Solution elusive for tax small businesses love to hate

There is little more despised in the Virginia small business community than BPOL (Virginia’s business, professional, and occupational license tax). Everyone agrees it needs to be eliminated or modified. Getting there, however, has proven elusive.

tax keys Can Stock Photo Inc.  bradcalkinsThat contempt was evident during the first panel discussion at the 2015 Virginia Small Business Summit, conducted at The Hilton in Springfield on Nov. 20, where beating on BPOL was the sport of choice. Virginia Delegate Chris Head (R-Roanoke), chairman of the Virginia General Assembly Business Development Caucus, said the Springfield gathering was the nineteenth time the caucus had led a discussion on improving Virginia’s business climate and the nineteenth time BPOL took center ring.

BPOL was instituted to pay off Virginia’s share of War of 1812 debts, which one has to assume have been paid by now. It taxes Virginia businesses on gross receipts. Not profit, but gross receipts. The rate varies with type of industry, but for tight-margin businesses their tax can be more than their profit. BPOL taxes are administered by counties and cities. Not all counties and cities administer the tax and for those that do, the rates vary greatly.

For example, Fairfax County taxes businesses a flat rate BPOL tax until gross receipts hit $100,000, at which point the percentages kick in. Prince William County starts its BPOL taxation when gross receipts hit $250,000, and county supervisors voted in November to raise that threshold to $300,000 in 2016.

According to the Washington Post, Fairfax County collects about $147 million in BPOL taxes annually. That’s about 3.8% of the county’s annual operating budget. Arlington collects about $50 million annually, or about 3.5% of its annual budget. In contrast, PotomacLocal pegs Prince William County’s BPOL annual income at $26.5 million, or 0.1% of its operating budget.

That may not seem like a lot, but with many counties facing budget shortfalls, every little bit counts. Even BPOL-haters agree to knock out BPOL something must replace it. There is no easy fix, however.

Both Democrat Terry McAuliffe and Republican Ken Cuccinelli during their 2013 race for governor said they would study ways to eliminate BPOL as well as the Merchants Capital (MC) tax, and Machinery and Tool (M&T) tax—two other taxes loathed by the small business community. McAuliffe won in a near draw. He has two more years to make something happen.

McAuliffe recently asked his Secretary of Finance to take a look at Virginia’s tax structure with an eye toward recommending ways to make it more business friendly. The request was vague enough to engender blank stares in the business community.

The Thomas Jefferson Institute for Public Policy entered the fray in 2012 with a report it said would eliminate BPOL, MC, and M&T taxes and yet be revenue neutral.

In September, the institute published an update that included 23 scenarios. In a letter to this year’s political candidates, the institute said each scenario has the same basic criteria behind them:

  • Tens of thousands of jobs are created
  • Income taxes are reduced or specific brackets eliminated and/or in some of the 23 scenarios the grocery tax is also eliminated
  • This overall plan is revenue neutral
  • The impact of BPOL, M&T, and MC taxes are eliminated
  • No new business-to-business taxes are applied
  • The localities that collect these three taxes are kept whole
  • The sales tax is broadened to services not now liable for collecting it except there is no sales tax on any health care services, just as is the case today

Although the institute’s first report was issued three years ago and the current rendition is backed by the Virginia Manufacturers Association, the Virginia NFIB, and the Virginia Retail Association, neither Delegate Head nor Delegate Vivian Watts (D-Annandale) reacted when the plan was raised at the summit. (Watts is not a member of the caucus but was at the summit because she represents the area.) Neither did either delegate respond by post time to requests made Wednesday afternoon for follow-up comments.

Other organizations, of course, have touted alternatives as well. For example, the Virginia Retail Federation commissioned its own study in 2009. It concluded:

“Improvements can be made to the current BPOL tax system to make it more consistent and uniformly applied across localities. Special treatment of BPOL taxes should be re-evaluated particularly regarding industry exemptions. Another alternative is to assess BPOL taxes based on profits rather than businesses’ gross receipts.

“With this approach, one rate is applied for all businesses. BPOL tax reform can also be framed under the re-evaluation of the overall tax structure of Virginia. Since sales taxes are also based on the gross receipts, it is possible to remove the BPOL tax, while broadening the current sales tax to construction, finance, real estate, and professional service industries.”

Watts noted at the summit that the issue is complicated by the fact that county tax structures were put in place in the 1700s and are real-estate-tax-based.

Despite it being the nineteenth time BPOL had been raised in a caucus panel discussion, only one BPOL-related measure was introduced by a caucus member in 2015. The bill would have eliminated double-taxation of contractors and subcontractors on gross receipts, allowing contractors to subtract subcontractor payments from its liabilities. That bill failed in committee.

While the War of 1812 ended in less than three years, this war has no end in sight. The brawl, however, will continue.


Tom Pfeifer is the managing partner and chief strategist for Consistent Voice Communications. Reach him at Tom@YourConsistentVoice.com.

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