COUNTY OF ALBEMARLE
Reduced BPOL Tax Rate for Direct Retail Sales
Worksession to Discuss Staff’s Analysis of a Reduced BPOL Tax Rate for Direct Retail Sales and the Draft Ordinance to Implement This Proposal
Tucker, White, Davis, Herrick, Wiggans, Walters
LEGAL REVIEW: Yes
April 05, 2006
ACTION: INFORMATION: X
At its March 1, 2006 meeting, the Board discussed a request that it approve a reduced Business, Professional, and Occupational License (BPOL) tax rate for direct retailers. The Board asked staff to prepare an analysis of the issue and a draft ordinance to review at its April 5, 2006 meeting.
This analysis is provided below. It includes a brief review of the history and current status of the BPOL tax in Virginia, an analysis of the financial implications of reducing the rate for direct retail sales, and the advantages and disadvantages to the County of this request. The draft ordinance is included as Attachment A.
4.0 Provide effective and efficient County services to the public in a courteous and equitable manner.
The BPOL tax has existed for quite some time in Virginia. Practically unheard of in the colonial period, it was recognized as a source of revenue at the state level following the War of 1812 when the state government assumed Virginia’s quota of the costs of that war. By 1850, the policy of levying a license tax on practically all well-established businesses and professionals was adopted. Today, the BPOL tax remains an important source of revenue to localities. The County of Albemarle generated $8.0 million of revenue in FY05 and it is estimated that it will generate $8.9 million of revenue in FY06.
All 50 states have some form of license tax. BPOL in Virginia is a tax levied on gross receipts without any deduction for expenses. Virginia does not allow local governments to levy an income tax which would take expenses into account. In response to concerns raised by businesses over different interpretations of the Code, Virginia significantly amended BPOL laws in 1996 to help ensure a more uniform administration of BPOL taxes throughout the Commonwealth. State law requires BPOL to be structured to categorize business activities that display similar operating ratios and sets maximum tax rates per gross receipts for these categories of businesses. Localities have the option to set lower rates. The Virginia Department of Taxation assists by publishing Guidelines which are amended periodically.
Staff identified three businesses that currently report sales that meet the definition in the proposed Ordinance for Direct Retail Sales. The draft Ordinance defines a “direct retail sale” as a retail sale made to a remote buyer ordering by telephone, internet, or mail, in which the item(s) sold is/are shipped by common carrier or by the U.S. Postal Service. Direct Retail Sales currently is not a separate classification for BPOL reporting and taxation. All retail sales are reported and levied as Retailers or Retail Merchants. Retail merchants generated BPOL tax revenue of $2.9 million for FY05 and are estimated to generate $3.3 million for FY06. Staff believes that there are more retail merchants that have sales that meet the definition but is unable to identify them or segregate the amount of sales. The amount of sales may be substantial.
Annual sales for direct retailers in Albemarle County, including actual amounts for the known retailers and an estimate for unknown retailers could range anywhere from $140 to $200 million (due to confidentiality reasons, staff can not disclose the sales figures for the known retailers or the estimate for the unknown retailers). Although extremely difficult to predict from current information, the increasing trend toward this type of direct sales versus counter sales, could increase this estimate to as much as $300 million. These sales are subject to the current BPOL rate of $0.20 per $100 of sales. The proposed Ordinance would reduce the rate to $0.10 per $100 of sales. Using the $200 million direct retail sales estimate, this reduction would decrease the tax revenue to the County from these direct retail sales from $400,000 to $200,000, an annual decrease of $200,000. If the rate was reduced to $0.025 per $100 of sales, the reduction would decrease tax revenue to the County from these direct sales to $50,000, an annual decrease of $350,000.
The above analysis has dealt specifically with BPOL. It should be noted that direct retail sales businesses are subject to real estate tax, personal property tax, and consumer utility tax, as well as being an agent to generate consumer sales and use taxes. Because these taxes may or may not be lost or replaced by other businesses, any analysis of lost taxes due to a business relocating because of the amount of the BPOL tax is speculative and uncertain.
The advantages to Albemarle County of reducing the BPOL tax on Direct Retail Sales include:
The disadvantages to Albemarle County of reducing the BPOL tax on Direct Retail Sales include:
As noted above, a ten cent reduction in the BPOL rate on Direct Retail Sales would decrease County revenues annually by $200,000. A 17.5 cent reduction in the rate, from 20 cents per one hundred dollars to 2.5 cents per one hundred dollars, would decrease County revenues annually by $350,000. The annual impact on County revenue of each one cent reduction in the BPOL tax rate on Direct Retail Sales is approximately $20,000.
An alternative to reducing the BPOL tax rate of Direct Retail Sales only is to reduce BPOL tax rates on all sales and services. The impact of each one cent reduction in the rates is approximately $380,000 in FY 2006-07.
The analysis presented above is for Board discussion and review. If the Board desires to consider an amendment of the BPOL tax rate for direct retail sales, staff recommends that the Board (1) determine the reduced rate it wishes to consider and (2) authorize a public hearing to be advertised for an ordinance to amend § 8-617 of the County Code to reduce the BPOL tax rate for direct sales as defined in the attached draft Ordinance.
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