June 1, 2022
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business, Professional and Occupational License Tax
Dear *****:
This final state determination is issued upon the application for correction filed by you on behalf of your client, ***** (the “Taxpayer”), with the Department of Taxation. You appeal assessments of the Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by ***** (the “Town”) for the 2017 through 2020 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 sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.
FACTS
The Taxpayer engineered, built and installed architectural millwork, institutional casework, laboratory casework and specialty furniture and equipment for educational, healthcare, laboratory, recreational, and governmental facilities. It also provided custom made products from manufacturers in conjunction with its services. The Taxpayer’s work resulted in highly specialized, finished interior spaces.
The Taxpayer filed its 2017 through 2020 BPOL tax returns with the Town and classified itself as a contractor. The Town audited the Taxpayer and re-classified it as a business service provider and requested a revised schedule of gross receipts. The Taxpayer filed an application for correction with the Town, asserting that it should be classified as a contractor. In its final determination, the Town determined that the Taxpayer would require two BPOL licenses, one as a business service provider and another as a wholesale merchant. The Taxpayer appealed to the Department, contending that it should be classified as a contractor only.
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 Virginia Code § 58.1-3706. 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 the enterprise generates gross receipts.
3. Where the enterprise conducts its business.
4. Who are the enterprise’s customers?
5. How the enterprise holds itself out to the public.
6. The enterprise’s NAICS code.
The Town concluded, in its final local determination, that the Taxpayer was not a contractor because none of the work required it to make openings in walls or to run plumbing, ductwork, or electrical lines. The Town observed that the Taxpayer’s employees did not have trade licenses, although they may have held contractor’s licenses. The Town asserted that while the furniture, counters and other items may have integrated into the functionality of the building, no new openings were required. Based on these findings, the Town reasoned that the work was “post-structural” and similar to installation.
Ultimately, the Town concluded that the Taxpayer should be classified as a wholesale merchant. It asserts that the Taxpayer was a wholesaler because it supplied machinery, fixtures or furnishings to government entities and that the installation of such equipment was ancillary to their sales.
The Taxpayer contends that it was a contractor as provided by Virginia Code § 58.1-3706 D 1 because it performed work in buildings or structures that required the use of wood, metal, plastic, epoxy, and other building materials. In addition, the Taxpayer argues that it was not a wholesaler because it did not sell goods.
Contractors
Virginia Code § 58.1-3714 D 1-6 includes the following definitions for the term “contractor:”
• Accepting or offering to accept orders or contracts for doing any work on or in any building or structure, requiring the use of paint, stone, brick, mortar, wood, cement, structural iron or steel, sheet iron, galvanized iron, metallic piping, tin, lead, or other metal or any other building material;
• Accepting or offering to accept contracts to do any paving, curbing or other work on sidewalks, streets, alleys, or highways, or public or private property, using asphalt, brick, stone, cement, concrete, wood or any compositions;
• Accepting or offering to accept an order for or contract to excavate earth, rock or other material for foundation or any other purpose or for cutting, trimming or maintaining rights of way;
• Accepting or offering to accept an order or contract to construct any sewer of stone, brick, terra cotta or other material;
• Accepting or offering to accept orders or contracts for doing any work on or in any building or premises involving the erecting, installing, altering, repairing, servicing, or maintaining electric wiring, devices or appliances permanently connected to such wiring, or the erecting, repairing or maintaining of lines for the transmission or distribution of electric light or power; or
• Engaging in the business of plumbing and steam fitting.
The Taxpayer has provided sample copies of contracts. In one contract, the Taxpayer was required to furnish and install countertops, frame and install wooden stairs, provide in-wall blocking for installation of finished carpentry, and coordinate rough-ins and cutouts with plumbing and electrical contractors. In another contract, the Taxpayer was required to furnish and install casework, millwork, window sills, countertops, shelving and ceiling panels. Further, it was required to install supports, anchors, blocking, provide cutouts for mechanical and electrical items, and install interior finish carpentry. Because these activities are incorporated onto or in a building or structure, they would come within the scope of contractor activities as defined in Virginia Code § 58.1-3714 D 1 and 5.
In Public Document (P.D.) 01-64 (5/17/2001), a taxpayer installed kitchen cabinets and countertops by installing new ductwork, electrical receptacles and plumbing lines, lights and general finishing work. The Department determined that such work was clearly that of a contractor. The work completed by the taxpayer in P.D. 01-64 is similar to the work performed by the Taxpayer in this case.
Wholesale Sales
Title 23 VAC 10-500-350 C provides that businesses that sell goods to government, institutional, business or industrial entities for their consumption, use or incorporation in an assembly, manufacturing or processing operation are typically subject to the BPOL tax on wholesalers. The use of “or” in this regulation means that consumption and use are separate from “incorporation in an assembly, manufacturing or processing operation.” Typically, if the products are not being incorporated into an assembly, manufacturing or processing operation, they would be used or consumed by such entities for business needs as supplies or equipment. In contrast with retail sales which are typically made to individual consumers to satisfy their own wants or needs, wholesale sales involve sales of goods to be used for such business purposes. See Roland Electrical Co. v. Walling, 326 U.S. 657, 674, 66 S.Ct. 413, 421 (1946). In addition, selling products in quantity at a discount or contracting with a purchaser prior to making a sale are consistent with wholesale sales. See P.D. 02-59 (4/19/2002).
The Town reasoned that the Taxpayer was a wholesale merchant whose installation of products should not be considered contracting. The Town pointed to a purported statement the Taxpayer made in a local administrative hearing that none of its work required it to make openings in walls, or to run plumbing, ductwork, or electrical lines. Title 23 VAC 10-500-260 A applies to merchants selling and installing appliances or other merchandise. The regulation states that when such an installation uses existing openings and fixtures, it is not considered contracting. If, however, the installation requires making openings in a wall, running ductwork, wires or plumbing, or any other work described in Virginia Code § 58.1-3714 D, then the installation work would be deemed contracting.
While some of the activities performed by the Taxpayer were consistent with contracting, it also purchased furnishings that were either integrated into their client’s structures or were merely placed inside the buildings. Such furnishings were included in the Taxpayer’s contracts as part of the design and installation process. Standalone furnishings were not, however, sold by the Taxpayer separately.
The Taxpayer’s customers were government, institutional, business or industrial entities with whom the Taxpayer had contracts. Although this fact suggests wholesale sales may have occurred, the question remains whether the Taxpayer was truly a merchant. Ultimately, the Taxpayer provided comprehensive interior solutions that were highly customized for its customers. This process involved design and planning, procurement of supplies and equipment, fabrication, installation and support. It does not appear that the Taxpayer held itself out as a dealer of particular products, had a store or showroom, kept property in inventory or otherwise conducted business as a merchant.
Repair, Personal, Business and Other Services
The Town also concluded that the Taxpayer should get a separate BPOL tax license as a business service provider. There are two separate classifications of services for purposes of the BPOL tax: “financial, real estate and professional services,” and “repair, personal, business and other services.” Those businesses classified as providers of professional services are specifically enumerated in Title 23 VAC 10-500-450. All other services not clearly identified as financial, real estate or professional services fall under the classification of “repair, personal, business and other services.” See Title 23 VAC 10-500-500.
The Taxpayer’s unique business model presents challenges in attempting to classify the Taxpayer for BPOL purposes. While the Taxpayer performed certain activities that would be considered contracting, it also engaged in activities that would fall under the business service classification of interior decorating pursuant to Title 23 VAC 10-500-500. The Department, citing the NAICS, defines interior designers as “establishments primarily engaged in planning, designing and administering projects in interior spaces to meet the physical and aesthetic needs of people . . . .” See P.D. 11-83 (6/2/2011). In addition, the Taxpayer engaged in activities that would be considered standalone services. For example, one of the Taxpayer’s contracts was just for design and planning services. In addition, the Taxpayer’s website indicates that it provided planning, grant writing assistance, purchasing justification, STEM guidance, as well as architectural design services.
Multiple Businesses
Virginia Code § 58.1-3703.1 A 1 provides that a separate license will be required for each definite place of business and for each business a taxpayer is operating. Local tax officials are responsible for making the determination as to whether a taxpayer is engaged in a single business or in two businesses, each of which could operate independently of the other. In order to make this determination, the local tax official must be provided with documentation demonstrating the substantiality of each business. See 1994 Op. Va. Att’y Gen. 99.
In order to obtain multiple licenses, a business must be engaged in clearly identifiable separate business activities and not merely activities ancillary to the primary business. In P.D. 97-257 (6/11/1997), the Department concluded that the term “ancillary” refers to business activities that are subordinate, subservient, auxiliary, or in aid of the business’ principal business activity. Distinguishing between an ancillary activity and an activity that rises to the level of a separate business can often be accomplished by determining if the activity under scrutiny exists independently of the principal business. In general, an activity for which no separate charge is made will be presumed to be ancillary to the activity for which a charge is made, but separately stating charges for different activities will not create a presumption that each such activity is a separate business. See Title 23 VAC 10-500-110 B.
A case that is often cited in determining whether a taxpayer is operating separate businesses is Caffee v. Portsmouth, 203 Va. 928, 128 S.E.2d 421 (1962). Caffee involved a bakery that had a manufacturing business because it made the baked goods at the location and also a retail storefront where customers could purchase the baked goods. The Court reasoned that the taxpayer was in fact conducting two separate trades or occupations for license tax purposes because the manufacturing component could be performed completely independent of, and without relation to the retail merchandising, even though the source of the retail sales was the taxpayer’s own manufacturing activities. See id. at 203 Va. 928, 930, 128 S.E.2d 421, 423.
The contracts and documentation provided by the Taxpayer show that it was performing activities that are considered to be both contracting and a business service. The Taxpayer, however, indicates that all of its services were performed in conjunction with the completion of an overall project, the primary activities for which appear to be contracting.
DETERMINATION
Based solely on the evidence provided, it appears that the Taxpayer’s activities primarily consisted of contracting work. In addition, after carefully considering the unique facts of this case, it appears that the service activities conducted by the Taxpayer were ancillary to its primary contracting business.
The Taxpayer, however, has only provided a small sample of contracts that were completed over the audit period. Accordingly, I am remanding the case back to the Town with instructions to conduct a more comprehensive review of the Taxpayer’s contracts. The Town should carefully review the analysis set forth in this determination. It is clear that the Taxpayer was conducting contracting activities. It is also clear that the Taxpayer’s business model had service components. To the extent that the service components, which included design, planning, grant writing assistance, purchasing justification, STEM guidance, and architectural design services, were performed in connection with the completion of the greater construction projects, then such activities were likely ancillary to the Taxpayer’s contracting activities. Further, to the extent that contracts included the provision of certain tangible personal property such as furniture or equipment, in addition to all of the contracting activities described in the contracts, the provision of such items likely was also ancillary to the Taxpayer’s contracting activities. To the extent, however, such services were provided or such tangible personal property was sold in separate transactions not in connection with the completion of a greater construction project, the Taxpayer may have been conducting separately licensable business activities. Again, these are factual matters that require a further examination at the local level.
The Taxpayer is instructed to provide such further contractual information to the Town within 60 days from the date of this determination or by another deadline mutually agreed on by the Taxpayer and the Town. Once the information is received, the Town is instructed to review the information, issue a revised final local determination, and adjust the assessments accordingly. If the Taxpayer disagrees with the Town’s revised final local determination, it retains the right to appeal such determination to the Department within 90 days of the determination date.
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/3974.B