Tax Type
BPOL Tax
Description
Determination whether a business is a manufacturer
Topic
Local Power to Tax
Local Taxes Discussion
Property Subject to Tax
Date Issued
05-02-2002
May 2, 2002
Re: Request for Advisory Opinion:
Business, Professional and Occupational License (BPOL) Tax
Dear *****:
This is in response to your letter requesting an advisory opinion on the proper classification of ***** (the "Taxpayer"). The Taxpayer, a wholly-owned subsidiary of the ***** ("Parent"), a manufacturer of alternators and other automotive parts, has plants in ***** (the County") and ***** (County B).
The local license fee and tax are imposed and administered by local officials. Section 58.1-3701 of the Code of Virginia authorizes the department to promulgate guidelines and issue advisory opinions on local license tax issues. The following opinion has been made subject to the facts presented to the department as summarized below. Any change in these facts or the introduction of facts by another party may lead to a different result. 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 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 Parent manufactures alternators and other automotive parts in locations throughout the United States and in other countries. The Taxpayer handles all alternators returned due to manufacturing flaws, trade-ins of worn out alternators, etc. The Taxpayer disassembles the alternator, replaces broken and worn parts, and performs quality control testing on the "new" alternator. Essentially a new alternator is built, with the exception of the casing, which is usually cleaned and put on the "new" alternator.
In some cases, the entire rebuilding of the alternators occurs in the County. However, in many cases the work begins in County B and is completed in the County. Between 10 and 20 percent of the parts used in the rebuilding of the alternators are new; the remainder are refurbished parts.
In addition to rebuilding alternators manufactured by the Parent, about 15 percent of the Taxpayer's work is for other manufacturers of alternators. The "new" alternators are sold at wholesale under the Taxpayer's name or some other name to retail markets.
OPINION
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- Code of Virginia § 58.1-3703 provides an exemption from the BPOL tax for certain manufacturers:
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- No county, city, or town shall impose a license fee or levy any license tax . . . [o]n a manufacturer for the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture.
The BPOL statutes do not define the term "manufacturer" for purposes of the local business license tax. 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. See County of Chesterfield v. BBC Brown Boveri, 238 Va. 64 (1989). In summary, 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.
In the situation presented, it must be determined if the Taxpayer is a manufacturer when it receives defective and worn-out alternators and rebuilds them, i.e., is the resulting product different from the original material?
In the BBC Brown Boveri case, the Court found that the rebuilding work in that instance constituted manufacturing. The locality had classified the activity as repair work. The work involved "services and repairs to defective equipment belonging to utility companies. BBPE disassembles the defective units, performs engineering tests on them, makes appropriate design changes for the units, and reassembles them." This sounds quite similar to the nature of the work in which the Taxpayer is engaged.
However, the Court's finding turned on the fact that BBPE fabricated some of the component parts used in the rebuilding. In the Taxpayer's case, it is using parts fabricated by the Parent as well as parts that it has re-fabricated. Because the Taxpayer is a wholly-owned subsidiary, the relationship between it and the Parent is such that one must conclude that its situation is analogous to that in BBC Brown Boveri.
A further discussion of vertically integrated companies can be found in Public Document 02-2 (1/4/02). This document discussed at length the findings of City of Winchester v. American Woodmark 250 Va. 451(1995), which found that the company had to be considered as a whole; therefore, its activities could not be segregated for purposes of local taxation.
This opinion rests on two premises, either of which can stand on its own:
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- 1. the "new" materials are manufactured at the Taxpayer's plant; or
2. the company is integrated to such an extent that its activities cannot be segregated for purposes of local taxation.
- 1. the "new" materials are manufactured at the Taxpayer's plant; or
If either of these conditions is present, it is my opinion that the Taxpayer should be classified as a manufacturer, and its sales at wholesale from the place of manufacture are exempt from BPOL taxation. Moreover, based on the information presented, it would appear that the Taxpayer's claim of being a manufacturer is similar to the situations presented in both BBC Brown Boveri and American Woodmark. However, the sole responsibility for this determination of the Taxpayer's classification rests with the local commissioner of the revenue. "The determination whether a business is a 'manufacturer' for the purposes of § 58.1-3703(B)(4) thus is a factual one to be made on a case by case basis by the commissioner of the revenue." Op. Att’y Gen. 233, 1993.
I hope this information is helpful. If you have any questions regarding this opinion, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/38835H
Rulings of the Tax Commissioner