City of Charlottesville v. Regulus Books, LLC

873 S.E.2d 81

CITY OF CHARLOTTESVILLE

v.REGULUS BOOKS, LLC

Record No. 210414

Supreme Court of Virginia.

June 9, 2022

John A. Rife (Lisa Robertson, City Attorney; Andrew M. Neville; Steven R. Minor, Bristol; Taxing Authority Consulting Services; Elliott Lawson & Minor, on briefs), for appellant.

Renee Flaherty (Keith Neely ; Paul Sherman; Neal L. Walters ; Institute for Justice; Scott Kroner, on brief), for appellee.

Amicus Curiae: National Taxpayers Union Foundation (Joseph D. Henchman; Victor M. Glassberg; Victor M. Glassberg & Associates, on brief), in support of appellee.

OPINION BY SENIOR JUSTICE LEROY F. MILLETTE, JR.

This case involves four issues. First, whether a freelance writer's business provides a service as defined by a business license tax ordinance. Second, whether the freelance writer's business falls under the ordinance's catchall provision. Third, if the ordinance's catchall provision does cover the freelance writer's business, whether the ordinance is unconstitutional as applied to the freelance writer because it is vague. Finally, whether the costs of litigation were properly awarded.

For the reasons stated below, we conclude the freelance writer's business does not provide a service. We further conclude the freelance writer's business is not covered by the ordinance's catchall provision, and therefore do not reach the question of whether the ordinance is unconstitutionally vague as applied to the freelance writer. Because we find the freelance writer's business is not covered by the ordinance, we uphold the circuit court's decision to order the city to refund the freelance writer his tax payments. As to the issue of litigation costs, we find the circuit court erred by awarding costs not essential for the prosecution of the suit and therefore reverse and remand the case to the circuit court to deduct such costs from its award.

I. BACKGROUND

Regulus Books, LLC ("Regulus") is a limited liability company solely owned by Corban Addison Klug ("Klug"); Regulus is the holding company for all the rights, transactions, and income related to Klug's literary works. Klug, who is a graduate of the University of Virginia School of Law, has published several internationally-received legal fiction novels focusing on international human rights. Klug is also working on other as-yet unpublished fiction and non-fiction projects. Regulus has entered into several contracts that grant various publishers the license to produce, publish, distribute, and sell specific works by Klug, and Regulus has received advance payments on Klug's behalf for at least some of his uncompleted projects.

In 2018, Klug filed a Virginia income tax return, attaching thereto a Schedule C to indicate that he derived business income in the City of Charlottesville ("City"). This prompted the City to check its records to confirm whether Klug obtained a business license for his business; the City could not locate a business license issued to Klug or to Regulus. As such, the City wrote Klug to inform him that the Code of the City of Charlottesville ("City Code") "require[s] those engaging in a business, trade, profession, occupation or calling" within the City to obtain a business license. Persons and entities possessing a business license are subject to City Code Section 14 ("Ordinance"), which outlines the City's business, professional, and occupation license ("BPOL") tax ordinance and provides:

Except as otherwise provided herein, there shall be assessed and collected by the commissioner a license tax, at the rates and/or in the amounts specified herein following, with respect to each business for which a license is required by this chapter, except that no license tax shall be assessed and collected from any person whose gross receipts from a business subject to licensure are one hundred thousand dollars ($100,000.00) or less.

(City Code § 14-15(a)). As such, the City requested information about Klug's business as well as his income therefrom for the tax years 2015 up to 2018.

Klug responded with a letter, asserting that the Ordinance does not apply to him because he "offer[s] no goods or services to the public[,]" has "no physical storefront or shingle[,]" "do[es] not advertise[,]" has no employees, has no inventory, and offers a "product" that is intangible intellectual property. Alternatively, Klug asserted that if the City insisted that the Ordinance applies to him, then it should explain how it proposed to classify him for purpose of the business license tax. He stated that the Ordinance did not identify freelance authors in its coverage, and he explained that he cannot be classified as a professional because he does not offer knowledge-based services. Klug indicated that the classification "book publisher" appeared to be the closest classification for his type of work—but he reiterated he is an author, not a publisher offering goods and services to the public.

The City replied that "[i]n general, any sort of self-employed endeavor, which produces income, requires obtaining a business license. Further, the Tax Commissioner for the Commonwealth of Virginia opined in Public Document 04-137 that an author is subject to licensure and payment of the BPOL tax." The City explained that a business is defined as

a course of dealing which requires the time, attention and labor of the person so engaged for the purpose of earning a livelihood or profit. It implies a continuous and regular course of dealing, rather than an irregular or isolated transaction.... The following activities shall create a rebuttable presumption that a person is engaged in a business: (i) advertising or otherwise holding oneself out to the public as engaged in a particular business or (ii) filing tax returns, schedules and documents that are required only of persons engaged in a trade or business .

(emphasis supplied in the City's letter reply); City Code § 14.2). The City concluded that Klug's writing activity is subject to the business license requirement and that "[e]ntities such as [Klug's] would typically be classified as a ‘miscellaneous business/personal service’ in [the City's] tax system[.]"

The City assessed a business license tax on Regulus’ income from Klug's writing activity for the tax years 2015 to 2018; the total assessment was $2,177.22. Regulus did not immediately comply with payment, but after being assessed a penalty and interest for its delinquency, Regulus paid the amount of $2,461.23 under protest. When the Commissioner sent an assessment for 2019, however, Regulus refused to pay.

Instead, Regulus filed a complaint and application for relief from the assessment in the circuit court. Regulus argued that the Ordinance is unconstitutionally vague because it contains a catchall provision covering repair services, business services, and personal services, but it does not define those terms and its definition for the separate terms of "business" and "service" do not assist reasonable persons in determining whether they will be taxed. Regulus averred that the Ordinance gave the City "unconstrained discretion to decide who must pay." As such, Regulus sought a refund of its payment for tax, penalties, and interest, as well as a declaration that the Ordinance is unconstitutional.

In response, the City filed a demurrer, which the circuit court overruled. The City thereafter filed an answer and a motion for summary judgment. The City contended that the Ordinance's broad definition of the terms "business" and "service" make it clear and unambiguous that Regulus is required to apply for a business license. The City added that the regulations of the Virginia Department of Taxation ("Department"), which are contained in the Virginia Administrative Code, omit the definitions of the terms "repair service," "personal service," and "business service" because those terms apply to all services not classified as financial, real estate, or professional—thereby creating a catchall subclassification that is required to be broadly construed. The City pointed out that the Ordinance also contains a catchall subclassification. Specifically, City Code § 14-19(i)(12) taxes "[a]ny other repair, personal or business service not specifically included in any other subclassification" at a rate of $0.36 per $100. The City argued that Regulus’ services "clearly fall into the catchall category."

Regulus also filed a motion for summary judgment arguing that the Ordinance is not clear and unambiguous either as to the subject of the tax or the amount of the tax, and as such it is unconstitutionally vague per this Court's precedent.

At the hearing on the cross-motions for summary judgment, the City argued that the Ordinance is not void for vagueness simply because a person is "not able to figure out what [he] ha[s] to pay" and asserted that Regulus’ assertions did not overcome the Ordinance's presumption of constitutionality. The circuit court took under advisement Regulus’ claim as to vagueness of the Ordinance.

The circuit court issued a letter opinion granting Regulus’ vagueness challenge. The circuit court observed that a statute's vagueness is evaluated by asking whether it (1) gives persons of ordinary intelligence a reasonable opportunity to know what is prohibited, so that they may act accordingly, and (2) provides explicit standards to those in charge of its application. The circuit court disagreed that Regulus provided a service to Klug's publishers. It also disagreed that Regulus’ business is covered by the Ordinance because (1) the Ordinance does not include authors and holders of their works from its listing of eight classes of businesses and specific identification of over 130 professions, and (2) placing Regulus’ activity under the...