Court rules for English Construction in tax dispute

The Virginia Supreme Court has decided against the city of Lynchburg in a case that could change the way localities around the state levy taxes on contractors.

The court on Friday upheld the decision of a lower court, saying that Lynchburg cannot tax contractors for money earned on projects outside the city, even if the locality where the work is performed does not tax the contractor.

Because of the decision, the city will refund more than $185,000 of taxes to Lynchburg-based English Construction and its partner firm W.C. English. Those taxes were paid on construction projects performed in other parts of Virginia, and the firms sued the city in 2005 to recover the money.

A number of Virginia localities, including Lynchburg, will have to stop taxing money earned by local contractors’ long-term jobs in other localities. They also will have to issue refunds to contractors within their borders that have paid taxes on work performed elsewhere.

“Now that’ll be the law of the land,” said Mitch Nuckles, Lynchburg’s commissioner of revenue. “It’s going to impact the way that tax is assessed across the commonwealth, no doubt about that.”

City Attorney Walter Erwin said the city is disappointed with the court’s decision, but it accepts it.

The conflict between English Construction and the city began in 2004 when city officials conducted a routine audit of English’s financial records. The city learned that English had neither reported nor paid taxes on income earned in other parts of Virginia.

The city officials said that state law required English to pay Lynchburg’s business license tax on gross receipts because English is headquartered in the city.

English disagreed, saying that its revenue from work in other localities should be taxed by the localities where the work is performed, or not at all.

“The city said that we owed taxes that we didn’t feel we did owe,” said James Higginbotham, in-house counsel for English Construction.

Higginbotham said that when a company sets up shop in another locality for an extended period of time — some of English’s projects require a satellite office to be established for years — then it should not be taxed at home for that work.

In December 2005, the company sued the city of Lynchburg for $185,472 in taxes the company had paid. As the case played out in Lynchburg Circuit Court, it was said to have statewide implications because Lynchburg was not the only locality in the state to charge taxes on work performed outside its borders.

Nuckles said that he surveyed the 33 largest localities in the state and learned that 30 of them followed the same practice as Lynchburg.

In April 2008, the local court ruled in favor of English, but the city appealed to the Virginia Supreme Court. The higher court accepted the case in November and heard oral arguments on Feb. 26.

One major question of the case was the meaning of a “definite place of business” under Virginia law. Tax laws say that a company has a definite place of business in a locality after being set up there for 30 days, and should pay that locality’s taxes. Lynchburg officials said the statute applies to out-of-state firms, but firms in the state should still pay the taxes of their home locality.

The Supreme Court examined the language in the statute and determined that it also applies to in-state firms that have locations in other localities for more than 30 days. The court’s written opinion said that Lynchburg couldn’t tax income earned from English’s business in other localities because the law does not specifically allow that.

Seven of the court’s 11 judges were present for the vote on the case and voted unanimously against the city.

“While we’re disappointed with the decision, we’ll accept the decision and proceed from here,” Erwin said. “… Contractors will now be able to come forward and request a refund. Other localities will have to address it in the same way that (Lynchburg) will.”

Because no federal laws are involved in the case, the city cannot appeal the case further. While it could ask the state Supreme Court to reconsider, the unanimous decision makes that unreasonable, Erwin said.