As the ranks of freelancers swell, the taxman cometh for those in Arlington

The pandemic has seen a rise in freelance and contract work from those looking for job flexibility.

What new freelancers may not know is that Arlington tax code says they need a permit to work from home and need to pay local business taxes, just like any other business or contractor.

COVID-19 has seen tremendous changes in how Americans work, where and for whom. People are taking their computers to exotic locales or states with lower living costs, while companies are rethinking their office leases or trying to make their offices more attractive. Meanwhile, many are leaving their jobs to strike out on their own as freelancers.

But one area is experiencing delayed shockwaves from these seismic shifts: taxes. Last year folks saw taxes rise or fall depending on where they worked from home or if they could write off their home office. With the second pandemic-era tax season dawning, here’s what independent workers of Arlington need to know.

1. The county keeps track of independent workers, requiring them to get a permit certifying their “definite place of business” is in Arlington.
2. Every business with a definite place of work in Arlington is considered taxable.
3. Business license taxes are calculated before expenses in Arlington.
4. License tax rates are fixed until gross receipts exceed $100,000, at which point they’re calculated on a variable rate.

Independent workers can deduct their expenses from their state and federal taxes, but locally, Arlington’s Business, Professional and Occupational License (BPOL) tax collects on pre-expense revenue, or gross receipts.

Businesses with receipts less than $10,000 owe nothing, while those grossing up to $50,000 pay $30 and those grossing up to $100,000 pay $50. After $100,000 over, the annual tax is $0.36 for each $100 of revenue.

“Customers can get confused and think that they should pay a flat fee for gross receipts up to $100,000, plus the tax rate on the remaining receipts, however, the correct amount to file and pay is based on multiplying the total gross receipts by the tax rate,” said Susan Anderson, the communications director for Arlington’s Office of the Commissioner of Revenue.

She says every person engaged in business in Arlington — whether a home or a co-working space — is subject to the BPOL.

“Anyone who is not an employee and who works as an independent contractor has a taxable business,” Anderson said. “It is not necessary to incorporate as an LLC or corporation in order to conduct licensable business activities.”

This is not a new tax being enforced, but she encouraged independent contractors with questions to contact the office’s Business Division Tax Specialists at (703) 228-3060 or email [email protected].

“Our staff is very happy to assist,” she said. “Also, as a reminder, the Business License Tax filing and payment are due annually on March 1.”

The BPOL tax is Arlington’s third-largest source of revenue behind real estate and personal property taxes, including car taxes. For the 2019-20 fiscal year, the BPOL tax netted $72 million, according to the 2022 adopted budget. It’s estimated to net $63 million for the 2020-21 fiscal year and could bounce back to $72.5 million in the 2021-22 fiscal year.

Criticisms of the BPOL 

The tax has long had critics who have called for its elimination — to the worry of Arlington County tax officials.

On the right and the left, in Arlington and at the state level, critics have argued for years the BPOL hurts small businesses, particularly those with razor-thin profit margins, as well as startups and entrepreneurs, while large companies — such as Arlington-headquartered Lidl and Nestle — have avoided it in Arlington because their sales happen elsewhere. The same could happen for Amazon.

Some Virginia writers who argue they’re hurt by BPOL took their battle to the courts and one court ruled in their favor.

Arlington-based freelancer Simson Garfinkel tells ARLnow he was surprised to learn his home office needs a permit and he would be taxed on his pre-expense receipts and his office equipment. He argues he should be exempt because the BPOL tax codes applies to a list of “professionals” rendering professional services.

“I am not an architect, an attorney-at-law, a CPA, a dentist, an engineer, a land surveyor, a surgeon, a veterinarian or a practitioner of the healing arts. I am a Ph.D. computer scientist and a freelancer… and the code explicitly says that ‘professional services’ refers to these occupations ‘and no others,'” Garfinkel said in a letter to the county.

Michael Farren, a research fellow at George Mason University’s Arlington-based Mercatus Center, says the BPOL is an “unusual” tax, allowed in only seven states, and economists tend to agree that it particularly hurts struggling businesses.

And the BPOL could have a disproportionate burden on women, who go into independent work more often in search of greater flexibility, says Farren.

“It is entirely possible that, to the extent that it makes it harder for small businesses with thin margins, the BPOL may have a greater impact on woman-owned businesses,” he said.

One workaround could be claiming a definite place of work in a jurisdiction without a BPOL, but the costs of commuting likely outweigh the benefits, he said, adding that Arlington’s rate is comparable others he has seen in Northern Virginia.

Why the BPOL matters now

Farren, who studies the rise in independent work and its economic impact, says the BPOL tax raises a more important policy topic: whether Virginia and its municipalities are adapting to the 21st century remote work world.

“To the extent that Virginia’s policies make it easy to start up that business at home, they’ll see increased tax revenue and growth from that increased business activity,” he said. “To the extent that policies make it harder or more expensive to strike out on their own, Virginia will see less economic growth.”

Meanwhile, smaller operations may be getting relief in a forthcoming tax holiday proposed by Gov. Glenn Youngkin that could offset their local BPOL taxes.

“The Governor’s Day One Game Plan legislative package includes tax relief designed to lower the cost of living for Virginians and targeted tax relief to help small businesses, including a one-year tax holiday for small businesses with under 50 employees on the first $250,000 of their income,” a Youngkin spokesperson told ARLnow.