Virginia's high court ruling could impact budgets

The recent Virginia Supreme Court ruling against the city of Lynchburg could have immediate and long-term impacts on local government budgets statewide.

The court’s ruling struck down, under certain conditions, a common practice of taxing local contractors for revenue earned on projects done in other localities.

While local government officials are looking into what the change could cost their budgets — in tax refunds now and in reduced collections later — some are mulling the idea of changing the law so that it allows for the tax.

Mark Flynn, director of legal services for the Virginia Municipal League, said the court’s decision flies in the face of the policies of many localities in the state and of the Virginia Department of Taxation.

“Localities around the state have, for years, followed what the law says to operate their taxes,” Flynn said. “Now that just gets thrown out the window.”

“The reason we have these taxes is so local governments can provide services,” Flynn said. “This is a $200,000 hit to the city of Lynchburg for one business, and everybody has to change their practices around.”

The April 17 decision upheld an argument from Lynchburg-based contractor English Construction and its partner firm W.C. English. They said that the city could not charge its business license tax on money they earned in other localities where they have a “definite place of business.”

Virginia law says a definite place of business is an office established for at least 30 days in a locality.

The city of Lynchburg contended that if a contractor does not pay a business license tax to the locality where its work is being done, it should pay the taxes to the locality where its headquarters are. The city spent about $122,000 in legal fees to argue its case.

The Supreme Court ruled that state law does not give the city clear authority to tax those revenues.

Because of that ruling, Lynchburg must pay the English firms $267,404, which includes nearly $82,000 in interest. City officials also expect tax collections to fall by about $50,000 per year going forward because of the change.

The fiscal impact could be greater if other contractors in the city step forward and say that some of their revenues are exempt from the city’s business license tax.

Mitch Nuckles, commissioner of the revenue for the city, said that Southern Air has asked to have some of its business license taxes refunded. Nuckles would not say how much the company requested, but the amount would become public if an audit shows a refund is necessary.

In other Central Virginia localities, officials are not certain how the court’s ruling could impact their budgets.

Calvin Massie, commissioner of the revenue for Campbell County, said no companies have asked for a refund yet. He is not seeking them out, either. “It’s a wait-and-see proposition, to see who comes to me and what their story is,” Massie said.

He said the county collects about $1.6 million per year in business license taxes. About $320,000 of that is from contractors, he said. The county doesn’t have many contractors who would meet the standards that would prevent the county from charging the tax, he said.

“I think (the impact is) going to be minimal to Campbell County,” he said. “At least that’s what we’re hoping.”

Amherst County collected about $404,000 in business license taxes in fiscal year 2008. Commissioner of the Revenue Linda Byers said she does not know how those collections could be impacted.

Bedford County and Appomattox County do not charge business license taxes on gross receipts.

Although the taxation practice overturned by the court was common in theory — 30 of the state’s 33 largest localities told Nuckles they followed Lynchburg’s practice — the circumstances addressed by the Virginia Supreme Court are less common.

In Chesterfield County, the commissioner of the revenue believes the county’s receipts won’t be affected at all because few contractors meet the requirements that make their revenue tax exempt.

“The opinion talked about a contractor with a definite place of business in a locality away from their home locality,” said Joe Horbal, commissioner. “That’s a different circumstance than a contractor who just has a project in a locality.”

Flynn said that because some localities could lose tax revenue because of the Supreme Court’s decision, the state legislature should address the issue.

“There’s going to be a reduction in taxes at the local level,” he said. “Are we supposed to raise state income taxes to pay for these things?”

“The issue will probably be raised through our legislative process to see what they want to do.”

Keith Cheatham, vice president of government affairs for the Virginia Chamber of Commerce, said he was pleased with the Supreme Court’s decision. He said it doesn’t make sense for a city to tax money that is earned somewhere else.

He pointed out, however, that the General Assembly could address the law in 2010 to allow the taxation of money earned in other localities.

The chamber opposes the business license tax on gross receipts entirely, because businesses owe the tax even if they operate at a loss, he said. But he also said that it would be nearly impossible to strike the tax entirely.

“We also understand and recognize that localities are dependent on the tax, so until we can replace the revenue that would be lost by a repeal of the tax, it’s going to be a non-starter.”