My timeshare association collects cleaning fees from unit owners and pays them straight through to an outside cleaning company -- can we exclude those fees from our BPOL gross receipts as a pure pass-through?

Plain-English summary

An association that operated a Virginia timeshare resort was audited by the city where it's located, which found that room cleaning fees -- paid mostly by the timeshare unit owners -- should have been counted as part of the association's taxable gross receipts for BPOL (business license) tax purposes. The association argued those fees shouldn't count because they were simply passed through to an unrelated, outside cleaning vendor rather than kept as the association's own revenue. Both the city and, on appeal, the Department disagreed.

For BPOL purposes, gross receipts generally means the whole, entire, total receipts a business takes in, with no deductions -- but Virginia recognizes a narrow exception for true agency relationships, where a business is really just a pass-through conduit rather than the actual party to the underlying transaction. To qualify, a taxpayer generally needs to show three things: a genuine contractual relationship connecting the client directly to the third-party vendor (not just to the taxpayer itself); separate accounting for the pass-through funds rather than commingling them with other revenue; and that the pass-through amounts aren't reported as the taxpayer's own income on its federal tax return. The Department found this case matched an earlier, similar timeshare ruling almost exactly: the unit owners paid fees to the association, but they had no direct contractual or stated relationship with the cleaning company the association itself hired to do the work. Merely collecting money earmarked for a specific purpose (cleaning) and paying it out to a vendor doesn't, by itself, establish the kind of legal agency relationship the exemption requires. Because the association was the one who actually contracted with and paid the cleaning vendor -- not a mere conduit between the owners and the vendor -- the fees remained part of its own taxable gross receipts, and the city's assessments were upheld.

What this means for you

Timeshare associations, HOAs, or property managers who collect fees for outside vendor services

Simply routing a specifically-designated fee to an outside vendor doesn't automatically exempt it from your BPOL gross receipts. To get true agency (pass-through) treatment, the underlying client (here, the unit owner) generally needs a direct contractual relationship with the vendor themselves -- not just with you as the collecting/paying party.

Any business trying to establish an agency exemption for pass-through costs

Review the three-part test carefully: a direct contractual link between your client and the third party, separate (non-commingled) accounting for the pass-through funds, and no reporting of the pass-through amounts as your own income on your federal return. Missing any one of these -- as happened here on the first element -- can defeat the exemption entirely.

Local governments and taxpayers with pending BPOL disputes over pass-through fees

This ruling reinforces a consistent line of Department decisions distinguishing genuine agency relationships (where the taxpayer is a legal disbursing agent for someone else) from cases where a business simply collects a fee for a defined purpose and pays a vendor itself -- the latter doesn't qualify for exemption even if the underlying cost was truly meant to cover a specific outside service.

Common questions

Q: Are pass-through fees automatically excluded from BPOL gross receipts if they're paid straight to an outside vendor?
A: No. This ruling shows that simply collecting a fee for a specific purpose and paying an outside vendor doesn't, by itself, create an exempt agency relationship -- the underlying client generally needs a direct contractual relationship with that vendor.

Q: What does a business need to show to establish a true agency relationship for BPOL purposes?
A: Three things, under the test applied here: (1) a contractual relationship directly linking the client to the third-party vendor, (2) separate, non-commingled accounting for the pass-through funds, and (3) that the pass-through amounts aren't reported as the taxpayer's own income on its federal tax return.

Q: Who administers and decides BPOL tax disputes in Virginia?
A: The BPOL tax itself is imposed and administered by local governments, not the state. The Department of Taxation's role, under Va. Code § 58.1-3703.1, is limited to deciding taxpayer appeals of local BPOL assessments -- and on appeal, the local assessment is presumed correct unless the taxpayer proves otherwise.

Citations and references

• Va. Code § 58.1-3700.1 (defines gross receipts as the whole, entire, total receipts, without deduction)
• Va. Code § 58.1-3703.1 (Department's authority to decide taxpayer appeals of local BPOL assessments)
• City of Alexandria v. Morrison-Williams Associates, Inc., 223 Va. 349, 288 S.E.2d 432 (1982) (establishes the three-part agency-relationship test)
• P.D. 01-38 (4/12/2001) and P.D. 06-94 (9/28/2006) (applying the three-part agency test)
• P.D. 17-8 (2/8/2017) (the true test is whether the taxpayer acted as a fiduciary legal disbursing agent for another party)
• P.D. 01-68 (5/22/2001) (a nearly identical timeshare-association cleaning fee case finding no agency relationship)

Subject

Exemption : Agents - Timeshare Owner's Association Fees

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-160

Original ruling text

December 28, 2021

Re: Appeal of Final Local Determination

Taxpayer: *

Locality Assessing Tax: *

Business, Professional and Occupational License (BPOL) tax

Dear *:

This final state determination is issued upon the application for correction filed by * (the “Taxpayer”), with the Department of Taxation. You appeal the assessment of Business, Professional and Occupational License (BPOL) tax by *** (the “City”) for the 2017 through 2019 tax years.

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 summarized below. The Code of Virginia sections 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 was an association that operated a time-share resort in the City. The City audited the Taxpayer and determined that room cleaning fees paid mostly by time-share owners should have been included in gross receipts. As such, assessments of additional BPOL tax were issued for the taxable years at issue. The Taxpayer appealed the assessments to the City, contending that the cleaning charges should not be included in gross receipts because such payments were passed through the Taxpayer to an unrelated third-party vendor. The City upheld the assessments on the basis that the cleaning fees were gross receipts because they were reported as revenue.

The Taxpayer filed an appeal with the Department, repeating its contention that the cleaning payments were merely passed-through from the time-share owners to an unrelated cleaning vendor.

ANALYSIS

For purposes of the BPOL tax, gross receipts means “the whole, entire, total receipts, without deduction.” See Virginia Code § 58.1-3700.1. The BPOL regulations further define gross receipts as:

[t]he whole, entire, total receipts, of money or other consideration received by the taxpayer as a result of transactions with others besides himself and that are derived from the exercise of the licensed privilege to engage in a business or profession in the ordinary course of business.

However, there are specific exemptions, deductions and exclusions that are either provided by statute or affirmed through Supreme Court decisions, opinions of the Attorney General and rulings by the Department. One such area is that of agency relationships. See 1986-1987 Op. Va. Att’y Gen. General 282 and Public Document (P.D.) 01-38 (4/12/2001).

The definition of “agency relationship” has been created through case law and affirmed through both opinions of the Attorney General and rulings by the Department. In City of Alexandria v. Morrison-Williams Associates, Inc ., 223 Va. 349, 288 S.E.2d 432 (1982), the Virginia Supreme Court established three criteria that must be met if a taxpayer is to establish it has an agency relationship with its clients. These criteria are: (1) contractual relationships exist between the taxpayer and both the client and the contracted third party, and there is a stated relationship between the client and the contracted third party; (2) the taxpayer does not commingle its “agency” funds with other sources; rather it must have a separate accounting system or a fiduciary account where the pass through receipts from its clients are recorded; and (3) the taxpayer does not report these “pass through costs” on its federal income tax returns. See P.D. 01-38 and P.D. 06-94 (9/28/2006). In accordance with P.D. 17-8 (2/8/2017), the true test is whether a taxpayer was acting in a fiduciary capacity as a legal dispersing agent for a person or entity other than the taxpayer. See 1985-1986 Report of the Attorney General 282 and 1999 Op. Att’y Gen. Va. 187.

Although there were several much smaller categories of cleaning fees accounted for in the audit, the large majority of the fees were paid by the owners. Because neither the Taxpayer nor the City have singled these smaller categories out for separate analysis, for simplicity, the Department will refer to the fees as paid by the owners.

The Taxpayer asserts that it was merely acting as an agent by collecting the cleaning fees on behalf of the owners and passing them through to an unrelated third-party vendor. In P.D. 01-68 (5/22/2001), time-share owners paid fees to the corporation organized to facilitate the operation of a time-share condominium. These fees were used to pay the costs of managing, furnishing, cleaning and maintaining the facility. The Department determined that there was no agency relationship between the owners and the corporation because the expenses at issue were incurred by the corporation and the owners had no contractual liability to the third parties the corporation hired to perform the work.

The facts of this case appear analogous to those of P.D. 01-68. The owners pay fees to the Taxpayer for cleaning services, and no information has been provided that would indicate the owners themselves have a contractual or stated relationship with the service providers hired by the Taxpayer. The fact that the Taxpayer may collect fees for a specific purpose is insufficient by itself to demonstrate that an agency relationship exists.

DETERMINATION

The Taxpayer has failed to prove that it was acting as a legal disbursing agent for the owners in obtaining the cleaning services at issue. As such, there is no basis to overturn the City’s final determination. The assessments, therefore, are 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/3880.B

Related Documents

01-38

01-68

06-94

17-8