Virginia Real Estate, Land Use & Construction Law : Virginia Construction Lawyers & Attorneys : Bean Kinney & Korman Law Firm : VA Real Estate, Land Use & Zoning

For those of you out there who are following whether commercial real estate can be taxed at a different rate than residential property, FFW Enterprises v. Fairfax County, et al. has been slated for the Supreme Court's September arguments docket.  Like most other states, in the Commonwealth of Virginia the Constitution contains a "Uniformity Clause" which was intended to prevent the General Assembly from allowing the taxation of different classifications of real property in an inequitable manner.  Specifically, Article X, Section 1 of the Constitution of Virginia provides:

"...All taxes shall be levied and collected under general laws and shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax, except that the General Assembly may provide for differences in the rate of taxation to be imposed upon real estate by a city or town within all or parts of areas added to its territorial limits..."

The core of the dispute is whether Fairfax County may tax only commercial property owners, such as FFW Enterprises, without taxing residential property owners, to fund transportation projects.  The General Assembly, through Section 58.1-3221.3 of the Code of Virginia, granted authority to Northern Virginia localities to levy special taxes for  transportation projects, and in combination with this authority, Fairfax County created a special tax to fund portions of the Silver Line metro project using Section 33.1-431 of the Code of Virginia.   In a nutshell, Fairfax County taxed commercial property owners a special transportation surcharge and exempted residential property owners from having to do so to fund metro improvements.

Last summer, the Circuit Court of Fairfax County (see here for opinion) held that the Uniformity Clause does not prohibit localities from "...provid[ing] for differences in the rate of taxation to be imposed upon real estate..." so long as these differences are not imposed upon the "same class of subjects."  However, in 1947 pursuant to City of Hampton v. Ins. Co. of North America, the Supreme Court has already held that the test to determine the constitutionality of such a tax is:

"[Alre there others, who are benefited as much or more than those smarting under the tax imposition, who go unwhipped of its burden?"

FFW Enterprises plead just that, asserting that residential property owners will benefit as much from the construction of the Silver Line as commercial property owners in Fairfax, however commercial property owners will bear the sole brunt of the costs and taxes.  Nonetheless, the Circuit Court of Fairfax County found FFW Enterprises failed to establish this, and that the 1947 standard is no longer relevant or applicable.  These questions will now be put to the Supreme Court in just a few weeks - we'll keep you posted.

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Last week, Montgomery County, Maryland passed what has been described as the nation's first local carbon tax.  The tax imposes $5 per ton on any entity that emits more than 1 million tons of carbon dioxide in a single year.  Interestingly, the tax only applies to Mirant Corporation which owns the Dickerson Generating Plant in Montgomery County.  Mirant will reportedly challenge the tax in court.  The county also passed an 85% increase on its energy use tax.

The passage of the tax highlights the distinct differences in local authority between Maryland and Virginia.  In Maryland, localities are far more free to adopt their own regulations, taxes and requirements. Proponents point to increased local control.  Detractors point to the patchwork regulatory scheme in Maryland which makes doing business across the state more complex and potentially expensive.

In Virginia, the Dillon rule still controls which provides that localities only have the powers given to them by the state.  While often criticized by local officials seeking more muscular authority, it does tend to lead to more uniformity in business regulation, taxes, and code requirements.  This can be particularly important in the real estate and construction industries.  It appears clear that localities in Virginia would not currently be able to pass a local carbon tax like that passed in Montgomery County, Maryland.

Image by Phillip

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Here is a new sampling of cases in which the Virginia Supreme Court has recently granted appeals.

In April, the Court granted the petition for appeal in Studio Center Corporation v. WKW Construction, LLC, Record No. 092257, challenging the ruling of Judge Shockley from the Circuit Court of the City of Virginia Beach. Studio Center is contesting Judge Shockley’s holding that Virginia Code Section 54.1-1115(C) applied when the unlicensed contractor admitted it knew Virginia law required a license, but did not realize that it could not use someone else’s license. This case should give us some much needed guidance on Section 54.1-1115(C)’s requirement of “good faith” and “actual knowledge.”

What “Case Watch” would be complete without an appeal involving one of my favorite topics – BPOL tax! In March, the Court accepted the petition for appeal in Ford Motor Credit Company v. Chesterfield County, Record No. 092158. This case will delve into, among other issues, when a tax payer can take a deduction for out-of-state gross receipts under Virginia Code Section 58.1-3732(B)(2), and when it is appropriate to use the default apportionment method in Virginia Code Section 58.1-3703.1(A)(3)(b) to measure the tax payer's gross receipts.

In January, the Court also granted the petition for appeal in AMEC Civil, LLC v. Commonwealth of Virginia, et al., Record No. 091662. AMEC Civil designated no less than twenty-two assignments of error, with the Commonwealth designating seven assignments of cross-error. Much of the debate revolves around whether AMEC was required to give VDOT written notice of its claims at the “beginning of the work,” or whether AMEC could have given notice at the “time of the occurrence” under Virginia Code Section 33.1-386, whether that notice requirement could be satisfied by VDOT’s actual notice, and whether VDOT must show prejudice by any delay in providing notice. Some of the other issues involve whether sustained elevated lake levels constituted a differing site condition, and whether VDOT had a reciprocal duty to provide AMEC notice of that condition under the contract.

As always, stay posted!
 

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If you are an owner or operator of affordable rental housing (property with four or more units), it might be worth noting that the General Assembly has just restricted your local real estate tax assessor's discretion to value your property to one method.   Senator Whipple, apparently at the request of the Virginia Housing Commission, patroned a bill passed by both houses this session to amend Section 58.1-3295, requiring localities to assess real property being operated as affordable rental housing solely via the income valuation approach.  Presumably, the reason for this was that local assessors have been trying to tax committed affordable rental housing (i.e. housing that is legally bound to remain and operate as affordable housing at limited rents), at rates that do not reflect these income stream restrictions, by using methods to determine fair market value other than the income approach.

In a nutshell, before this amendment, a local assessor could assess real property three different ways:

1. The Sales Comparison Method, or "Market Approach;"
2. The Replacement Cost Less Depreciation Method, or "Cost Approach;" and
3. The Capitalization of Income Method, or "Income Approach."

Additionally, when dealing specifically with affordable housing, after application made by the owner, assessors were required to consider:

1. The impact of any legally imposed rent restrictions;
2. Any additional operating expenses associated with affordable housing compliance requirements; and
3. Any legally imposed restrictions on the transfer of title or other restraints on alienation.

Assessors were also expressly prohibited from attributing the value of affordable housing tax credits to affordable housing sites.

So, basically, assessors will still be required to take into account the special affordable housing valuation factors listed above, but will now be required to only use the Income Approach in determining fair market value.  Well, the policies involved being fairly apparent, we just have to wait and see whether local assessors will decide whether they think they need to obey this new valuation as prescribed by this amendment, or whether they may disregard it.  In any event, it may be worth looking into how your local assessor is currently determining the value of your affordable housing inventory.

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It looks like “Punt” is the name of the game with Virginia tax reform. In a January 5, 2010 blog post and a January 20, 2010 blog post, I discussed four tax reform proposals – all of which the General Assembly has managed to put off until a later date.

Apparently, HB 57 got the most traction. This was the bill proposing to prohibit any locality that had not already imposed a BPOL tax from doing so and prohibiting any increase in BPOL tax rates. The House passed that bill with a resounding 88 to 8 vote, but the Senate referred the bill to the Committee on Finance and continued a vote on the bill until 2011.

The other three votes never even made it to a vote by the House. HB 2 recommended a tax credit for small business taxpayers equal to 10% of eligible investments in personal property and real estate improvements. HB 47 proposed tax credits for companies with telecommuting employees. HB 110 would have allowed localities to decide whether to impose BPOL taxes on a taxpayer’s business’s gross receipts or on its Virginia taxable income. All three of these bills got stuck in the House Committee on Finance and were continued to 2011 by voice vote.

I have to admit that, of the four bills, I had the highest hopes for HB 110. I'm sorry to see the General Assembly has put off voting on what would have been a welcome amendment to the BPOL tax statute. Hopefully the General Assembly will agree in 2011!

Here is a piece of good news for Virginia taxpayers and Delegate Mark Cole, who sponsored both HB 57 and HB 110.  Delegate Cole also sponsored HB 17, which proposed to reduce the limitation period for collection of state taxes from 20 years to 10 years. HB17 passed in both the House and the Senate, and was just approved by the Governor last week. This law will take effect on July 1, 2010.
 

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Virginia Delegate Mark Cole is up to it again, proposing another amendment to the business, professional and occupational (“BPOL”) tax laws. Delegate Cole sits on the House of Delegates Finance Committee, and represents the 88th District, spanning Stafford, Spotsylvania and Fauquier Counties and the Town of Remington. As you may recall from my last blog post on proposed business tax reforms in the Commonwealth, he sponsored HB 57, which would freeze BPOL tax rates, and prohibit those localities that do not have a BPOL tax from imposing one.

Currently, the BPOL tax is targeted at a business’s gross receipts, defined by Virginia Code Section 58.1-3700.1 as a company’s “whole, entire, total receipts, without deduction.” Delegate Cole’s proposal, HB 110, would allow localities to decide whether to impose their BPOL tax on a business’s gross receipts, or on its Virginia taxable income.  HB 110 provides two methods to calculate "Virginia taxable income," depending on which is applicable to the business -- a calculation under Virginia Code Section 58.1-322 (Virginia taxable income for residents) or under Virginia Code Section 58.1-402 (Virginia taxable income for corporations). 

Undoubtedly, localities may be skittish of these changes in the face of some very hard economic times and dwindling local budgets. However, businesses should view HB 110 as a welcome change to take the sting out of what many consider to be the harshest aspect of the BPOL tax – the notion of taxing gross receipts with no ability to consider adjustments or deductions.
 

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Tax reform means “Don’t tax you, don’t tax me, tax that fellow behind the tree.” – Russell Long, U.S. Senator from Louisiana, 1948-1987.

Despite the budget crisis facing the Commonwealth and local jurisdictions all around Virginia, the General Assembly is considering new tax credits and limits in its upcoming session.

HB 2 proposes a tax credit equal to ten percent of the eligible investments made by small business tax payers in personal property and real estate improvements used in the business. Acquisition of or expenses related to motor vehicles used in the business and purchase or rental of real estate will not qualify as eligible investments. Qualifying investments must be at least $10,000 and must be made beginning July 1, 2010 but before July 1, 2011. For purposes of this proposed tax credit, a business qualifies as “small” if it has 500 or fewer employees. The patrons of HB 2 are Delegate Manoli Loupassi of the 68th District, which includes parts of Chesterfield County and the City of Richmond, and Delegate Christopher Peace of the 97th District, which includes parts of Hanover, Caroline, Henrico, Spotsylvania, King William and King and Queen Counties.

HB 47 proposes a tax credit to employers for expenses incurred in allowing employees to telecommute pursuant to a signed telework agreement for taxable years beginning on or after January 1, 2011 but before January 1, 2013. Under this proposed tax credit, an employer is eligible for a credit of up to $1,200 per teleworking employee, depending on the number of days per month the teleworking employee teleworks and whether the employer’s primary place of business is located in a nonattainment area under the Federal Clean Air Act. The employer may also receive a 100% tax credit (capped at $20,000 per employer) for costs incurred for conducting a telework assessment in the year prior to implementing a formal telework program. There is a $1 million annual cap for taxable years 2011 and 2012 for the aggregate amount of tax credits to be issued. This seems like a good deal for the constituents of Delegate Scott Lingamfelter of the 31st District, who is sponsoring this bill. Delegate Lingamfelter is based out of Woodbridge, an area that could greatly benefit by an increase in telecommuting.

HB 57 seeks to prohibit localities from imposing a business, professional and occupational license (“BPOL”) tax if they have not already done so as of January 1, 2010. Additionally, the bill freezes BPOL tax rates in jurisdictions that have already chosen to impose BPOL taxes. This bill is being introduced by Delegate Mark Cole of the 88th District, which spans Stafford, Spotsylvania and Fauquier Counties and the Town of Remington. Unlike its neighbors, Stafford County had no BPOL tax until 2008, when the Stafford County Board of Supervisors narrowly voted to impose the tax by a 4-3 vote. The Stafford County Sun’s article shortly after that vote discusses how opposed Stafford residents were to the tax, and how controversial the vote was. In fact, Stafford County residents were not the only ones opposed to the tax. Some Spotsylvania residents, who were already subject to the BPOL tax, felt that the lack of a BPOL tax in Stafford not only gave Stafford a competitive edge, but also put political pressure on their local politicians to keep their taxes low. You can read one take on this theme in a blog post on the Spotsylvania Republican Committee’s blog, On the Spot.  For an overview of what jurisdictions have imposed BPOL taxes as of 2005, take a look at this chart meticulously pulled together by the University of Virginia's Weldon Cooper Center for Public Service.
 

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As a follow up from an earlier blog post discussing tax amnesty programs in the Washington Metropolitan area, Nancy Trejos's article in the Washington Post today discussed Maryland's tax amnesty program that extends until October 30 and Virginia's program that gives residents until December 5.  The District of Columbia has also approved a tax amnesty program, but has not yet announced the relevant dates.  There's no better time than the present if you owe any back taxes!

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The economy has affected the budgets of not just individuals and companies, but also state and local governments. In these hard economic times, governments are facing serious shortfalls of revenue, made worse by the plunging value of real estate, shriveling sources of funding and growing budget deficits.  In response, states and municipalities have become much more proactive about checking and enforcing compliance with all taxes, including business taxes.

You are likely aware of business license requirements, but  you may not realize that you could be required to obtain a nonresident construction license if you work in other states, such as Maryland. Additionally, you could be subject to further business tax obligations above and beyond your business license fee, such as sales or gross receipts taxes and use taxes.

One of the most notable examples of business taxes can be found in Virginia, where counties, cities and towns are authorized to levy “BPOL” (Business, Professional and Occupational License) taxes. BPOL taxes are geared towards a company’s gross receipts, making these taxes controversial and often the subject of political attack. Most local governments in Virginia, including those in Northern Virginia, have opted to impose BPOL taxes. 

Generally, BPOL taxes are levied where the company has its “definite place of business.” Special provisions apply to contractors, including one provision that allows a locality outside the contractor’s “definite place of business” to impose BPOL taxes if the contractor does more than $25,000 of business in a year in that locality. Because there is no centralized administration for BPOL taxes, you must work with each locality to ensure compliance.

In an effort to encourage businesses and individuals who are behind on or non-compliant with payments, some jurisdictions will extend a form of amnesty. Starting September 1, 2009 and extending until October 30, 2009, Maryland is extending Tax Amnesty to business taxpayers. You can find more information and an application on the Comptroller of Maryland’s website.

The District of Columbia has an ongoing “Voluntary Disclosure Program” through its Office of Tax and Revenue (“OTR”). With this Program, the District may agree to a three- to five-year look-back period and may waive civil penalties if the tax and interest are paid in full. You can find information and a form Voluntary Disclosure Agreement on OTR’s website.

Because state and local governments are currently hungry for tax revenue and actively enforcing compliance with local taxes, it is vital to ensure that you are in full compliance with your licensing and business tax obligations.

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