Document Number
04-13
Tax Type
BPOL Tax
Description
Wholesale versus Retail Sales
Topic
Allocation and Apportionment
Basis of Tax
Date Issued
04-23-2004


April 23, 2004



Re: 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"). I apologize for the delay in the Department's response.

The local license tax and fee are imposed and administered by local officials. Virginia 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. This determination addresses the question of whether or not the Taxpayer was entitled to certain exclusions and deductions from the BPOL tax imposed by the City on the Taxpayer's business for license years 1998, 1999, 2000 and 2001.

Copies of the Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.
FACTS

The Taxpayer represents itself as a wholesale distributor of electrical materials and supplies. It is headquartered in ***** (State A) and has warehouses located throughout the country, including one in the City. The Taxpayer also maintains its national sales office in *****, (State B), a national office for warehouse cash disbursements in ***** (State C) and a national, office for warehouse receipts in ***** (State D). The sales office in State B solicits national accounts and assigns the accounts to various warehouses for servicing, depending upon location. The Taxpayer has a centralized financial and accounting system, with specific functions assigned to its offices in States C and D. Each warehouse maintains an internal invoicing system, but the actual invoicing of all national accounts is generated by the sales office in State B.

Prior to the audit, the Taxpayer had estimated that, on an annual basis, 65 percent of its sales were at wholesale and 35 percent were at retail. After performing a year-end reconciliation of actual sales in preparation for the audit, the Taxpayer revised its estimate. It states that during the audit period, 98 to 100 percent of its sales were made to governmental, institutional, commercial or industrial users for "consumption, use or resale by said customers in the normal course of their business." The Taxpayer states that it makes very few "over the counter" sales and has one small showroom in which some lighting fixtures are displayed. The remainder of the Taxpayer's physical building is devoted to storage of bulk supplies.

The City has classified the Taxpayer as a retail business, finding that 98.7, 97.4, 99.2 and 96.0 percent of the Taxpayer's sales were at retail during tax years 1998,1999, 2000 and 2001, respectively.

The Taxpayer sets its pricing based upon the wholesale sales prices set by the Trade Service Corporation (TSC), a trade service that establishes pricing for the electric supply distribution industry. However, this is a "default" price. Most of the Taxpayer's customers pay a lower price than the default price based upon negotiated discounts.

The Taxpayer has a sales force of nine based in the City; five are paid on a salary plus commission basis, three are compensated by commission only, and one is devoted to servicing a national account. In addition to selling goods to customers in Virginia, the Taxpayer also sells to out-of-state customers from its location in the City.

During the tax years covered by the audit, the Taxpayer claimed bad debt deductions for federal income tax purposes for certain customer accounts receivable.

The City has sourced all of the Taxpayer's gross receipts to the City, and assessed the Taxpayer an additional *****, for the tax years in question. The assessment resulted from the City's classification of the Taxpayer's sales as being at retail. In addition, the City attributed all of the Taxpayer's gross receipts to its situs in the City. The Taxpayer contends that it should be classified as a wholesale business, rather than a retail business, and that sales attributed to its national account should be excluded from the taxable measure, as should sales to other states. Additionally, the Taxpayer asks that drop shipment sales, cash discounts and bad debts be deducted from its taxable measure.
ANALYSIS

Wholesale versus Retail Sales

For purposes of the BPOL tax, a retail sale generally means "a 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 definition of a wholesale sale goes beyond the traditional concept of "sale for resale" for purposes of the BPOL tax. A wholesale sale 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.

This distinction was discussed at length in Public Document (P.D.) 98-160 (10/20/98), which emphasized price, quantity and characteristics of the purchaser:
    • Factors used to discern the difference between a retail and wholesale sale are the characteristics of the purchaser and the purchaser's use of the merchandise and, to a lesser degree, the price and quantity of the product sold.
    • An institutional, commercial, industrial, or governmental purchaser of wholesale goods must use them in such purchaser's processing or fabrication process or to maintain the purchaser's own business operations.
    • When a business does sell to both retail users and institutional, commercial, industrial, or governmental users, the merchant must substantiate the lesser price to institutional, commercial, industrial, or governmental users for such sales to qualify as wholesale sales.

In this case, the vast majority of the Taxpayer's sales are of a wholesale nature. According to sales data supplied by the Taxpayer, it is clear that the vast majority of its clients are of an institutional, commercial, industrial or governmental nature and use the goods they purchase for consumption, use or resale in the normal course of their business. Indeed, the City has stated that there appeared to be no full-time attendant in the retail section of the facility, and that the Taxpayer's enterprise largely consists of a warehouse from which supplies are distributed in bulk.

National Account

The Taxpayer contends that the sales that emanated from its national account with Company X should not be included in its taxable measure for purposes of the City's BPOL tax. These sales were both solicited by and negotiated from the sales office in State B. The Taxpayer's employee in the City merely serviced the account, assuring that delivery was made in a timely fashion on items ordered through the office in State B. The point of purchase, however, was actually at the Taxpayer's warehouse in the City.

In City of Richmond v. Petroleum Marketers, Inc., 221 Va. 372 (1980), the Virginia Supreme Court held that a wholesale merchant that maintained its petroleum in a distribution facility in one jurisdiction while negotiating sales of such fuel from its headquarters in another jurisdiction, was liable for the local license tax in the jurisdiction from where the goods were delivered. The Court found that the site of the execution of the sales contract was irrelevant in terms of the second jurisdiction's ability to tax the petroleum merchant as a wholesale merchant. I see nothing in this Taxpayer's case that would lead to a different conclusion. The Taxpayer makes sales from both State B and the City. It delivers the goods from the warehouse in the City. Assuming the City's BPOL tax for wholesalers is based on purchases, the gross receipts associated with the sales generated by the national office, yet delivered from the Taxpayer's warehouse in the City, are subject to the City's BPOL tax. In this case, the Taxpayer agrees that the goods are delivered from its warehouse in the City; therefore, receipts associated with the delivery of such goods are subject to the City's BPOL tax

Gross Receipts Attributed to Business in Other States

Virginia Code § 58.1-3732 provides a deduction for receipts attributable to business done in other states where a taxpayer files an income or income like tax. Specifically, the statute states that a deduction from gross receipts or gross purchases that would otherwise be taxable shall be allowed for:
    • Any receipts attributable to business conducted in another state or foreign country in which the taxpayer (or its shareholders, partners or members in lieu of the taxpayer) is liable for an income or other tax based upon income.

The Taxpayer states that at least 60 percent of its business was conducted in other states where it filed an income tax return during the audit period. The Taxpayer is entitled to these deductions. Because the assessment is "deemed prima facie correct," the Taxpayer must supply evidence of having filed tax returns in these states in order to take the deduction. The Taxpayer has furnished the Department with a summary worksheet of its filings in other states. This is an issue that the Taxpayer must resolve with the local commissioner of the revenue. Moreover, it is important to note that for purposes of the BPOL tax, gross receipts are attributed to the jurisdiction in which the actual business is conducted.

Deductions for Bad Debts and Cash Discounts

The Taxpayer claims that it is entitled to a "deduction from the taxable measure for cash discounts taken by its customers for prompt payment and worthless receivables with respect to which the Taxpayer is entitled to a bad debt deduction for federal income tax purposes." The Taxpayer is, in fact, entitled to the following exclusions:
    • Any amount representing the liquidation of a debt or conversion of another asset to the extent that the amount is attributable to a transaction previously taxed (e.g., the factoring of accounts receivable created by sales which have been included in taxable receipts even though the creation of such debt and factoring are a regular part of its business). Virginia Code § 58.1-3732 (A)(2).
    • Rebates and discounts taken or received on account of purchases by the licensee. A rebate or other incentive offered to induce the recipient to purchase certain goods or services from a person other than the offer or, and which the recipient assigns to the licensee in consideration of the sale goods and services shall not be considered a rebate or discount to the licensee, but shall be included in the licensee's gross receipts together with any handling or other fees related to the incentive. Virginia Code § 58.1-3732 (A)(6).

It is important to note, however, that the burden of proof in supporting claims for these exclusions remains with the Taxpayer. The Taxpayer must supply the local commissioner of the revenue with evidence of such bad debts and cash discounts in order to claim such exclusions.
DETERMINATION

It is my determination that the Taxpayer is primarily a wholesaler, and it should be taxed accordingly. If the local commissioner of the revenue finds a significant amount of the Taxpayer's business is retail, he should issue two licenses to the Taxpayer: one as a wholesaler and one as a retailer. Given the facts presented, however, it would appear that a vast majority of the Taxpayer's business is conducted on a wholesale basis.

Based on the Virginia Supreme Court's decision in Petroleum Marketers, the gross receipts derived from purchases and deliveries made from the warehouse in the City and associated with the national account are attributable to the City for purposes of the BPOL tax. If any of these gross receipts are subject to an income or an income-like tax in another state, they may be deducted from the taxable measure if the Taxpayer has filed a return in those other states. The burden of proof is on the Taxpayer in these instances. Finally, the Taxpayer is entitled to take the bad debt and cash discount exclusions for such gross receipts, provided it can supply the local commissioner of the revenue with proof of the debts and discounts.

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,


                • Kenneth W. Thorson
                  Tax Commissioner


AR/41400H




Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46