04-142 | Virginia Tax

Tax Type

BPOL Tax

Description

Are sales wholesale from the place of manufacture?

Topic

Local Taxes Discussion

Property Subject to Tax

Date Issued

09-17-2004

September 17, 2004

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 a final local determination denying the Taxpayer's request for a refund of BPOL taxes paid for license tax years 1999, 2000, 2001 and 2002. I apologize for the delay in this 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, that is, 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. 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 is a "general commercial and direct mail printer" that handles medium to large printing orders ranging from 5,000 to more than one million pieces. The Taxpayer's customers are direct mail house agencies and governmental or nonprofit organizations, government agencies and commercial enterprises. The Taxpayer does not engage in direct mail services. Rather, it prepares materials for direct mailing companies that, in turn, resell the materials to their clients.

The Taxpayer is the successor in interest to ***** (the "Company"). The Company was merged into the Taxpayer in 2002. After the merger, the Taxpayer determined that both it and the Company had been "improperly classified for BPOL tax purposes as a personal service business." The Taxpayer filed an application for review with the local commissioner of the revenue in which it sought to be reclassified as a manufacturer for the years 1999 and forward. In connection with the reclassification, the Taxpayer requested a refund for BPOL taxes paid in 1999, 2000, 2001 and 2002.

In its application for review, the Taxpayer stated that the only activity in which it is engaged is printing and there has been no substantive change in the core activities of the Company since it merged into the Taxpayer in 2002. Prior to the merger, the Company did add some additional press capacity in September 1999 and March 2000.

The Company originally printed large volumes of envelopes using offset presses designed specifically for envelope printing. Prior to moving to its new facility in the Town in December 1998, the Company acquired additional offset web and sheet fed presses enabling it to expand the types of printed products it could produce. In the new facility, the Taxpayer's printing press area includes four envelope presses or "jet presses," three-half web presses and a bindery department. The jet presses are two color presses and can print 40,000 one-sided envelopes an hour. The half-web presses are six color presses, with each press capable of printing different sized forms or other printed materials. The equipment in the bindery department consists of machines that cut the printed materials to specified sizes and folding machines. Other equipment includes pre-press photographic equipment, digital pre-press equipment and shrink wrapping machines for shipping the finished printed products. The facility consists of the production floor and administrative offices. The Taxpayer has no retail shop or space at the facility, which is its only real property.

The Town denied the Taxpayer's request for a refund, concluding that the Taxpayer had supplied it with insufficient information to change either the Taxpayer's or the Company's classification from "personal services" to "manufacturer."

The Taxpayer has stated that it does not have a retail sales area; that 99.5 percent of its sales are at wholesale. It has made an occasional sale to the Town at cost. The Taxpayer's total gross receipts reported for tax year 2002 were ***** million. The Town has stated that it asked the Taxpayer to furnish it with a breakdown of its retail and wholesale sales. A precise breakdown of retail and wholesale sales was not furnished to the Town, however.

The questions presented on appeal are: (1) should the Taxpayer be classified as a manufacturer for purposes of BPOL taxation, and (2) did the activities of the Company, prior to its merging with the Taxpayer, constitute manufacturing and should the Company have been treated as a manufacturer for purposes of the BPOL tax?

ANALYSIS

Manufacturer's Exemption

The BPOL tax is based on the gross receipts attributable to the exercise of a licensable privilege at a definite place of business. Virginia Code § 58.1-3700.1 defines the term "gross receipts" as "the whole, entire, total receipts, without deduction." The Code does provide for certain exemptions from the BPOL tax. Virginia Code § 58.13703(C)(4) states that 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."

Printers as Manufacturers

It is well established that printers may be treated as manufacturers for purposes of the BPOL tax. See, for example, Public Document (P.D.) 99-200 (7/23/99), P.D. 99228 (8/10/99), P.D. 02-56 (4/17/02), and P.D. 99-239 (8/23/99).

The activities of both the Company and the Taxpayer are very similar to printing activities of the taxpayer described in P.D. 99-239. In this opinion, responding to a question about the classification of "job printers" the Tax Commissioner found:

- Under § 6.7 of the 1997 BPOL Guidelines, a job printer is classified as a manufacturer engaged in either retail or wholesale sales as to the sales of the items printed. As a result, those job printers meeting the conditions set forth in Code of Virginia § 58.1-3703(C)(4) are exempt from local license taxes.¹. The term "job printer" does not lend itself to a rigid definition. In general, a job printer is one who engages in "commercial printing, on order, and the production of business forms, books, blank books, pamphlets, advertising, calendars, bill heads, periodicals, etc.", which is generally considered to be manufacturing. Heidelberg Central, Inc. v. Director of the Department of the Revenue of the State of Missouri, 476 S.W.2d 502 (1972).

The description of the Company that the Taxpayer submitted in its original correspondence with the Town certainly meets that of a "job printer." Both the Taxpayer and its predecessor, the Company, engaged in "commercial printing, on order, and the production of business forms, books, blank books, pamphlets, advertising, calendars, bill heads, periodicals, etc.," during the years in question. This description would include the commercial printing of envelopes, which was the primary product the Company originally produced. Furthermore, the printing activities of the Company had expanded significantly after its move to the Town in December 1998 to include other types of printed material. All of the Taxpayer's products are printed on order.

Sales at Wholesale

To be exempt under the BPOL tax, a manufacturer must also sell its goods, wares and merchandise at wholesale at the place of manufacture. A wholesale sale is described in § 5.3.2 of the 2000 BPOL Guidelines as follows:

- Wholesale trade is generally recognized as the selling at such prices and in such quantities to others who will then resell such goods either to ultimate consumers or further down the normal distribution chain. Wholesale trade may also include sales to industrial, commercial, or governmental users where goods sold will be used by the buyer in its productive processes.

The Taxpayer states that 99.5 percent of its sales are made at wholesale, either to mail marketers who resell the items at retail to the end users or to commercial institutional or governmental users who use the items in their productive processes. The Town, however, would like to see formal documentation of this fact. It did not formally present such a request to the Taxpayer.

Assuming the Taxpayer's statement is documented and accurate, its retail sales would be considered ancillary to its wholesale sales and would not rise to the level of a separately licensable activity. That being the case, the Taxpayer and the Company would be entitled to the exemption for manufacturers as provided for in Va. Code § 58.1-3703(C)(4).

DETERMINATION

It is my determination from the facts presented that the business activities of the Taxpayer and the Company constitute manufacturing. Provided the Taxpayer and the Company were selling at wholesale from the place of manufacture, both would be exempt from BPOL taxation.

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. The Taxpayer states that 99.5 percent of its sales were at wholesale. There is, however, some dispute as to the information provided to the Town regarding the breakdown between retail and wholesale sales. Therefore, I am returning this to the Town with the instruction to review the records the Taxpayer offered for inspection in its letter of September 22, 2003. If these records substantiate the fact that the Taxpayer's retail sales were ancillary to its primary business as a printer selling at wholesale from the place of manufacture, the Town must grant the Taxpayer the full refund requested for tax years 1999, 2000, 2001 and 2002.

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/48241H

¹This definition was dropped from the 2000 BPOL Guidelines because it had been fully incorporated in P.D. 99-239

Rulings of the Tax Commissioner