means for you

Board or advisory fees are not automatically outside the BPOL tax. If you receive director or similar fees and report them as self-employment income (1099 / Schedule C), a locality can presume you are engaged in a business subject to the license tax.

The presumption is rebuttable -- but the burden is on you. You can present evidence that you are not carrying on a continuous, regular course of dealing, or that the federal independent-contractor classification is erroneous or inapplicable. A one-off or isolated engagement is different from regular, ongoing service.

Confirm the details with the locality. BPOL is a local tax. Even where the director is "in business," classification and situs of the gross receipts -- which affect how much, if any, is taxable -- are separate questions the Department did not resolve here.

Common questions

Q: Didn't an Attorney General opinion say directors aren't taxable?

A: The 1984-85 opinion said so, but it interpreted a statute that predated the 1996 statutory definition of "business." Under the current definition, a director who reports fees as self-employment income is presumed to be in business.

Q: What flipped this director into "business" status?

A: He reported his fees on a Form 1099 and Schedule C as an independent contractor, and he attended monthly meetings with preparation -- a continuous and regular course of dealing. Both point to a licensable business under § 58.1-3700.1.

Q: Does this mean he definitely owes BPOL tax?

A: Not automatically. The presumption is rebuttable, and the Department did not decide the classification or situs of the receipts -- issues that determine the actual tax. The locality administers those questions.

Citations and references

• Va. Code § 58.1-3701 -- authorizes the Department to issue advisory opinions on local license tax questions
• Va. Code § 58.1-3700.1 -- defines "business" for BPOL and sets the rebuttable presumption from business-only tax filings
• Va. Code § 58.1-266.1 -- the former license-tax authority the 1984-85 Attorney General opinion construed
• Title 23 VAC 10-500-10; 10-500-130 -- BPOL definitions; employee-versus-independent-contractor treatment and reliance on federal payroll-tax classification
• 1984-1985 Report of the Attorney General 345 -- earlier opinion that corporate directors are not normally in business

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-204

Original ruling text

December 10, 2018

Re: Request for Advisory Opinion

Business, Professional and Occupational License Tax

Dear *:

This will reply to your letter in which the * (the “City”) requests an advisory opinion regarding whether an individual is conducting a business for the 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 regulations cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.

FACTS

An individual serves on the board of directors of a bank. The City requests an opinion concerning whether the compensation he receives for such services is subject to BPOL tax.

OPINION

The BPOL tax is a tax on the privilege of doing business within a locality. The Attorney General of Virginia has opined that corporate directors are not normally considered to be conducting a business for purposes of the BPOL tax, even when their remuneration may be substantial. See 1984-1985 Report of the Attorney General 345. That opinion was based on an interpretation of Virginia Code § 58.1-266.1 in effect at that time, which stated:

The council of any city or town, and the governing body of any county, may levy and provide for the assessment and collection of city, town or county license taxes on businesses , trades , professions , occupations and callings and upon the persons, firms and corporations engaged therein . . . .” (Emphasis in the original).

The Attorney General reasoned that the underlined terms were activities that were one’s livelihood and means of support. Because corporate directorships were not commonly considered as requiring an individual’s primary attention as a livelihood or means of support, then the individual would not normally be considered to be in the business of being a corporate director.

This interpretation, however, preceded the enactment of certain definitions governing the BPOL tax statutes. See Virginia Code § 58.1-3700.1, which was added by 1996 Senate Bill 587 (Chapter 715 of the 1996 Acts of Assembly) and 1996 House Bill 293 (Chapter 720 of the 1996 Acts of Assembly). The term “business” is now defined as :

a course of dealing which requires the time, attention and labor of the person so engaged for the purpose of earning a livelihood or profit. It implies a continuous and regular course of dealing, rather than an irregular or isolated transaction . . . The following acts shall create a rebuttable presumption that a person is engaged in a business: (i) advertising or otherwise holding oneself out to the public as being engaged in a particular business or (ii) filing tax returns, schedules and documents that are required only of persons engaged in a trade or business.

See also Title 23 of the Virginia Administrative Code (VAC) 10-500-10. In addition, although employees are generally not engaged in a licensable activity separate from that of their employer, independent contractors are engaged in business separate from those who contract for their services. See Title 23 VAC 10-500-130 A and B. Further, Title 23 VAC 10-500-130 D provides that “[I]ocalities are entitled to rely upon the classification of a person as an employee or independent contractor for federal payroll tax purposes unless the taxpayer demonstrates that the classification for federal payroll tax purposes is erroneous or inapplicable.”

The director in this case receives fees that are reported on a federal Form 1099 and a Schedule C of his federal income tax return, consistent with the status of an independent contractor. Under the statutory definition of “business” now in effect, such reporting creates a rebuttable presumption that the director is engaged in business. See Virginia Code § 58.1-3700.1. In addition, the City states that the director has monthly meetings and some level of preparation goes into each meeting, suggesting a continuous and regular course of dealing, rather than irregular and isolated transactions.

The Department expresses no opinion concerning the application of any other aspect of BPOL tax law to the facts presented, including the classification or situs of any gross receipts. 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/1848.M