Can a real estate company or team (a licensed business entity) also exclude from its BPOL gross receipts the commissions it pays to its own real estate salespersons, the way the principal broker excludes commissions paid to it?

Plain-English summary

A Virginia city asked the Tax Commissioner for an advisory opinion on how the BPOL (Business, Professional and Occupational License) tax gross-receipts exclusion for real estate commissions applies when commissions pass through more than one layer of business entity. Under Va. Code § 58.1-3732.2, a real estate broker can exclude from its BPOL gross receipts any amounts it receives from real estate sales that it then pays out to a real estate agent as a commission, as long as that agent is itself subject to BPOL tax on the amount. The city's scenario involved a principal broker who pays commissions to individual salespersons, to a real estate company ("the Company"), and to a real estate team ("the Team"). The Company and the Team are each separately licensed LLCs for BPOL purposes -- the Company has three salespersons and no brokers, while the Team has one associate broker and two salespersons. Both the Company and the Team, in turn, pay commissions to their own salespersons. The city asked whether the Company and the Team could also exclude those "downstream" commission payments from their own gross receipts.

The Tax Commissioner's answer turns entirely on licensure. Because Virginia Code § 58.1-3732.2 does not define "real estate broker," the Department looked to Chapter 21 of Title 54.1 of the Code of Virginia, which regulates the real estate industry and distinguishes "real estate brokers" (Va. Code § 54.1-2100) from "real estate salespersons" (Va. Code § 54.1-2101). A business entity can be licensed as either. If the Company or the Team is actually licensed as a real estate broker, the statutory exclusion applies to the commissions it pays out to its own agents. But if the entity is licensed only as a real estate salesperson -- which is how an entity affiliated with a broker is typically licensed under 18 VAC 135-20-45 -- then it does not qualify for the exclusion, regardless of how the individuals working through it are licensed.

The ruling also makes clear that having an associate broker on staff, as the Team does, does not automatically make the entity itself a "broker" for BPOL purposes, because business entities are legally separate and distinct from their individual owners or employees (18 VAC 135-20-10 treats associate brokers as individuals, not entities). Because exemptions and exclusions from tax are narrowly construed against the taxpayer (citing DKM Richmond Associates v. City of Richmond, 249 Va. 401 (1995)), the Department would not assume broker status for the Company or the Team without documentation that they are actually licensed as brokers. If they are not, the same commission dollars could be taxed twice under the city's BPOL scheme -- once as gross receipts to the Company or Team, and again as gross receipts to the individual salespersons -- and the Tax Commissioner noted that this potential double taxation does not change the legal outcome.

The Department recommended that the city examine the actual licenses held by the Company and the Team, and consult the appropriate real estate licensing agency, to determine how each entity is licensed before deciding whether the exclusion applies.

What this means for you

If you are a real estate broker, company, or team

The commission exclusion under Va. Code § 58.1-3732.2 is not automatically available to every entity in a multi-layered commission structure. It applies only to the entity that is actually licensed as a "real estate broker" under Va. Code § 54.1-2100. If your company or team is licensed as a real estate salesperson entity (common for entities affiliated with a broker under 18 VAC 135-20-45) rather than as a broker, you cannot exclude the commissions you pay to your own agents from your BPOL gross receipts, even if you are passing those dollars straight through. Having an associate broker on your team does not change this -- broker status is evaluated at the entity level, not through an individual's license.

If you are structuring commission splits among affiliated entities

Before assuming a downstream exclusion applies, confirm exactly how each entity in the chain (principal broker, company, team) is licensed with the real estate licensing authority. Because BPOL exclusions are narrowly construed against the taxpayer, the Department will look for documented broker licensure, not just the practical role the entity plays in paying out commissions. Entities that are only salesperson-licensed should expect their commission receipts -- and the commissions they in turn pay to their own salespersons -- to potentially be taxed at multiple levels under a locality's BPOL ordinance.

Common questions

Q: Can a real estate company or team exclude the commissions it pays to its own agents from BPOL gross receipts?
A: Only if the company or team is itself licensed as a real estate broker under Va. Code § 54.1-2100. If it is licensed only as a real estate salesperson entity, the exclusion under Va. Code § 58.1-3732.2 does not apply to it.

Q: Does having a broker on staff (like the Team's associate broker) make the entity a "broker" for this exclusion?
A: Not by itself. Business entities are separate from their individual owners or employees, and an associate broker is licensed as an individual under 18 VAC 135-20-10, not as the entity itself.

Q: What if the entity doesn't qualify for the exclusion -- does that mean the same money gets taxed twice?
A: Potentially yes. If the entity is not a licensed broker, its commission receipts and the receipts its own salespersons earn could both be subject to BPOL tax, since both may be separately licensable. The ruling notes this possible double taxation does not affect the legal outcome.

Citations and references

• Va. Code § 58.1-3732.2 (gross receipts exclusion for real estate brokers' commission payments to agents)
• Va. Code § 58.1-3700.1 (defines "gross receipts" for BPOL tax purposes)
• Va. Code § 58.1-3701 (Department's authority to issue local license tax advisory opinions)
• Va. Code § 54.1-2100 (licensing of real estate brokers)
• Va. Code § 54.1-2101 (licensing of real estate salespersons)
• 18 VAC 135-20-45 (requirements for a business entity applying for a salesperson's license)
• 18 VAC 135-20-10 (designation of associate brokers as individuals)
• DKM Richmond Associates v. City of Richmond, 249 Va. 401 (1995) (exemptions/exclusions narrowly construed against the taxpayer)
• Public Document (P.D.) 00-210 (12/6/2000) (related document)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-156

Original ruling text

September 1, 2020

Re: Request for Advisory Opinion

Dear *:

This is in response to your letter in which you request an advisory opinion regarding the exclusion for gross receipts of real estate brokers for amounts paid to real estate agents as commissions under Virginia Code § 58.1-3732.2 for purposes of the Business, Professional and Occupational (BPOL) license 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 public document cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.

FACTS

The City describes a scenario in which a principal broker excludes amounts paid as commissions to real estate salespersons, a real estate company (the “Company”) and a real estate team (the “Team”) from gross receipts. The Company and the Team are each limited liability companies separately licensed for BPOL purposes. The Company has three real estate salespersons but no brokers. The Team has an associate broker and two real estate salespersons. In addition, each of the Company’s and Team’s real estate salespersons are sole proprietors who are also separately licensed for BPOL purposes. The City asks whether the Company and the Team should also be permitted to exclude commissions paid to their real estate salespersons from the amounts previously paid to the Company and Team by the principal broker.

OPINION

For purposes of the BPOL tax, gross receipts means “the whole, entire, total receipts, without deduction.” See Virginia Code § 58.1-3700.1. In determining the BPOL tax, however, the Code of Virginia provides a number of exemptions and exclusions from gross receipts.

Code of Virginia § 58.1-3732.2 provides an exclusion for real estate brokers:

Gross receipts of real estate brokers for license tax purposes under Chapter 37 (§ 58.1-3700 et seq.) of this title shall not include amounts received by any broker that arise from real estate sales transactions to the extent that such amounts are paid to a real estate agent as a commission on any real estate sales transaction and the agent is subject to the business license tax on such receipts.

Real estate brokers are not defined for purposes of Virginia Code § 58.1-3732.2. The Department believes it is appropriate, therefore, to consult Chapter 21 of Title 54.1 of the Code of Virginia which provides for the regulation of this industry. See Public Document (P.D.) 00-210 (12/6/2000). Business entities can be either real estate brokers or real estate salespersons. See Virginia Code § 54.1-2100 and 54.1-2101. In the Department’s opinion, whether the Company or the Team can properly claim the exclusion depends on whether the business entity is a real estate broker. The statute is clear that real estate brokers can exclude any amounts received from real estate sales transactions to the extent that such amounts are paid to real estate agents as commissions. In the City’s example, it appears that both the Company and the Team pay commissions to their own salespersons from amounts the Company and the Team receive from real estate transactions. If the entity that pays the commission is a broker, then it appears the statutory requirements would be satisfied to claim the exclusion.

It is well established, however, that exclusions or exemptions must be narrowly construed against the taxpayer. See DKM Richmond Associates v. City of Richmond , 249 Va. 401 (1995). Although the statute seems to contemplate the possibility that business entities may be “real estate brokers” under Virginia Code § 54.1-2100, it is not clear based on the facts presented whether they are actually licensed as such. They would, however, be considered “real estate salespersons” under Virginia Code § 54.1-2101 as entities that are already affiliated with a real estate broker. Their status as real estate salespersons also appears to be consistent with Title 18 of the Virginia Administrative Code (VAC) 135-20-45 which sets forth requirements for “an applicant for a salesperson’s license as a business entity” [emphasis supplied].

Because business entities are separate and distinct from their owners, the fact that the Team has an associate broker would not be relevant unless that individual’s licensure affected the entity’s licensure. The Department observes that associate brokers are specifically designated as individuals under Title 18 VAC 135-20-10. Again, it is the Department’s opinion that the exclusion would not apply unless the entity itself was considered a broker and licensed as such. Should the exclusion not apply, and to the extent the gross receipts are not otherwise excludable or deductible, then the gross receipts would be taxable at both the entity level and at the salesperson level because both the entities and the salespersons are separately licensable for BPOL tax purposes under the City’s scenario. The fact that double taxation would occur, however, does not affect the outcome.

The City may wish to examine the entities’ licenses and any related documentation to verify how the entities are licensed. The City may also wish to consult the appropriate licensing agency for clarification as to how entities are licensed.

This opinion is expressly limited to the application of Virginia Code § 58.1-3732.2 to the facts presented. The Department expresses no opinion regarding what other exclusions or deductions from gross receipts any of the persons or entities described herein may be eligible for, if any.

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/3402.M

Related Documents

00-210