Document Number
04-160
Tax Type
BPOL Tax
Description
Wholesale sale of merchandise not manufactured by the Taxpayer constitutes
Topic
Manufacturing
Manufacturing Exemption
Date Issued
10-01-2004


October 1, 2004



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 your firm on behalf of ***** (the "Taxpayer"), with the Department of Taxation. You appeal a final local determination of a BPOL tax assessment for tax years 1999, 2000, 2001 and 2002 made by the Commissioner of the Revenue of the ***** (the "City").

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 manufacturer of chainsaws and "portable hand-held cut-off machines representing a complete line of outdoor power equipment for homeowners and professional users." It is a subsidiary of a foreign-based holding company, and one of six such manufacturing companies in the corporate group. The Taxpayer's products are stored in two warehouses in the City. The products are shipped from the warehouses to twelve distribution centers located in other states, of which the Taxpayer owns five, and seven are independently owned. Those products shipped to the Taxpayer-owned distribution centers are recorded as transfers, and those products shipped to the independent distributors are recorded as wholesale sales to the distribution center. The products are then sold at wholesale from the distribution centers to independent servicing power equipment retailers located throughout the United States and in foreign countries.

The Taxpayer also stores merchandise that is manufactured by its parent and sister corporations in its warehouses. This merchandise is designed specifically to enhance the capabilities of the power tools the Taxpayer manufactures in the City. It consists primarily of replacement or add-on parts that can be utilized in customizing the Taxpayer's products to meet individual consumer's needs. All of this merchandise is sold under the Taxpayer's name. The Taxpayer's records indicate that it tracks such sales and, for accounting purposes, they are segregated from the Taxpayer's "own" business. This merchandise is also distributed from the warehouses to the twelve distribution centers in the same manner as the Taxpayer's own manufactured products.

Both the Taxpayer's manufactured products and the goods manufactured by its affiliates benefit from shared corporate administrative services. The Taxpayer states, "The business as a whole is seamless as it relates to manufactured and merchandise product ... [and] there are no [Taxpayer] divisions, cost centers, or employees that exclusively handle parent/sister corporation manufactured merchandise inventory."
  • The Taxpayer and the City have agreed that:

· the Taxpayer is a manufacturer for purposes of the BPOL tax;
· the Taxpayer sells its own products at wholesale from the place of manufacture or one of its distribution centers; and
· any receipts attributed to sales in other states where the Taxpayer is liable for an income or an income-like tax are to be excluded (deducted) from the Taxpayer's base for purposes of determining gross receipts subject to the BPOL tax.

What is in dispute are the sales of merchandise manufactured by the Taxpayer's affiliates, purchased by the Taxpayer, stored in Virginia, and sold at wholesale to the seven independent distributors. The City contends that the wholesale sale of this merchandise to the independent distributors constitutes a second line of business that can function independently of the Taxpayer's business; therefore, it is a separate licensable activity subject to the BPOL tax. The Taxpayer argues that such sales are ancillary to its manufacturing business and, therefore, are exempt from the BPOL tax pursuant to Va. Code § 58.1-3703(A).

Specifically, the Taxpayer asks the Department to find that:
    • 1. the Taxpayer's operations in the City are substantially those of a manufacturer; 2. the wholesaling of parent and sister corporation manufactured merchandise is ancillary to the Taxpayer's primary business of manufacturing; and 3. all of the Taxpayer's sales at wholesale, inclusive of parent and sister corporation manufactured merchandise, are excludable from BPOL taxation under the provisions of Va. Code § 58.1-3703(C)(4).
ANALYSIS

Manufacturers' Exemption

The BPOL tax is a local tax imposed on a business's gross receipts. Virginia Code § 58.1-3703(C)(4) provides an exemption from the tax for certain manufacturers:
    • 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. Code of Virginia § 58.1-3703(C)(4).

To qualify for this exemption, a taxpayer must first qualify as a manufacturer, and then it must sell the goods it manufactures at wholesale from the place of manufacture. The City and the Taxpayer have agreed that the "Taxpayer's operations in the City are substantially that of a manufacturer." The question becomes one of whether its sales of merchandise manufactured by its affiliates, stored in the Taxpayer's city-based warehouses and sold to independent distributors can be considered as ancillary to the main purpose of the business of manufacturing, or does this activity constitute a separate line of business requiring a BPOL license and payment of the tax.

Ancillary Activity Versus Separate Business

An ancillary activity is one that is "subordinate to, subservient to, or in aid of that which is principal and primary." 2000 BPOL Guidelines, Chapter 1. The Taxpayer contends that wholesaling of the parent and sister corporations' manufactured merchandise is ancillary to the Taxpayer's primary business of manufacturing. It states, "the wholesaling of [its] manufactured goods and the manufactured goods of its parent sister corporations are conducted under the umbrella of a single corporation, [the Taxpayer]."

In Public Document 99-211 (7/30/99), citing with approval P.D. 97-257(6/11/97), the Tax Commissioner found:
    • Distinguishing between an ancillary activity and an activity which rises to the level of a separate business can often be accomplished by determining if the activity under scrutiny exists independently of the principal business. To the extent that additional services are offered to make the sale of a good or service more attractive to the consumer, the offering of such supplemental services are usually ancillary to the principal business. [Emphasis added.]

In this case, while the parent and sister corporations' manufactured merchandise may be goods that enhance the Taxpayer's product, the merchandise is not to be equated with supplemental services associated with the Taxpayer's product. The merchandise at issue was manufactured elsewhere, was sold to the Taxpayer, and was stored at the Taxpayer's warehouse for purposes of selling the products at wholesale in conjunction with the goods manufactured at the Taxpayer's site in the City to the various distribution centers.

The Tax Commissioner directly addressed the question of a manufacturer selling parts manufactured by another business in P.D. 97-183 (04/16/97). The Tax Commissioner ruled that a company that manufactures heavy equipment and sells parts not manufactured by the company is subject to the BPOL tax on those sales of parts not manufactured by the company. In a later ruling examining separate licenses, the Tax Commissioner found:
    • If the Taxpayer receives substantial gross receipts from the sale of those products that it receives from other manufacturers and sells at wholesale to retailers, the Taxpayer should apply for a separate license as a wholesaler. See P.D. 01-98 (08/08/01).

The Taxpayer's records indicate that its sales of merchandise ranged from 33.1% to 37% over the years in dispute. Clearly these sales were a substantial component of the Taxpayer's receipts.

Even though the merchandise at issue is marketed under the Taxpayer's name in conjunction with the goods manufactured at the Taxpayer's site in the City, it is manufactured elsewhere and sold to the Taxpayer. It is my determination that the sale of these goods at wholesale to the independent distributors is distinct from, rather than ancillary to, the Taxpayer's manufacturing business and could indeed function as a separate business.

Affiliated Group

The Taxpayer, the Taxpayer's parent and sister corporations, and the Taxpayer's own distribution centers are all a part of an affiliated group. As such, any sales or purchases between members of the group are excluded from the BPOL tax. See Va. Code § 58.1-3703(C)(10). Sales of affiliates products or services to a non-affiliated entity are subject to BPOL taxation, however. Virginia Code § 58.1-3703(C)(10) provides that the exclusion for members of an affiliated group:
    • shall not preclude a locality from levying a wholesale merchant's license tax on an affiliated entity on those sales by the affiliated entity to a non-affiliated entity, notwithstanding the fact that the wholesale merchant's license tax would be based upon purchases from an affiliated entity. Such tax shall be based on the purchase price of the goods sold to the non-affiliated entity.

In this case, any transactions involving the parent and sister corporation's merchandise, made between the Taxpayer and its own distribution centers would not be subject to BPOL taxation under the affiliated group exclusion. The Taxpayer is liable for the tax based on the wholesale sales of the parent and sister corporations' manufactured merchandise to the independent (i.e., non-affiliated) distribution centers.
DETERMINATION

It is my determination that the wholesale sale of merchandise not manufactured by the Taxpayer constitutes a separate licensable activity subject to the BPOL tax. Only those sales of such merchandise to independent distribution centers in states where the Taxpayer is not subject to and has not filed an income or an income like tax return are subject to the City's BPOL tax.

If the Taxpayer has paid a tax on transfers of the merchandise from the Taxpayer's warehouses to its own distribution centers, those monies are to be refunded to the Taxpayer, with interest. Transfers between members of the affiliated group are not subject to BPOL taxation pursuant to Va. Code § 58.1-3703(C)(10).

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/47362H

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46