Is a special-purpose LLC that holds land and hires others to build condominiums for sale a 'contractor' with a definite place of business subject to BPOL tax?

Plain-English summary

The BPOL tax (business, professional and occupational license tax) is a local tax on the privilege of doing business at a definite place of business in a locality. The locality assesses it; the Department only hears appeals (Va. Code Sec. 58.1-3703.1), and on appeal the local assessment is presumed correct unless the taxpayer proves otherwise.

The taxpayer is a single-purpose LLC that bought real estate in the county to develop into condominiums for sale. It holds title but hired a general contractor to do the construction and a marketing firm for future management, marketing, and brokerage. It has no employees, and its members are out-of-state LLCs. It argued it (1) had no definite place of business in the county and (2) wasn't a contractor, and alternatively that the Department's contractor regulation is broader than the statute.

The Commissioner rejected each argument:

• Definite place of business. Virginia defines this as 'an office or a location at which occurs a regular and continuous course of dealing for 30 consecutive days or more' (Va. Code Sec. 58.1-3700.1). The LLC's only location was the county site it was developing; it reported that address on its BPOL application and showed no business activity anywhere else. That the on-site staff worked for a contracted third party, and that its members are out of state, didn't change the result -- the LLC had no other place of business.
• Contractor. The Code lists contractor activities (Va. Code Sec. 58.1-3714), and the Department's regulation (23 VAC 10-500-240) makes clear a contractor includes a person who engages others to perform those activities, and persons who subdivide and improve real estate or build with the intent to offer the lots or buildings for sale. The Department has consistently held you need not perform the work yourself (P.D. 97-423, 13-76, 17-10). The LLC subdivided and improved property to sell condominiums and engaged others to do it -- squarely a contractor.
• Regulation vs. statute. Virginia's Attorney General has found the regulation does not contradict the statute (2000 Op. Va. Att'y Gen. 044).

Because the LLC engaged in a licensable activity at a definite place of business in the county, it owed the BPOL license and tax, and the county's builder/developer classification stood.

What this means for you

Real-estate developers and 'special-purpose' land-holding entities

Holding title through a thin, employee-less LLC and outsourcing the construction and sales does not avoid the BPOL tax. If your entity subdivides and improves property, or engages others to build for sale, Virginia treats it as a contractor -- regardless of who actually performs the work or where your members live.

'Definite place of business' is about your only location, not headcount

A development site where your business activity happens for 30+ consecutive days is a definite place of business, even if you have no employees there and your owners are out of state. Reporting that address on the BPOL application reinforces it.

The Department won't parse a local subclassification

The Department decides only whether you meet the broader statutory classification (here, contractor); it doesn't referee a locality's internal 'builders and developers' subclass, which localities may create so long as rates stay within state caps (23 VAC 10-500-20).

Common questions

We hired a general contractor -- how are we the contractor? Because the BPOL rules include those who engage others to perform contractor activities and those who subdivide/improve real estate for sale (23 VAC 10-500-240; P.D. 97-423, 13-76, 17-10).

We have no employees in the county -- isn't there no definite place of business? No. The development site was the LLC's only business location, and a location with a regular, continuous course of dealing for 30+ days qualifies (Va. Code Sec. 58.1-3700.1).

Where do I appeal a BPOL assessment? First to the locality; the Department hears the appeal of the locality's final determination under Va. Code Sec. 58.1-3703.1, and the local assessment is presumed correct.

Citations and references

• Va. Code Sec. 58.1-3700.1 -- 'definite place of business.'
• Va. Code Sec. 58.1-3703.1 -- local BPOL appeal procedure and Department determinations.
• Va. Code Secs. 58.1-3714, 58.1-3715 -- activities defining a contractor; contractors licensed where work is done.
• 23 VAC 10-500-240 -- contractor includes those who engage others and who subdivide and improve real estate for sale.
• P.D. 97-423, 13-76, 17-10 -- a taxpayer need not perform contractor activities itself; 2000 Op. Va. Att'y Gen. 044 -- regulation consistent with statute.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-106

Original ruling text

June 23, 2020

Re: Final Local Determination

Locality Assessing Tax: *

Taxpayer: *

Business, Professional and Occupational License Tax

Date of Final Local Determinations: 2019

Dear *:

This final state determination is issued upon the application for correction filed by you on behalf of your client, * (the “Taxpayer”), with the Department of Taxation. You appeal an assessment of the Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by *** (the “County”) for the 2019 tax year.

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 as summarized below. The Code of Virginia sections, regulations and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website.

FACTS

The Taxpayer is a limited liability company that owns real estate that is being developed into condominium units for sale. Although the Taxpayer holds title to the real estate, it entered into a general contracting agreement for the performance of work related to the development of the condominium units. The Taxpayer also entered into a marketing agreement for the future property management, marketing, and brokerage services. The Taxpayer has no employees, and its members are * (State A) limited liability companies.

The Taxpayer filed a BPOL application as a contractor, builder and developer, architect and engineer with the County. Based upon the information provided in the application, the Taxpayer was classified under the County ordinance for consultants and specialized occupations. The Taxpayer disputed its classification. The County agreed to reclassify the TP under the County ordinance for builders and developers. The Taxpayer filed an application for correction with the County, asserting that it was not subject to the County’s BPOL license requirement or tax because it does not have a definite place of business within the County and should not be classified as contractor.

In its final determination, the County determined the Taxpayer’s BPOL liability and classification were correct because the Taxpayer submitted a BPOL application that reported its current business location at a taxable situs within the County. The County also determined that the Taxpayer purchased real property within the County with the intent to develop, build, and sell condominium units.

The Taxpayer appealed to the Department, contending it is not subject to the County’s BPOL license requirement or tax because it does not have a definite place of business within the County and was not in business as a builder or developer. In the alternative, the Taxpayer asserts that even if it is found to meet the regulatory definition of contractor, the regulation is impermissibly broad in violation of the relevant statute.

ANALYSIS

Virginia Code § 58.1-3703 allows Virginia localities to enact a BPOL tax. The BPOL tax is imposed on businesses and professionals for the privilege of doing business in a locality. Every BPOL ordinance adopted or maintained by a locality is required to be substantially similar to the provisions of Virginia Code § 58.1-3703.1 et seq . Where a Virginia locality has adopted a BPOL ordinance, every person engaged in a licensable activity at a definite place of business in such locality must apply for a license. Whether or not a particular activity is in fact subject to BPOL taxation depends upon the local ordinance.

The BPOL tax is imposed at different rates according to the classification of an enterprise. See Virginia Code § 58.1-3706. These classifications are regulated under Title 23 of the Virginia Administrative Code (VAC) 10-500-10 et seq . Classification of a specific business must be determined based on consideration of all the facts and circumstances. Some of the factors to be considered include:

What is the nature of the enterprise’s business?

How the enterprise generates gross receipts.

Where the enterprise conducts its business.

Who are the enterprises customers?

How the enterprise holds itself out to the public.

The enterprise’s NAICS code.

License Requirement

Similar to Title 23 VAC 10-500-30, the County’s BPOL ordinance imposes a license tax on every person engaged in any business, profession, trade, occupation or calling which has a taxable situs in the County. In addition, every person is required to apply for a license for each business or profession when engaging in a business in the County if (i) the person has definite place of business in the County; (ii) there is no definite place of business anywhere and the person resides in the County; or (iii) there is no definite place of business in the County but the person is classified as, among other things, a contractor subject to Virginia Code § 58.1-3715.

The Taxpayer contends that it should not be subject to the County’s BPOL license requirement or tax because it does not have a definite place of business within the County and should not be classified as a contractor. The County’s final determination states that the TP was classified under the County ordinance for builders and developers.

Definite Place of Business

The County determined that the Taxpayer had a definite place of business within the County because it submitted a BPOL application that reported its current business location at a taxable situs within the County, and the Taxpayer purchased real property within the County with the intent to develop, build, and sell condominium units. The Taxpayer does not dispute the facts relied upon by the County. Instead, the Taxpayer asserts that its conduct does not meet the definition of definite place of business because (1) the property is staffed by employees of a contracted third party, who hold themselves out to be employees of the contracted third party; (2) the Taxpayer has no employees because it is a special purpose entity created only to hold title and subdivide the property; and (3) none of the Taxpayer’s members are headquartered, live or do business in Virginia.

The County’s BPOL ordinance uses the same definition of the term “definite place of business” as found in Virginia Code § 58.1-3700.1, which is defined as “an office or a location at which occurs a regular and continuous course of dealing for 30 consecutive days or more …”

While the Taxpayer argues it is controlled by employees who act on its behalf from offices in * (State B), it, in fact, has no employees. Further, the Taxpayer’s only location was being developed into condominium units in the County. No evidence has been provided to show the Taxpayer conducted business activities at any other definite place of business.

Contractor

The Code of Virginia and relevant BPOL regulations do not specifically provide for a builders and developers classification. Localities are permitted to establish subclassifications within the classifications set out in state law and provide for different rates or exemptions for such subclassifications, as long as no rate exceeds the maximum permitted by state law. See Title 23 VAC 10-500-20.

The County defines builders and developers to include every person conducting or engaging in the business trade, occupation or calling of improving or developing for sale or rent of any property or structure owned or leased by or otherwise in control of such builder and developer. The Department is not required to interpret any local ordinance. The Department, therefore, will only consider whether the Taxpayer meets the broader classification of contractor.

The Taxpayer asserts that it does not meet the definition of contractor because it does not engage in the acts intended under the statutory definition of contractor. The Taxpayer further contends that its vendors also do not directly perform the acts intended under the statutory definition of contractor. Even if the Taxpayer is found to meet the regulatory definition, the Taxpayer claims such definition should not apply because it is broader than the definition provided by the statute.

The County’s BPOL ordinance incorporates by reference the definition of the term “contractor” as found in the Code of Virginia . Virginia Code § 58.1-3714 D 1-6 lists several activities that define the term contractor. Further, Virginia Code § 58.1-3701 mandates that the Department promulgate guidelines and regulations, which by their nature amplify and clarify the statutory provisions. Title 23 VAC 10-500-240 clarifies that included in the definition of contractor is: (1) a person who engages others to perform any of the activities found in Virginia Code § 58.1-3714, and (2) persons who subdivide and improve real estate, and speculative builders who build houses or other buildings with the intention to offer the subdivided lots or completed buildings for sale.

The Department has consistently held that a taxpayer does not have to actually perform the contractor activities itself to be considered a contractor for purposes of the BPOL tax. See P.D. 97-423 (10/17/1997), P.D. 13-76 (5/23/13), and P.D. 17-10 (2/24/17).

The Taxpayer asserts that the language in the Department’s regulation is impermissibly broad. However, Virginia’s Attorney General has found that the regulation does not contradict the statute. See 2000 Op. Va. Att’y Gen. 044.

CONCLUSION

Absent evidence to the contrary, the Taxpayer’s business appears to have been owning and developing real estate in the County. The Taxpayer clearly meets the definition of contractor because it subdivided and improved property with the intention of offering the subdivided condominiums for sale, and it engaged others to perform the activities of a contractor.

Based on the evidence provided, I find that the Taxpayer did have a definite place of business within the County and was properly classified as a contractor. Because the Taxpayer was engaged in a licensable business activity at a definite place of business within the County, it was subject to the County’s BPOL license requirement and tax. Further, the Department finds no reason to negate the County’s classification as a builder and developer. As such, the assessment at issue is upheld.

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/2230-C

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