Joint Subcommittee to Study and Revise Virginia's State Tax Code

HJR 60 (2002)
HJR 685/SJR 387 (2001)

The joint subcommittee studying Virginia's tax code held its fourth meeting of the year in Richmond and heard from several work groups on issues assigned for study by the joint subcommittee and the General Assembly. The joint subcommittee received testimony regarding the Streamlined Sales Tax Project, the Telecommunications Tax Study (HJ 209; 2002), the BPOL tax, the individual income tax, appeals of state taxes to the Department of Taxation, appeals of real estate tax to local Boards of Equalization, and sales tax collected on non-dealer sales of motor vehicles.

Streamlined Sales Tax Project

The Streamlined Sales Tax Project is a project that was begun by several states and tax administrators (both government and business). The objective of the project is to simplify and make more uniform the administration of sales and use taxes for merchants who sell their goods over the Internet or who are active in interstate commerce. One result of the project may be the voluntary collection and remittance of use tax to state authorities by merchants who are not legally obligated to collect and remit the tax.

Legislation passed by the 2002 General Assembly enabled Virginia to join the Streamlined Sales Tax Project and for appointed members of the General Assembly to enter into multi-state discussions on behalf of the Commonwealth to consider whether the Commonwealth should enter into a multi-state sales and use tax simplification agreement (See Senate Bill No. 688). Virginia is one of 35 states (implementing states) that have entered into the multi-state discussions. The consensus of representatives of the implementing states is to not impose taxes on means of accessing the Internet. The group has also agreed that sales taking place over the Internet should be subject to sales and use taxes. (The United States Congress has passed legislation placing a moratorium on new taxes for accessing the Internet and on new sales and use taxes on goods sold over the Internet. This moratorium is due to end in 2003).

It was reported to the joint subcommittee that Virginia has an estimated loss of between $225 million - $260 million annually in sales and use tax that is not collected for sales taking place over the Internet. The joint subcommittee was told that Virginia's annual loss is estimated to reach $1 billion per year over the next 6 to 8 years if there are no changes in the law.

The implementing states have agreed to allow for more than one sales and use tax rate in a state, but the tax base must remain the same in every locality of the state. Rules on rounding the amount of tax are one area where agreement has not been reached.

The implementing states will try to reach a final agreement on legislation for adoption by each state at the group's November 12 meeting in Chicago. Adoption of the agreement is voluntary for each implementing state.

Telecommunications Tax Study

House Joint Resolution No. 209 (2002) established a joint subcommittee to study the state and local taxation of the telecommunications industry and its customers. This joint subcommittee reported that local taxes collected by telecommunications companies include consumer utility, E-911 and cable television fees. As a result, telecommunications companies must make many deposits to the accounts of local governments for each of these taxes.

The joint subcommittee studying telecommunications taxes found that state taxes on telecommunications are very low while local taxes on telecommunications are very high. The Commonwealth collects $80 million annually in telecommunications taxes while local governments collect $320 million annually from these taxes.

Businesses in the telecommunications industry would like a reduction in the number of telecommunications taxes and a reduction in the amount of tax on telecommunications. They also believe that local governments must be kept whole as part of any tax restructuring of telecommunications taxes.

Ideas discussed in meetings of representatives of the telecommunications industry and of local governments include the consolidation of all telecommunications taxes into one line item on customer bills, uniformity of tax rates across the state, and collection of all telecommunications taxes by a central administration, possibly the Department of Taxation.

The joint subcommittee studying telecommunications taxes will seek to continue its study for another year to give the industry representatives and local government representatives additional time to develop a solution that all will support.

BPOL Tax

The joint subcommittee also heard from representatives of the business community and local governments in regard to the BPOL tax.

The business community would like to see the BPOL tax repealed. Representatives of the Virginia Chamber of Commerce believe that the tax can only be repealed as part of a larger restructuring of Virginia's tax code. The Greater Richmond Retail Merchants Association (the "Association") presented two alternatives for eliminating the BPOL tax. The first alternative would be to eliminate the BPOL tax over a five-year period by rolling back BPOL tax rates at twenty percent a year for five years. To offset the loss in revenue for local governments, the Association suggested that local governments be paid the revenue from an immediate ½ percent increase in the retail sales tax and, at the end of the fifth year, a ¼ percent increase in the corporate income tax. The second alternative suggested was to eliminate the BPOL tax over a ten-year period by rolling back BPOL tax rates at ten percent a year for ten years. The Association suggested compensating local governments with the revenue from an immediate ½ percent increase in the retail sales tax and, at the end of the tenth year, a ¼ percent increase in the corporate income tax.

Representatives of the Virginia Association of Counties (VACO) and the Virginia Municipal League (VML) stated that the BPOL tax generated more than $459 million in local revenue in fiscal year 2001. Statewide, the tax accounted for more than four percent of all locally generated revenue. Some localities rely on the BPOL tax for as much as twenty-five percent of their locally generated revenue. Towns have a much higher reliance on the BPOL tax.

VACO and VML stated that BPOL revisions in 1996 have improved administration of the BPOL tax for all involved. In addition, the revisions gave taxpayers a right to appeal their tax to the Tax Commissioner. VACO and VML also stated that the 1996 revisions eliminated the BPOL tax for many small businesses.

Individual Income Tax

The joint subcommittee received a recommendation for restructuring Virginia's individual income tax. The recommendation would eliminate all individual income tax exclusions, deductions and tax credits, with the exception of the current deduction for social security income. The tax would be applied to federal adjusted gross income reported on an individual's federal income tax return. The plan calls for no tax for the first $20,000 of federal adjusted gross income reported on each individual income tax return. The new income tax brackets and tax rates would be:

The tax rates and tax brackets are intended to be revenue-neutral in regard to the revenue currently generated from Virginia's individual income tax.

Appeals of State Taxes to the Department of Taxation

The joint subcommittee heard recommendations from the Tax Commissioner for changes in the current process for appealing state taxes to the Department of Taxation. The Tax Commissioner proposed the creation of a limited right of appeal to an independent hearing officer located in the Department. The Tax Commissioner would have no right of review over the hearing officer’s decision nor would the Tax Commissioner have any authority to direct or otherwise interfere with the independent hearing officer’s determination. The independent hearing officer would be an attorney selected by the Tax Commissioner and would serve for renewable terms of four years.

Under the Tax Commissioner’s recommendation, the hearing officer would only hear appeals that involve sales and use, corporate income, or individual income assessments of $30,000 or more. A $500 fee would be charged to each taxpayer filing an appeal with the independent hearing officer. The fee would help offset the cost of establishing an independent hearing officer position.

Decisions of the hearing officer would be rendered in 90 days. Both the Department of Taxation and the taxpayer would be able to appeal the hearing officer’s decision, de novo, in circuit court.

The Tax Commissioner also recommended that there be no change to the current law requiring a taxpayer to pay his tax assessment prior to the circuit court hearing the taxpayer’s appeal.

Appeals of Real Estate Tax to Boards of Equalization

The joint subcommittee received a report relating to the procedures for appealing local real estate taxes. Representatives of the business community and local governments have formed a work group to study the procedures for appealing real estate taxes to Boards of Equalization. The work group has agreed on several issues relating to appeals of real estate taxes to Boards of Equalization, and will continue to meet to try to reach agreement on the remaining unresolved issues. Discussions have focused on, among other things, the taxpayer’s burden of proof in appealing a real estate tax assessment and the term of service for members of Boards of Equalization.

Tax Collected on Non-dealer Sales of Motor Vehicles

The joint subcommittee heard testimony that the sales price reported for automobile sales not involving dealers is much less than the sales price reported for sales of similar automobiles in which a dealer is a party to the sale. In collecting the motor vehicle sales and use tax on non-dealer sales, the Department of Motor Vehicles (DMV) will accept the sales price reported to it by the buyer provided the buyer provides documentation of the selling price. Acceptable documentation from the buyer can include a sales receipt or a certificate of title with the sales price filled in. DMV’s analysis of 95,000 non-dealer sales of automobiles in which the buyer provided documentation of the selling price revealed that in every case the selling price reported by the buyer was at least $1,500 less than the NADA Average Trade In Price for the same vehicle.

The work group is studying whether purchasers of automobiles are reporting the true sales price in transactions that do not involve dealers. Of course, if the sales price reported to DMV is less than the actual sales price agreed to, the amount of sales and use tax collected by DMV is less than what is required under current law. The work group will continue to meet to develop recommendations for improving the accuracy of information collected by DMV.

Public Hearing/Next Meeting

The Joint subcommittee has scheduled a public hearing for Monday, October 28, at 7:00 p.m. in Senate Room B of the General Assembly Building in Richmond. The public is invited to comment on the nine recommendations proposed by the joint subcommittee (See summary of September 12 meeting for a list of the recommendations). This will be the only public hearing scheduled in 2002. The full subcommittee will meet again on November 13 to determine formally which of the recommendations it will propose for the upcoming session of the General Assembly.

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