03-36 | Virginia Tax

Tax Type

BPOL Tax

Description

Manufacturer selling at wholesale

Topic

Local Power to Tax

Taxpayers' Remedies

Date Issued

04-15-2003

April 15, 2003

Re: Appeal of Assessment: 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 the finding of the ****************** (the "City") that classifies the Taxpayer as a wholesaler. It is your contention that the Taxpayer is a manufacturer selling at wholesale, rather than a wholesaler and should be assessed accordingly.

The local license tax and fee are imposed and administered by local officials. Va. Code § 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. Code of Virginia sections, regulations and public documents cited are 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 a division of another company that has been classified as a manufacturer for purposes of the BPOL tax. You describe the parent company as an industrial manufacturer that is headquartered in another state, but with two operating plants in the City. One plant manufactures strapping for bundled products. The City has classified that plant as a manufacturer. The other plant, the Taxpayer, produces "printing blankets."

The Taxpayer purchases materials from third-party vendors. These materials include rolls of rubber, metal bars of various sizes and composition, other hardware and fasteners. It uses a 35-ton hydraulic press and other machinery to produce the printing blankets for various presses. The blankets are made for presses used in the production of labels for aluminum soft drink cans (metal decorating), high speed web presses for commercial printers, newspaper presses, high speed web or sheet fed applications, presses used in boxboard printing, and presses used in the production of business forms.

To produce the printing blankets, the Taxpayer must cut and shape the rubber, attach metal bars and apply industrial adhesives "in a very precise manner to fashion the blanket to the proper specifications" of its customers. The Taxpayer states that its process "guarantees no porosity and uniformity of thickness from blanket to blanket." The ply, thickness and surface hardness vary according to the intended use of the blanket.

The Taxpayer has its own sales force that operates out of its facility. Finished goods are shipped either directly to the customer or to a single warehouse in another state that serves as a storage facility for both the Taxpayer and the other plant that operates in the City.

The City responded to the Taxpayer's appeal by drawing an analogy between the Taxpayer's activities and those described in Public Document (P.D.) 02-86 (5/20/02). The facts in P.D. 02-86 involved the process of taking rolls of paper and cutting them into various sizes for commercial sale. In that case, the Department determined that the Taxpayer was not a manufacturer. The City argues that the Taxpayer's situation is analogous to that described in P.D. 02-86 in that rubber comes in, is cut to specification and the same rubber goes out with metal strips affixed to it.

The Taxpayer classified itself as a manufacturer for purposes of the BPOL tax. The City audited the Taxpayer for tax years 1997, 1998, 1999 and 2000, and determined the Taxpayer was a wholesaler subject to the BPOL tax and tangible personal property tax appropriate to that classification. The Taxpayer timely filed an application for correction of the final local determination with the Tax Commissioner.

- - - - ANALYSIS

Manufacturing

Under Va. Code § 58.1-3703(C)(4), Virginia localities are prohibited from imposing a license fee or tax "[o]n a manufacturer for the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture."

Manufacturing is not defined in Title 58.1 of the Code of Virginia for BPOL tax purposes. In Prentice t/a Prentice Poultry Plant v. City of Richmond, 197 Va. 724 (1956), the Supreme Court of Virginia offered a definition of manufacturing that has been used in subsequent cases. See e.g., Solite Corporation v. County of King George, 220 Va. 661 (1980) and County of Chesterfield v. BBC Brown Boveri, 238 Va. 64. (1989). Manufacturing occurs when: (1) an original product, (2) is subjected to a process, and (3) whereby it is substantially transformed into a new and different product. In other words, there must be a substantial, well-recognized transformation in form, quality and adaptability rendering the material more valuable for use.

In this case, the character and nature of the product produced by the Taxpayer is far different from the original material. While the component parts may be identifiable as rubber and metal, the product's actual character is different from that of a roll of rubber. The materials undergo a process to create a printing blanket meeting the specifications of the Taxpayer's customers.

The process addressed in P.D. 02-86 is clearly distinguishable from the Taxpayer's process. In P.D. 02-86, large rolls of paper and board were cut to various sizes. The paper and board did not undergo any other process resulting in a product different from the original material. In the Taxpayer's case, the rubber and metal undergo a process to create a printing blanket and an industrial adhesive is added, resulting in a product substantially different in character from the original materials.

Wholesale Sales

For BPOL tax purposes, wholesale sales are defined as:

- 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.

The Taxpayer is manufacturing a product designed for industrial entities. Based on the facts presented and the definition of "wholesale sales" cited above, it appears that the Taxpayer is selling at wholesale. Provided the Taxpayer is selling at wholesale from the place of manufacture, it is exempt from BPOL taxation. The local commissioner of the revenue must make a determination as to whether the sales are being made at wholesale from the place of manufacture. These determinations are dependent upon the facts and circumstances surrounding the sales.

Wholesale Activities Ancillary to Manufacturing

Most manufacturers engage in a wholesale function in bringing their goods to market. So long as this function is ancillary to the manufacturing function, the manufacturer is not licensable as a wholesaler or subject to the wholesaler BPOL tax. Examples of ancillary wholesale functions include:

· When the wholesale function and the related sales personnel are located at the place of manufacture. The wholesale function is ancillary to the principal business of manufacturing and thus not licensable or taxable as a wholesale operation for BPOL purposes.
· All facilities of the manufacturer are at the same location except completed goods warehoused in a separate jurisdiction. Mere storage of completed goods is ancillary to manufacturing regardless of where the storage takes place. 2000 BPOL Guidelines § 5.3.3.

From the facts provided, it would appear that the Taxpayer's activities meet these criteria and are ancillary to the manufacturing function.

DETERMINATION

Based on the information provided, the Taxpayer qualifies as a manufacturer. Furthermore, it appears that the Taxpayer's sales qualify as wholesale sales. Provided the sales are made from the place of manufacture, the Taxpayer should be treated as a manufacturer for purposes of the BPOL tax pursuant to Va. Code § 58.1-3703(C)(4). I am returning this matter to the City to determine if the Taxpayer is selling at wholesale from place of manufacture. If this is the case, the City must adjust the assessments in accordance with this determination.

If you have any questions regarding this final determination, you may contact ********* in the Office of Policy and Administration, Appeals and Rulings, at *********.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/41538H

Rulings of the Tax Commissioner