Virginia Law

A. Section 58.1-3703 of the Code of Virginia authorizes localities to enact an ordinance levying a local license (BPOL) tax or a fee, or both for issuing a license. Every ordinance adopted or maintained by a locality that levies a license tax is required to be substantially similar to the provisions in § 58.1-3703.1 of the Code of Virginia. Further, §§ 58.1-3703 and 58.1-3706 of the Code of Virginia set statutory maximums for license rates and fees. Localities may choose not to require a license or impose fees, or localities may assess rates and fees that are less than the maximums stated in the statute.

B. Localities may levy license taxes at rates above the statutory maximum only if subject to the "rollback" provisions of § 58.1-3706 B of the Code of Virginia. Any locality that had, on January 1, 1978, a license tax rate for any of the categories listed in § 58.1-3706 A of the Code of Virginia that is higher than the maximum prescribed in § 58.1-3706 A of the Code of Virginia, may maintain a higher rate in such category, but no higher than the rate applicable on January 1, 1978, subject to the following conditions: (i) a locality may not increase a rate on any category that is at or above the maximum prescribed for such category in § 58.1-3706 A of the Code of Virginia; (ii) if a locality increases the rate on a category that is below the maximum, it shall apply all revenue generated by such increase to reduce the rate on a category or categories that are above such maximum; and (iii) a locality shall lower rates on categories that are above the maximums prescribed in § 58.1-3706 A of the Code of Virginia for any tax year after 1982 if it receives more revenue in tax year 1981, or any tax year thereafter, than the revenue base for such year. The revenue base for tax year 1981 shall be the amount of revenue received from all categories in tax year 1980, plus one-third of the amount, if any, by which such revenue received in tax year 1981 exceeds the revenue received for tax year 1980. The revenue base for each tax year after 1981 shall be the revenue base of the preceding tax year plus one-third of the increase in the revenues of the subsequent tax year over the revenue base of the preceding tax year. If in any tax year the amount of revenues received from all categories exceeds the revenue base for such year, the rates shall be adjusted as follows: the revenues of those categories with rates at or below the maximum shall be subtracted from the revenue base for such year. The resulting amount shall be allocated to the category or categories with rates above the maximum in a manner determined by the locality, and divided by the gross receipts of such category for the tax year. The resulting rate or rates shall be applicable to such category or categories for the second tax year following the year whose revenue was used to make the calculation.

C. While localities must follow the exemptions, rates, classifications and thresholds as set forth in Chapter 37 (§ 58.1-3700 et seq.) of Title 58.1 of the Code of Virginia, their local ordinances may:

1. Set tax rates at levels lower than those authorized by state law, or select the classifications to tax or not tax;

2. Establish subclassifications within the classifications set out in state law and provide for different rates or exemptions for such subclassifications, as long as no rate exceeds the maximum permitted by state law;

3. Establish graduated tax rates for any classification or subclassification so that the rate increases or decreases with volume, as long as no rate exceeds the statutory maximum for the classification under state law; and

4. Establish a threshold amount of gross receipts below which no tax will be imposed, or a maximum tax for any classification.

D. Localities may establish classifications and subclassifications based upon reasonable distinctions in municipal policy, and through the establishment of classifications and subclassifications, localities may choose to exempt certain categories of taxpayers.

E. Section 58.1-3704 of the Code of Virginia provides that no locality shall be required to impose either a license tax on merchants or a tax on the capital of merchants.