Tax Type
BPOL Tax
Description
Wholesale integrated manufacturer
Topic
Local Taxes Discussion
Taxability of Persons and Transactions
Date Issued
01-04-2002
January 4, 2002
Re: Request for Advisory Opinion
Business, Professional and Occupational License (BPOL) Tax
Dear *****
This will respond to your letter in which you request an advisory opinion regarding the application of the BPOL tax to ***** (the "Taxpayer"). In your request, you represent that the Taxpayer is a vertically integrated company that both processes and manufactures a variety of products in different localities throughout the Commonwealth. You submit that the entire set of operations should be treated as a single entity for BPOL tax purposes. I apologize for the delay in the department's response.
While addressing the questions raised in your letter, this response is intended to provide advisory guidance only, and does not constitute a formal or binding ruling. Copies of cited material are enclosed for your review.
FACTS
You represent that the Taxpayer is a vertically integrated manufacturer that "transforms raw material (live poultry) into finished food products through a series of production steps." The nature of the business requires that the poultry be raised in rural areas, subjected to "kill plants," sent to "deboning" plants, then sent to "final production" plants. At the final production plants, the poultry is transformed into various prepared products such as sandwich meats, a variety of flavored sausages, chicken tenders, nuggets, frozen entrees and other ready to eat/cooked products, as well as animal feed products. Ultimately, the final products are transferred to distribution centers.
The Taxpayer provided an example of the manufacturing process as it occurs in one of the four Virginia plants at issue in this request for an advisory opinion. The Taxpayer states that its total investment in equipment at the plant is ***** of which ***** is in equipment used in the manufacturing process. The facility in question employs ***** workers and ***** managerial staff persons. The Taxpayer owns similar facilities in other states.
A review of the Taxpayer's total net sales by product reveals that the percentage of its sales attributed to manufacturing over the past four fiscal years (FY) were as follows:
FY 1998: 30.41%
FY 1999: 34.13%
FY 2000: 39.63%
FY 2001: 38.79%
Additionally, the Taxpayer produces other by-products from its poultry, including feed, fertilizer, and refined oil. These areas were not included in the request for an advisory opinion. However, in these areas (which were not included in the above figures), you indicate that 43% of sales were attributed to manufacturing.
OPINION
The situation presented raises three questions: (1) is the Taxpayer a manufacturer, (2) is the Taxpayer to be considered a single business for BPOL tax purposes and if so, (3) is it selling goods at wholesale from the place of manufacture for purposes of the local business license tax?
Statutory Definition
Code of Virginia § 58.1-3703(C)(4) provides that no county, city, or town shall impose a license fee or levy any license tax on a manufacturer for the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture. The definition of a "manufacturer" is not in the Code of Virginia. However, the Supreme Court of Virginia has developed a test involving three essential elements in determining whether a manufacturing activity is being undertaken. These elements are: (1) original material, referred to as raw material; (2) a process whereby the original material is changed; and (3) a resulting product, which by reason of being subject to such processing, is different from the original material. County of Chesterfield v. BBC Brown Boveri, 238 Va. 64 (1989) 1 For BPOL purposes, a manufacturer means one engaged in a processing activity whereby the original materials are transformed into a product that is substantially different in character from the original materials.
Other Case Law
In Commonwealth v. Meyer 180 Va. 466 (1942), the Supreme Court of Appeals opined, "[a] hog on the hoof put through plaintiffs' packing plant is no longer a hog. It comes out as hams, shoulders, middlings, sausage, souse, chitterlings and other articles of commerce fit for consumption. Its value is increased." The Court affirmed the trial court's decision that the plaintiffs were manufacturers.
This opinion applied to a manufacturing process that is very similar to that of the Taxpayer. In another case, Prentice v. City of Richmond 197 Va. 724, (1956), the business operation consisted of the "buying, killing, chilling, and the sale and delivery of poultry to various wholesalers and jobbers." In Prentice, the Court held that:
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- In [the Taxpayer's] processing operation the necessary qualitative element of manufacturing is lacking. There is no change or transformation of the poultry into an article or product of substantially different character; slaughtering poultry, picking and cleaning it does not constitute such change as is essential to manufacturing.
In the opinion, however, the Court also noted a ruling of the former Tax Commissioner and agreed that under "certain conditions, a poultry processor will be treated for tax purposes as though he were a manufacturer."
In the present instance, operation of the Taxpayer's plants bears a far stronger resemblance to examples in Meyer than to that of Prentice. The preponderance of the Taxpayer's investment is in sophisticated machinery. Through its processes, the Taxpayer transforms "raw material" (live poultry) into foods such as sausages, pastrami, ham, lunchmeats, chicken franks, and breaded and prepared ready-to-eat meals, etc. A substantial portion of the Taxpayer's products resulting from its processes is different from the original material. Therefore, it is my opinion that the Taxpayer is a manufacturer.
One Business versus Separate Businesses
The Taxpayer has argued that its business must be examined as a whole, rather than have each location examined in isolation of the business as a whole. In City of Winchester v. American Woodmark (1995), the Virginia Supreme Court addressed whether the particular activities of a taxpayer in a jurisdiction can be separated from the company as a whole for purposes of taxation.
American Woodmark is headquartered in Winchester, Virginia. It manufactures kitchen cabinets and bathroom vanities at certain manufacturing facilities located in several states. However, no manufacturing occurs at its headquarters facility.
American Woodmark also has distribution facilities, warehouses, service centers and sales offices throughout the United States. In the case before the Supreme Court, American Woodmark maintained that its personal property, including property at its headquarters, is used in its manufacturing business and, therefore, is not subject to local taxation. The City of Winchester argued that American Woodmark's personal property located at its headquarters is subject to local taxation because the headquarters is not a manufacturing business and the property at issue is not used in the manufacturing business.
The Court ruled that American Woodmark's personal property constitutes capital used in manufacturing businesses that is not subject to local taxation. The Court found that the applicable law did not require capital be used in a manufacturing facility in the locality to be used in a manufacturing business.
Similarly, in BBC Brown Boveri, the Court noted:
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- When a party is engaged in both manufacturing and non-manufacturing activities, it will nonetheless be classified as a manufacturer for tax purposes if the manufacturing portion of its business is substantial. 2
- When a party is engaged in both manufacturing and non-manufacturing activities, it will nonetheless be classified as a manufacturer for tax purposes if the manufacturing portion of its business is substantial. 2
In this case, the Taxpayer has demonstrated the substantiality of the manufacturing portion of its business. The percentage of receipts attributed to manufacturing meat products from live poultry ranged from 30.41 % to 39.63% (not including other by-products). Therefore, I am of the opinion that the activities of the Taxpayer as set out above constitute a single business and must be treated as such for purposes of local business license taxation.
Wholesale Sales
Wholesale sales generally involve among other things one or more of the following: sale for resale by the purchaser, sales to institutional, commercial, industrial, and governmental users at wholesale, which determination is based on the facts and circumstances of the sales, and sales by the original manufacturer. 2000 BPOL Guidelines § 5.3.2.
Code of Virginia § 58.1-3703(C)(4) provides that no county, city or town may impose a BPOL tax on a manufacturer for the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture.
Public Document (P.D.) 98-154 (October 16, 1998) addresses the issue "sales at wholesale from the place of manufacture," noting that some sales can be made at retail from the place of manufacture. To be exempt from the BPOL tax, it must be determined that the sales of a manufacturer's product are made at wholesale from the place of manufacture.
Conclusion
Based on the information provided, the Taxpayer is a manufacturer. Further, its operations (as outlined in the first paragraph of the "FACTS" section above) should be considered as those of a single business. The local commissioner of the revenue must make a determination as to whether or not the sales are being made at wholesale from the place of manufacture. These determinations are dependent upon the facts and circumstances surrounding the sales.
This advisory opinion is based on the facts presented in your letter. Any change in facts may lead to a different result. If you have other questions regarding this matter, you may contact ***** in the department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/33426H
1 BBC Brown Boveri cited Solite Corp. v King Georges County 220 Va. 661 as the precedent for this finding.
2 The court cited a 1984-85 Op. Va. Att'y. Gen. 364,366, in which the Attorney General opined that the term "substantial is not defined by mathematical precision, rather it is not synonymous with preponderance and is properly "defined as not 'incidental' or 'inconsequential."'
Rulings of the Tax Commissioner