Tax Type
BPOL Tax
Description
Ancillary and Primary business
Topic
Local Taxes Discussion
Taxable Transactions
Date Issued
10-31-2006
October 30, 2006
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 you on behalf of ***** (the "Taxpayer") with the Department of Taxation. You appeal a final local determination upholding assessments of BPOL tax made by the Commissioner of the Revenue of ***** (the "County") for the tax years 2002 through 2005.
The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections, regulations and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.
FACTS
The Taxpayer sells, installs and services water purification equipment. The Taxpayer purchases components from manufacturers and sells them as a water system. The water purification systems are custom designed and installed by the Taxpayer. The Taxpayer also services and maintains the systems.
The issue in this appeal concerns deionization systems. A deionization system involves chemical replacement in tap water. Deionization tanks are recharged with the chemicals at the Taxpayer's place of business. When a customer's deionization tank is exhausted, a recharged tank is attached to the customer's water system. The customer purchases the chemicals and leases the tank from the Taxpayer. The Taxpayer provides maintenance and minor repairs on site. The Taxpayer maintains a Virginia contractor's license for the purpose of installing the systems into existing buildings and new constructions.
The Taxpayer had been classified as a wholesale merchant for BPOL tax purposes. As the result of an audit, the County reclassified the portion of the Taxpayer's water deionization business as a business service and assessed additional BPOL tax for the tax years 2002 through 2005.
The Taxpayer appeals the additional assessments, contending that it is a wholesale merchant for BPOL tax purposes.
ANALYSIS
Classification
For BPOL tax purposes, the term "wholesale sale" is defined in § 1 of the 2000 BPOL Guidelines as:
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- 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.
For BPOL tax purposes, "services" are defined as "things purchased by a customer which do not have physical characteristics, or which are not foods, wares, or merchandise." 2000 BPOL Guidelines § 1.
The issue is whether the Taxpayer's deionization systems constitute the sale of services or wholesale sales. Customers need deionization systems to purify water to satisfy their business requirements. The Taxpayer designs, installs, services and maintains the systems to the customer's specifications. As such, customers are purchasing the water deionization process, not just the chemicals. In essence, the customers are purchasing a service to clean their water. Although customers are charged for tangible property, such as the chemicals, tank rentals, and replacement parts, such purchases do not change the underlying character of the transactions, i.e., a business service.
Ancillary activity
In Public Document 97-257 (6/11/97), the Tax Commissioner defined the term "ancillary" for BPOL tax purposes:
The term 'ancillary' . . . refers to business activities, which are subordinate, subservient, auxiliary, or in aid of the businesses [sic] principal business activity. Distinguishing between an ancillary activity and an activity that 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.]
The facts presented in this case indicate that the Taxpayer's sale of the chemicals and replacement parts individually is not useful without the tank leasing or maintenance of the system and other the services provided by the Taxpayer. Likewise, the Taxpayer's contracting activity is not a separate business but instead exists to supplement the principal business of providing a service. Hence, such activities must be considered to be ancillary to the primary business of the Taxpayer.
DETERMINATION
Based on the facts presented, I find that the portion of the Taxpayer's business relating to the deionization systems constitutes a business service. I also find that the Taxpayer's business of installing water purifications systems does not constitute a contracting business for BPOL tax purposes. In this case, the contracting business is ancillary to the Taxpayer's business service. Accordingly, the County's assessments are correct.
If you have any questions regarding this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings at *****.
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- Sincerely,
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Janie E. Bowen
- Tax Commissioner
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AR/57006B
Rulings of the Tax Commissioner