Document Number
14-21
Tax Type
BPOL Tax
Description
Taxpayer was a wholesale merchant for the tax years at issue
Topic
Classification
Filing Status
Local Taxes Discussion
Sale for Resale
Date Issued
02-25-2014

February 25, 2014



Re: Appeal of Final Local Determination
Locality: *****
Taxpayer: *****
Business, Professional and Occupational License Tax

Dear:

This final state determination is issued upon the application for correction filed on behalf of ***** (the "Taxpayer") with the Department of Taxation. You request a refund of Business, Professional and Occupational License (BPOL) taxes paid by the Taxpayer to the ***** (the "County") for the 2009 through 2013 tax years.

The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, i.e., the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia section and regulations cited are available on­line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.

FACTS


The Taxpayer purchases mining equipment and parts on behalf of its customers. Customers place an order for the equipment or part with the Taxpayer. The Taxpayer determines the part or equipment required and orders it from a vendor. Although the vendor ships the equipment or part directly to the customer, the Taxpayer takes title to the parts and directly pays the vendor. The Taxpayer then bills the customer an amount greater than the vendor cost and keeps the difference as a commission.

The Taxpayer initially classified itself as an equipment broker on its BPOL returns filed with the County through the 2011 tax year. On its 2012 BPOL return, the Taxpayer reclassified itself as a supplier. In accordance with this reclassification, the County determined that the Taxpayer was subject to tax at the retail rate and issued a refund for the 2012 tax year.

The Taxpayer requested from the County a refund of BPOL taxes paid for the 2009 through 2011 tax years because the County accepted the retailer classification for the 2012 tax year. The County held that the Taxpayer was a service provider for the 2009 through 2011 tax years based on how it classified itself on its BPOL returns. Accordingly, the County denied the Taxpayer's request for refund. The Taxpayer appealed the County's determination to the Tax Commissioner.

In Public Document (P.D.) 13-25 (3/5/2013), the Department remanded the case back to the County to determine the Taxpayer's proper classification because it relied solely on the Taxpayer's descriptions on the BPOL tax returns and did not conduct a thorough review of the Taxpayer's licensable activities. After conducting an examination, the County determined that the Taxpayer was properly classified as a retailer. The Taxpayer appeals the County's final determination to the Tax Commissioner, asserting it should be classified as a wholesaler.

ANALYSIS


Classification

The BPOL tax is imposed on businesses and professionals for the privilege of doing business in a locality. The tax is imposed at different rates according to the classification of an enterprise. See Va. Code § 58.1-3706 A. These classifications are regulated under Title 23 of the Virginia Administrative Code (VAC) 10-500-10 et seq. Classification of a specific business must be determined based on consideration of all the facts and circumstances. Some of the factors to be considered include:
      • 1. What is the nature of the enterprise's business?
        2. How does the enterprise generate gross receipts?
        3. Where does the enterprise conduct its business?
        4. Who are the enterprise's customers?
        5. How does the enterprise hold itself out to the public?
        6. What is the enterprise's North American Industry Classification System (NAICS) code?

On the 2012 BPOL tax return, the Taxpayer classified itself as a retail merchant. Under Title 23 VAC 10-500-10, a "retail sale" is defined as "a sale of goods, wares and merchandise for use or consumption by the purchaser or for any purpose other than resale by the purchaser, but does not include sales at wholesale to institutional, commercial, industrial, and governmental users that are classified as wholesale sales." While no single factor, such as price, purpose, or place, can always distinguish between wholesale and other types of sales, retail merchants typically purchase inventory for resale and sell such inventory to an individual consumer for the consumer's own personal use. See Title 23 VAC 10-500-350 B.

In its final determination, the County determined that the Taxpayer was a retail merchant because the parts it sells are not for resale. The parts, in this case, are sold to mining companies that install the parts in their mining equipment. The Taxpayer contends that it should be classified as a wholesaler because it sold its parts to industrial users.

For purposes of BPOL taxation, Title 23 VAC 10-500-350 A recognizes the wholesale trade as the selling at wholesale prices and in large quantities to others who will then resell such goods either to ultimate consumers or further down the normal distribution chain. Taxpayers engaged in the business of selling goods to a government, institutional, business, or industrial entity for consumption, use or incorporation in an assembly, manufacturing or processing operation are typically subject to the BPOL tax on wholesalers. See Title 23 VAC 10-500-350 C.

The Taxpayer's business specializes in purchasing and reselling replacement parts to mining companies. It does not hold itself out for business as a retailer of mining equipment. While not controlling, Sector 21 of the NAICS defines mining entities as:
    • establishments that extract naturally occurring mineral solids, such as crude petroleum; and gases, such as natural gas. The term mining is used in the broad sense to include quarrying, well operations, beneficiating (e.g., crushing, screening, washing, and flotation), and other preparation customarily performed as the mine site, or as part of mining activity.

Industry is defined as "[s]ystematic labor for some useful purpose; esp. work in manufacturing or production." See Black's Law Dictionary 791 (8th ed. 2004). Because mining companies are engaged in production, their activities are generally considered to be industrial in nature. Further, in Hodel v. Virginia Surface Min. and Reclamation Ass'n, Inc., 452 U.S. 264, 307, 101 S.Ct. 2352, 2376 (1981), United States Supreme Court found mining of coal to be "a major industrial activity." Therefore, the sale of replacement parts to mining companies would be wholesale sales.

DETERMINATION


Based on the facts presented, the Taxpayer was a wholesale merchant for the tax years at issue because it purchased and resold parts to an industrial user for the purpose of incorporating into a processing operation. As such, this case is remanded back to the County in order for it to make adjustments to the Taxpayer's liability for the 2009 through 2013 tax years.

If you have any questions regarding this determination, you may contact *****in the Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,



Craig M. Burns
Tax Commissioner


AR/1-5229775604.B

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46