Tax Type
BPOL Tax
Local Taxes
Description
Wholesale Merchant; Purchases
Topic
Local Power to Tax
Local Taxes Discussion
Date Issued
12-14-1990
[Opinion - Virginia Attorney General: 1990 at 220]
REQUEST BY: The Honorable Ray A. Conner Commissioner of the Revenue for the City of Chesapeake P.O. Box 15285 Chesapeake, Virginia 23320
OPINION BY: Mary Sue Terry, Attorney General
OPINION:
Based upon particular facts, you ask whether a corporation is subject to the imposition of a local business license tax as a wholesale merchant pursuant to § 58.1-3703 of the Code of Virginia. If the corporation may be licensed as a wholesale merchant, you ask what constitutes "purchases" in determining the amount of the business license tax to be imposed.
I.Facts
A corporation that manufactures and sells computers and computer equipment maintains an office in the City of Chesapeake out of which several salesmen, who are employees of the corporation, operate. The salesmen solicit sales directly from potential customers, presenting catalogs and brochures and assisting customers in selecting products. If a customer purchases a computer, an order form is sent to the Chesapeake office, which sends the form to an Henrico County office for approval. The manufacturing plant, which is located outside the Commonwealth, delivers the product and an invoice directly to the customer. After delivery, the salesmen operating out of the Chesapeake office may visit the purchaser to assist in the installation and operation of the computer. The salesmen receive a regular salary and a commission on all sales originating from their solicitations.
II. Applicable Statutes
Section 58.1-3703(A) authorizes the governing body of a city to levy license taxes on "businesses, trades, professions, occupations and callings and upon the persons, firms and corporations engaged therein within the county, city or town subject to the limitations provided in subsection B of this section." Among the limitations provided, § 58.1-3703(B)(4) prohibits the imposition of a license tax "[o]n a manufacturer for the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture." Situs for the taxation of businesses is the locality where the person or corporation "has a definite place of business or maintains his office." §58.1-3708(A).
The Chesapeake, Virginia, Code (1989) defines a "wholesale merchant" as "[a]ny person who sells goods, wares and merchandise to others for resale only or who sells to institutional, commercial or industrial users." Id. ch. 15, art. II, div. 2, § 15-21, at 187.
III. Only Manufacturers Selling at Place of Manufacture Exempt Pursuant to § 58.1-3703(B)(4)
The local license taxes authorized by § 58.1-3703 constitute excise taxes imposed on the privilege of engaging in business within the jurisdiction. See 1974-1975 Att'y Gen. Ann. Rep. 459. It is clear from the facts you present that the corporation is engaged in business within your jurisdiction.1 As a result, unless one of the exemptions in § 58.1-3703(B) applies, the corporation is subject to the local license tax.
You state that the corporation operating the business in your jurisdiction is a manufacturer, although the corporation conducts only sales activities within your locality. The exemption for manufacturers in § 58.1-3703(B)(4), by clear and unambiguous language, extends only to the manufacturers' sales of goods at wholesale at the place of manufacture. Sales made at other locations and sales made at retail are not included within the manufacturers' exemption. See 1985-1986 Att'y Gen. Ann. Rep. 287. To construe the statute, despite this specific language, to include all sales made by manufacturers that are shipped directly from the manufacturing plant to the purchaser would violate the established principle that exemptions from license taxes are to be narrowly construed. See Solite Corp., v. King George Co., 220 Va. 661, 662-63, 261 S.E.2d 535, 536 (1980). It is my opinion, therefore, that the business you describe is not entitled to the manufacturers' exemption in § 58.1-3703(B)(4), because the sales are not made at the place of manufacture.
IV. In Facts Presented, Manufacturer Also May Be "Wholesale Merchant" for License Tax Purposes
If the business is not exempt pursuant to the manufacturers' exemption, you ask whether the corporation may be licensed as a wholesale merchant. If the business is taxed in Chesapeake as a wholesale merchant, the rate of tax is governed by § 58.1-3716. "No county, city or town shall impose a license tax on wholesale merchants at an aggregate rate in excess of 5 cents per $ 100 of purchases . . . .2 Id. If the sales are made at retail, the rate of tax is "twenty cents per $ 100 of gross receipts." §58.1-3706(A)(2).
An argument can be made that, under the facts you present in which the business purchases no products and maintains no stock of merchandise on hand, the business is not a "merchant" within the ordinary definition of the word as "one who is engaged in the business of buying commercial commodities and selling them again for the sake of profit.'" Commonwealth v. Meyer, 180 Va. 466, 472-73, 23 S.E.2d 353, 356 (1942) (quoting Century Dictionary (case citation not provided)). It does not follow from this argument, however, that the sales business conducted in your locality is not subject to the imposition of a local license tax. To the contrary, § 58.1-3703(B)(4) is clear that sales of a manufacturer are exempt only to the extent that the sales are "at wholesale at the place of manufacture." §58.1-3706(A)(4) further provides that the rate of "thirty-six cents per $ 100 of gross receipts" for "all other businesses and occupations not specifically listed or excepted in this section" shall not be applicable to license taxes on "wholesalers, which shall be governed by § 58.1-3716." §58.1-3706(A)(4) evidences a legislative intent that sales made at wholesale are to be taxed at the rate established in § 58.1-3716, regardless of whether the sales are by a wholes merchant or by a manufacturer at a place other than the place of manufacture.
The Supreme Court of Virginia has recognized that a manufacturer may be subject to a license tax as a retail merchant and, to the extent that the manufacturer's sales are made other than at the place of manufacture, as a wholesale merchant. Caffee v. City of Portsmouth, 203 Va. 928, 930-31, 128 S.E.2d 421, 422-23 (1962). See also County of Chesterfield v. BBC Brown Boveri, 238 Va. 64, 380 S.E.2d 890 (1989).3
The question whether sales are made at retail or at wholesale is a factual issue to be determined by the commissioner of the revenue. The term "wholesale" is not currently defined in the Code of Virginia. Under a former Virginia license tax statute, the term "wholesale merchant" was defined as "every merchant who sells to other persons for resale only or who sells at wholesale to institutional, commercial or industrial users." §58-304 (Rep. Vol. 1959). The definition of "wholesaler" in the present administration of the local license taxes is based on this earlier definition. See Dep't Tax'n, Guidelines for Local Bus., Prof. & Occ. License Taxes, at 3 n.2 (Jan. 1, 1984) ("BPOL Guidelines").4
This definition recognizes the basic historical distinction between retail sales and wholesale sales. In retail sales, the purchaser buys to satisfy his personal wants and needs. In wholesale sales, the purchaser buys to make a profit, either by reselling the goods or by using them in his business as supplies or equipment. See Roland Co. v. Walling, 326 U.S. 657, 673-78 (1946).
The definition also recognizes that, while sales to institutional, commercial or industrial users generally are considered sales at wholesale, there may be circumstances in which such sales constitute retail sales. As noted in the BPOL Guidelines, "[t]he term 'wholesale' or 'sells at wholesale' is not susceptible to a general definition which will cover all possible situations." Id. at 3 n.2.
It is my opinion that § 15-21 of the Chesapeake, Virginia, Code may be read in conformity with this accepted standard. Despite the fact that the sales are made to commercial or industrial users, if you determine that the goods are sold at a price or for a purpose that does not constitute a wholesale sale, the sales would constitute retail sales.5
IV. License Tax on Wholesaler Who Sells to Commercial Users May be Based on Actual Sales
You also ask the proper method for determining the basis for the tax, in the event you determine that the business is subject to the wholesale license tax. §58.1-3716 provides that the license tax on wholesale merchants is based on "purchases" rather than on gross receipts. In the facts you present, the business arguably does not make "purchases" since the computers are shipped directly from the factory pursuant to purchaser invoices.
In the absence of a present statutory definition of "purchases," a former Virginia license tax statute again may provide guidance. Former § 58-304 provided the following definition of "purchases":
The word 'purchases', as used in this article shall be construed to include all goods, wares and merchandise received for sale at each definite place of business of every wholesale merchant. The word as so used shall not be construed to exclude any goods, wares and merchandise otherwise coming within the meaning of the word. All goods, wares and merchandise manufactured by any wholesale merchant and sold or offered for sale, in this State, as merchandise, shall be considered as purchases within the meaning of this article. But this article shall not be construed as applying to manufacturers taxed on capital by this State, who offer for sale at the place of manufacture goods, wares and merchandise manufactured by them. [Emphasis added.]
Because a license tax is based on the privilege of doing business within the jurisdiction, the amount of the tax imposed must bear a rational relationship to the type and amount of business conducted within that jurisdiction. Standard Steel Co. v. Wash. Revenue Dept., 419 U.S. at 563-64. Based on the facts you present, it is my opinion that the proper basis for the wholesale license tax is the sales price of the merchandise sold by the salesmen in the Chesapeake office and delivered to a purchaser in Chesapeake or in Virginia, depending on the circumstances. In interstate sales transactions, when the various components of a transaction occur in different states, the state of destination of the property sold has the authority to impose a tax on revenues generated from that transaction. See Standard Steel Co. v. Wash. Revenue Dept., 419 U.S. at 560; General Motors v. Washington, 377 U.S. at 436; Norton Co. v. Dept. of Revenue, 340 U.S. at 534. Whether only the sales destined for Chesapeake or the sales destined for all of Virginia may form the basis for the tax depends on whether the company has a definite place of business in another Virginia locality with a sufficient nexus to impose the tax on sales destined for that locality. See § 58.1-3708; 1987-1988 Att'y Gen. Ann. Rep. 512, 513. While the license tax under these circumstances may be less than the tax that would be imposed on a wholesaler who maintains a stock of merchandise, it is my opinion that a license tax based on actual sales is within the meaning of "purchases" in § 58.1-3716, and accurately reflects the type of business conducted in the facts you present.
1 A locality may impose a gross receipts tax on sales of a foreign corporation with sufficient nexus in the state without burdening interstate commerce in violation of the commerce clause of the Constitution of the United States. Standard Steel Co. v. Wash. Revenue Dept., 419 U.S. 560 (1975); General Motors v. Washington, 377 U.S. 436 (1964), overruled on other grounds, Tyler Pipe Industries v. Dept. of Revenue, 483 U.S. 232 (1987); Norton Co. v. Dept. of Revenue, 340 U.S. 534 (1951). The facts you present establish a sufficient nexus in Chesapeake to support the imposition of a license tax on the company. See Att'y Gen. Ann. Rep.: 1989 at 306; 1987-1988 at 512, 513.
2 Localities with a higher rate in effect on January 1, 1964, may continue to tax at such higher rate. §58.1-3716.
3 In BBC Brown Boveri, the Supreme Court of Virginia determined that Brown Boveri was a manufacturer for purposes of personal property taxes under § 58.1-3507(A). The Court also held that the company was not subject to the local license tax tax because its "non-manufacturing activities [were] ancillary to its primary business of manufacturing." 238 Va. at 72, 380 S.E.2d at 894. The facts in BBC Brown Boveri are distinguishable from the facts you present in that BBC Brown Boveri was conducting all of its business at a plant located in the County of Chesterfield. The question of sales at wholesale at a place other than the place of manufacture wa not presented.
4 Statutes that relate to the same subject "are not to be considered as isolated fragments of law, but as a whole, or as parts of a great connected, homogenous system, or a single and complete statutory arrangement." Prillaman v. Commonwealth, 199 Va. 401, 405, 100 S.E.2d 4, 7 (1957); 1989 Att'y Gen. Ann. Rep. 315, 316-17.
5 See also BPOL Guidelines § 2-3: "When a merchant conducts both a wholesale and a retail business, the merchant is subject to the retail license tax on the retail portion of the business and subject to the wholesale license tax on the wholesale portion of the business. However, the locality may permit but not require the merchant to pay the license tax as a retailer on both the retail and wholesale portions of the business."
Attorney General's Opinion