State: Interior designers overtaxed in Norfolk

NORFOLK

The state tax commissioner has issued an opinion indicating that some of Norfolk 's interior designers are improperly classified for their business licenses, requiring them to pay higher taxes than they otherwise would.

An unnamed interior design and custom-framing company asked Tax Commissioner Janie Bowen to rule on the classification of its Business, Professional and Occupational License. A BPOL classification identifies the type of business and the tax rate it should pay to the locality where it operates.

Many interior designers said they make most of their money by selling furniture and other decorative items to clients. They typically don't charge fees for their design and consulting services.

Over the years, some interior designers in Norfolk have carried a BPOL license that classified them as retailers. Others were considered service businesses. Several have a "dual" retail and service license, paying the tax based on the amount of revenue they derive from each part of the business.

A business with a service license pays a tax of 36 cents for every $100 in revenue, while a retail business pays 20 cents.

In her ruling last week, Bowen concluded that the interior designer should get a retail license if it does the bulk of its business by selling products. "Because more than half of the company's gross receipts are from the retail sales of furniture and furnishings, it should be classified as a retailer for BPOL tax purposes," she wrote.

Kathy Knack Interior Designs began appealing to Norfolk 's commissioner of the revenue six years ago, asking to switch her service license to a dual retail/service classification. More than 90 percent of her revenue comes from product sales.

"Most of us earn our living that way," Knack said.

Sharon McDonald, the city's commissioner of the revenue since 1997, has never approved Knack's business for a dual license and has never provided a clear reason, Knack said.

Knack's husband, Doug Knack, is running against McDonald for the commissioner of the revenue seat. Kathy Knack said he did not enter the race because of her situation, but that it made him aware of changes needed in the way the office operates.

Other interior designers in the city, including downtown design studio Calvin & Lloyd, also have questioned their classifications. Last year, a few complained to Retail Alliance, the region's merchants association.

The alliance checked with interior designers in other cities and learned they all had licenses that reflected their portion of revenue from service and retail sales, said Margaret Ballard, the association's vice president of advocacy.

She and the interior designers met with McDonald, who said she had applied the tax laws as she understood them, Ballard said. Two days after that meeting, about 10 interior design companies received audit notices from McDonald's office, Ballard said.

Most had their licenses altered - either switched from a retail to a dual service/retail classification, or designated with a larger service component than they had before under a dual license, Ballard said.

Janice Holmes held a BPOL license as a retailer since she opened her Interiors by Decorating Den franchise 22 years ago. After the audit in fall 2008, McDonald's office switched her to a service classification.

"My business model hadn't changed," Holmes said, adding that her BPOL taxes jumped by 80 percent.

The alliance asked Virginia's tax commissioner to clarify the classification for the local interior designer.

McDonald was at an annual commissioners conference Monday and unavailable for comment. Through her assistant, Marcey Hunter, McDonald said she would address Bowen's ruling when she returns to the office.

Bowen's ruling is "advisory" and nonbinding on the city's commissioner of the revenue, said Joel Davison, a Tax Department spokesman. "In other words, if they don't want to follow it, there's nothing in the law that makes them."

On Monday, Kathy Knack went back to McDonald's office to ask for a dual service/retail license. Holmes also said she planned to ask the commissioner to return her to a retail classification.

"All anybody ever wanted was just fairness," she said.