Tax Type
BPOL Tax
Description
Retail and wholesale sales to industrial, commercial, or governmental users
Topic
Collection of Delinquent Tax
Local Power to Tax
Penalties and Interest
Date Issued
04-19-2002
April 19, 2002
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Business, Professional and Occupational License (BPOL) Tax
Dear *****:
This final state determination is issued upon the application for correction filed by you on behalf of ***** (the "Taxpayer") with the Department of Taxation. You appeal a final local determination upholding an audit assessment of BPOL taxes made by the Commissioner of the Revenue of the ***** (the "City").
The local license tax and fee are imposed and administered by local officials. Code of Virginia § 58.1-3703.1(A)(5) authorizes the department to issue determinations on taxpayer appeals of certain BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct. In other words, 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 as summarized below. This determination addresses the question of whether or not the City correctly assessed the Taxpayer as a retail merchant. It also addresses the Taxpayer's request for relief from the City's Notice of Assessment in the amount of ***** together with interest, penalties or other charges that may have accrued.
Copies of the Code of Virginia, regulations and public documents cited are included for reference purposes. These and other reference documents are also available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.
FACTS
The Taxpayer is in the business of selling large quantities of modular business furniture to businesses. It maintains that a typical transaction is the "outfitting of an entire office complex most frequently associated with the customer's move to a new place of business opening a new location." Based on the information provided, 62 percent of the Taxpayer's sales are to commercial entities, while the remaining 38 percent of sales are to federal and state government entities. The Taxpayer performs some installation work as required.
The Taxpayer does not maintain an inventory. Rather, it takes orders from customers for modular office furniture, places the order with any one of a number of manufacturers or the manufacturer's distributor. The product is then shipped either to the Taxpayer's warehouse for storage until such time it is ready for installation, or in some instances, directly to the customer. Either the Taxpayer or a third party subcontractor performs the installation.
The Taxpayer sells the furniture to its customers at price discounts. The amount of the discount varies greatly from project to project. For example, the discount provided for office suites for five offices would not be as great as the discount provided for an order of office suites for fifty offices. Quantity determines the ultimate value of the discount offered in any given transaction.
The Taxpayer does not maintain a showroom, nor does it hold itself out for business as a retail seller of office furnishings. Rather, it holds itself out as an authorized dealer for over 300 office furniture manufacturers. It also holds itself out as offering comprehensive services. The Taxpayer states that 80 percent of its gross receipts are attributed to its actual sales, and 20 percent of its overall receipts are attributed to the services it offers (on-site consultation, design, delivery, installation, and storage).
The Taxpayer maintains that the volume of its sales, and the fact that it does not mark up prices to either a recommended list price or a retail price, qualify it as a wholesaler.
The City's Position
The City classified the Taxpayer as a retail business for BPOL tax purposes, based on the (1) the Taxpayer's "market environment," (2) the type and use of the product sold, and (3) the fact that it is buying the products at wholesale and selling the product to the end user, rather than selling the products for resale. The City also emphasizes the importance of the idea that to qualify as wholesale sales to industrial, commercial, or governmental users, the goods sold must be used by the buyer in its productive process.
ANALYSIS
Treatment of Wholesalers for Local BPOL Tax Purposes
For Virginia sales and use tax purposes, wholesale sales are defined as "sales for resale." The BPOL definition of wholesale sales is far more expansive, incorporating the indicia of quantity, price and the user of the product. For BPOL tax purposes, wholesale sales are defined as:
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- a sale of goods, wares and merchandise for resale by the purchaser, including sales when the goods, wares and merchandise will be incorporated into goods for sale, and also includes sales to institutional, commercial, industrial, and governmental users which because of the facts and circumstances surrounding the sales, such as the quantity, price, or other terms, indicate that they are consistent with sales at wholesale. 2000 BPOL Guidelines § 1.
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- Examples of these wholesale activities include: bulk quantity sales of goods for maintenance of facilities or equipment; sales of materials or components for incorporation into a product; or the supplying of machinery, fixtures or furnishings. 2000 BPOL Guidelines § 5.3.2 [Emphasis added.]
The Taxpayer sells its product in quantity at a discount, which increases as the quantity of the specific goods sold increases. This is consistent with a wholesale sale. Furthermore, the Taxpayer contracts with the purchaser prior to making a sale, which is also consistent with a wholesale sale.
The Taxpayer's sales are to institutional, commercial, and governmental users. It is clear that these sales may qualify as wholesale sales under the BPOL Guidelines cited above. While the Taxpayer does not engage in sales for resale, it is important to distinguish between the definitions of a wholesaler as it applies to the sales and use tax and to the BPOL tax. Quantity, price and the intended use of the product are all factors to consider in determining whether or not the business is engaged as a wholesaler or a retailer. See Public Document 98-160.
Retail Sales
A retail sale is defined in the BPOL Guidelines as the "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 which are classified as wholesale sales." 2000 BPOL Guidelines § 1.
The Guidelines also note two factors characterizing a retail sale are the items are sold for the "personal use by individual consumers" at the "retail price offered to consumers." 2000 BPOL Guidelines § 5.3.2. In the Taxpayer's case, while it does sell to end users, neither the "personal use" nor the "retail price" factors apply.
Productive Process
The City emphasizes the use of the concept of "use in the productive process" in distinguishing between retail and wholesale sales to industrial, commercial, or governmental users. To qualify as a wholesale sale for BPOL classification purposes, the goods sold must be used by the buyer in its productive process. The City seems to restrict this concept of "productive process" to the actual manufacturing process. However, for BPOL tax purposes, this definition extends beyond items used in manufacturing. To reiterate, the 2000 BPOL Guidelines include the sale of furnishings in the definition of wholesale sale of goods for use by commercial, industrial, and governmental entities. [Emphasis added.]
Moreover, for general definitional purposes, the concept of "productive process" is not necessarily restricted to manufacturing. "Productive" is defined as the "creation of goods and services to produce wealth or value." American Heritage Dictionary, Second College Edition, 1985.
"Process" is defined in Black's Law Dictionary, Sixth Edition, 1990, as "the method, mode or operation whereby a result or effect is produced." Given these definitions, sales "for use in the productive process" would include furnishings sold to governmental, commercial or institutional entities as defined in 2000 BPOL Guidelines § 5.3.2, and would be classified as wholesale sales.
DETERMINATION
Considering the nature of the Taxpayer's sales and how closely they conform to the characteristics ascribed to wholesale sales in both 2000 BPOL Guidelines, it is my determination that the Taxpayer is a wholesale merchant and should be classified accordingly.
Pursuant to Code of Virginia § 58.1-3703.1(A)(5)(c), the City is to provide the Taxpayer with relief from the Notice of Assessment in the amount of ***** together with any interest, penalties or other charges that may have accrued.
If you have any questions regarding this determination, you may contact ***** in the department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/37372H
Rulings of the Tax Commissioner