Document Number
06-51
Tax Type
BTPP Tax
Description
Tangible personal property treated as intangible property
Topic
Manufacturing
Property Subject to Tax
Tangible Personal Property
Date Issued
04-24-2006


April 24, 2006




Re: Application for Correction of Final Local Determination
Taxpayer: *****
Locality: *****
Business Tangible Personal Property Tax

Dear ***************:

You filed an application for correction of an erroneous assessment on behalf of the ***** (the "Taxpayer"). The application appeals a final local determination of an assessment of Business Tangible Personal Property ("BTPP") taxes made by the Director of Finance of the ***** (the "County") for tax years 2001 and 2002.

Local personal property taxes are imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue determinations on taxpayer appeals of certain BTPP tax assessments. On appeal, a BTPP tax assessment is deemed prima facie correct, and the local assessment will stand unless the taxpayer proves that it is incorrect.

This determination is based on the facts presented to the Department, summarized below. The Code of Virginia sections and public documents 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 is a manufacturer of lumber products. One of the Taxpayer's divisions maintains an internal distribution network through which it sells its products to wholesalers, retailers and industrial users. Approximately 75% of the Taxpayer's products are sold through this distribution network. The remaining 25% of its sales are direct mill-to-customer sales. The Taxpayer's warehouse and distribution facility (the "CSC facility") in the County is a part of this network.

In order to complete and diversify its product lines, the Taxpayer purchases products from unrelated manufacturers. While these products are not manufactured by the Taxpayer, they enhance the array of products the Taxpayer can offer to its customer base. Substantially all of these products are complementary to the Taxpayer's product line. On occasion, when inventory of a particular item produced by the Taxpayer is low, the CSC facility will purchase similar items from unrelated, third-party manufacturers. The Taxpayer produces approximately 80 to 85% of the products sold from the CSC facility.

Nationwide, 85% of the Taxpayer's employees are directly engaged in manufacturing. The Taxpayer's personnel at the CSC facility in the County consists of nine warehouse employees, nine sales employees and seven administrative employees. The warehouse personnel unload shipments received, handle inventory in the warehouse, modify products to meet customer specifications, and prepare products for transport to customers. The Taxpayer's products are delivered from its mills to the CSC facility by rail or by the Taxpayer' trucks.

The administrative and sales personnel solicit orders, sign contracts and make sales to established customer accounts. The sales staff is also authorized to deal with potential customers. While most of the "leads" come from the Taxpayer's corporate offices, an occasional referral is made by current customers. The sales team is also encouraged to promote new products produced by the Taxpayer through sales and marketing campaigns designed and initiated by the Taxpayer's corporate offices. There is no walk-in traffic at the facility.

The Taxpayer contends that its functions at the CSC facility are an integral part of its business as a manufacturer. As such, the Taxpayer maintains that the tangible personal property located at the CSC facility should be classified as capital that is intangible property under the provisions of Va. Code § 58.1-1101, and exempt from local property taxation. The County disagrees and regards the CSC facility as a wholesale business for BTPP tax purposes. The County assessed the Taxpayer's property located at the CSC facility at the BTPP tax rate.

ANALYSIS


Taxation of Business Tangible Personal Property

In general, business tangible personal property, with some exceptions, is subject to local taxation. Virginia Code § 58.1-1100 provides that certain property that is otherwise tangible in fact, is classified as intangible property and segregated for state taxation only. One of the subjects classified as intangible personal property under Va. Code § 58.1-1101 2 is:
    • Capital which is personal property, tangible in fact, used in manufacturing (including, but not limited to, furniture, fixtures, office equipment and computer equipment used in corporate headquarters) . . . businesses. Machinery and tools, motor vehicles and delivery equipment of such businesses shall not be defined as intangible personal property for purposes of this chapter and shall be taxed locally as tangible personal property according to the applicable provisions of law relative to such property. [Emphasis added.]

There is no dispute that the Taxpayer's overall business is that of a manufacturer. The question is whether the Taxpayer's CSC facility in the County should be regarded as part of an integrated manufacturing business and its tangible personal property treated as intangible property for purposes of taxation, or whether the CSC facility should be considered a wholesale business, with its tangible personal property subject to the BTPP tax.

The County's Position

The County argues that the Taxpayer is actually engaged in two businesses, manufacturing and wholesaling. The County relies on Va. Code § 58.1-5, which provides:
    • When any person, firm or corporation is engaged in more than one business which is made by law subject to taxation, such person, firm or corporation shall pay the tax provided by law on each branch of his, their or its business.

The County asserts that the Taxpayer's business at the CSC facility is that of a wholesaler, and as such, is subject to local property taxation under the provisions of Va. Code § 58.1-3503. The County maintains the Taxpayer's case is controlled by the decision of the Virginia Supreme Court (the "Court") in Coca­-Cola Bottling Company of Roanoke, Inc. v. County of Botetourt, 259 Va. 559, S.E.2d 746 (2000).

In Coca-Cola, the taxpayer held a franchise from the Coca-Cola Company for the production, distribution and sale of its products. The taxpayer's status as a manufacturer was not at issue. The issue was whether vending machines used to make retail sales of the taxpayer's product were used in its manufacturing business.

In the lower court proceeding, the Botetourt County Circuit Court described the vending machines as having no logical, rational relationship to a manufacturing business. "Vending machines do not expedite the manufacturing business, aid in production or production control, regulate, enhance or otherwise impact the manufacturing of Coca-Cola products." Coca-Cola Bottling Company of Roanoke, Inc. v. County of Bofetourt, 1998 Va. Cir LEXIS 437. The Supreme Court found this argument to be persuasive, stating, "[T]he evidence in this case indicates that the sales equipment in question (the vending machines) was not used in manufacturing but merely in selling the finished product." Coca-Cola Bottling Company of Roanoke, Inc. v. County of Botetourt, 259 Va. 559, 565, 526 S.E.2d 746, 750 (2000). The Court found that the taxpayer's retail sales of its products through vending machines constituted a separate business, and that the property used in that business (the vending machines) was subject to the BTPP tax.

It is important to recognize that the Coca-Cola Court confined its analysis to property taxation of vending machines used in the taxpayer's retail sales business. The Court declined to address the question whether the taxpayer was engaged in a separate wholesale business because the taxpayer had "not borne [its] burden under Code § 58.1-3984 of showing, which, if any, of the taxed property (the vending machines) was used in sales at the wholesale level." Id. [Emphasis added.] The Court was only addressing the question of the retail sales of the separate vending machine business. The Court did not address the taxpayer's other business activities, including the storage and sale of the taxpayer's products from its warehouse and distribution centers.

The question in the present case concerns the tangible personal property taxation of the property of a manufacturer's distribution center that sells the manufacturer's products and some products of other manufacturers at wholesale.

The Taxpayer's Position

The Taxpayer contends that, as a part of a vertically integrated manufacturing company, its business tangible personal property at the CSC facility in the County should be classified as intangible property under Va. Code § 58.1-1101, and, therefore, not subject to local taxation. The Taxpayer cites the Virginia Supreme Court's ruling in City of Winchester v. American Woodmark Corporation, 250 Va. 451, 464 S.E.2d 148 (1995) in support of its position.

In Woodmark, the company's executive officers, accounting personnel, credit management personnel, computer systems managers and operators, senior sales marketing personnel, operations and customer service personnel, and senior manufacturing officers were located in the City of Winchester. The taxpayer's manufacturing facilities and distribution centers were located elsewhere.

The City of Winchester initially contended that the taxpayer actually was engaged in four separate businesses: manufacturing, assembly, distribution and sales, and assessed the taxpayer with a business tangible property tax on the tangible personal property located at the taxpayer's headquarters office in Winchester.1 The company appealed the assessment, contending that, as a vertically integrated manufacturing entity, its tangible property should be classified as intangible under the provisions of Va. Code § 58.1-1101 and subject only to state taxation. The Court agreed with the taxpayer, finding that the business activity undertaken at the taxpayer's location in Winchester was integral to the overall business of the manufacturer. As such, the taxpayer's personal property in question constituted capital used in a manufacturing business, and, therefore, under the provisions of Va. Code § 58.1-1101 B, was not subject to taxation by the City of Winchester.

The Court was not asked to address the issue of property at the distribution centers. It is important to note, however, that the Court did not disagree with the City of Winchester Circuit Court's dismissal of the idea that the taxpayer was engaged in multiple businesses for purposes of property taxation. 2

In the present case, the question becomes whether the Taxpayer's wholesale sales of both its own products and the products of other manufacturers from its own distribution facility are integral to, ancillary to, or separate from the manufacturing business.

Manufacturers and Wholesalers

In Commonwealth of Virginia and City of Richmond v. Leonard Meyer, et al., 180 Va. 466, 471, 23 S.E.2d 353, 355 (1942), the Court addresses the distinction between the business of manufacturers selling at wholesale and the business of retail and wholesale merchant, noting a Tennessee definition to this effect:
    • "The marked distinction between a manufacturer and a merchant is that the merchant or dealer sells to earn a profit, and the manufacturer sells to take profit already earned. He must buy the materials out of which to make his finished product, and he must sell the product of his factory after it is finished. But such dealings are not his occupation." [Quoting from Neuhoff Packing Co. v. Sharpe, 146 Tenn. 293, 297, 240 S.W. 1101, 1102 (1921).

The City of Winchester Circuit Court cited this language with approval in American Woodmark Corp. v. City of Winchester, 34 Va. Cir. 421, 435 (1994) finding, "A manufacturer does not alter its status as a manufacturer because it also sells its products."

In Meyer, the Court drew a distinction between a manufacturer that sells its products as an integral part of its manufacturing business, and a merchant whose occupation is the business of selling. In Coca-Cola, both the County of Botetourt Circuit Court and the Virginia Supreme Court found the taxpayer's retail sales business through its vending machines to be an independent, separate line of business, unrelated to the business of manufacturing. That is, the taxpayer was functioning as a merchant, rather than as a manufacturer in its retail vending machine business.

Unlike the vending machine issue in Coca-Cola, the delineation of functions of the CSC is not as clear. While most of the activities conducted by the CSC are clearly an extension of the manufacturing process, others could be regarded as a separate sales activity. In this case, the CSC functions as the initial and primary contact between the Taxpayer and its customers. The Taxpayer purchases raw material, transforms it into a finished product, and makes it available to market through its CSC. The CSC manages the finished goods inventory, receives orders from customers, occasionally modifies inventory to meet customer specifications, and makes product deliveries.

The CSC is also engaged in a wholesale business apart from its distribution function. Sales personnel and equipment are actively used to promote and solicit orders for products produced by other manufacturers. In some instances, the products compete directly with products manufactured by the Taxpayer. Thus, the equipment at issue is used in both manufacturing and sales activities.

In County of Chesterfield v. BBC Brown Boveri, Inc., 238 Va. 64, 380 S.E.2d 890 (1989), the Court discussed with approval an opinion of the Attorney General that found no legal basis for allowing "a single piece of property to be subject to more than one ad valorem tax apportioned according to its use." 1984-1985 Va. Att'y Gen. Rep. 364, 366. Because Taxpayer's tangible property cannot be subject to more than one ad valorem tax for BTPP tax purposes, the question is which of the Taxpayer's business activities should control.

In the present case, manufacturing is not only a substantial, but indeed, is a preponderant part of the Taxpayer's business. The wholesale sales of its own products from the CSC facility is an integral part of the Taxpayer's manufacturing business. Although the Taxpayer could use another system for distributing its products, the mere fact that it has chosen to use strategically located distribution facilities that also sell at wholesale other manufacturers' products does not alter the CSC's primary purpose.

DETERMINATION


After careful consideration of the excellent arguments by both parties, I would make the following observations:
  • 1. None of the cases cited by the parties is directly on point.
  • 2. None of the cases cited give definitive guidance on how the issues presented in this case should be resolved.
  • 3. While I refrain from drawing a hard and fast distinction on the basis of retail versus wholesale sales in this case, that consideration is a pivotal issue in the decisions of the Virginia Supreme Court.
  • 4. Had the sales taken place at the site of manufacture, this question would not be here on appeal. The Taxpayer's self-declared classification under the BPOL tax as a wholesaler is not controlling in this case. It only indicates that wholesale sales are not taking place at the place of manufacture, else the gross receipts from such sales would be exempt from the BPOL tax. Moreover, as it has often been said, the tax consequences under the BPOL tax are not determinative of the tax consequences under any other tax, including the tangible personal property tax.
  • 5. The manufacturer must have a means of selling its goods and bringing its goods to the marketplace. In this case, the CSC facility is selling at wholesale exclusively. The fact that the location of the CSC facility is remote from the site of the manufacture does not change its functional character. A national manufacturing business must be able to preposition its inventory at decentralized locations convenient to its customers to assure prompt delivery.
  • 6. The fact that, incidental to the sales of its own line of goods, the Taxpayer may sell goods of other manufacturers does not destroy the character of the sales of the manufacturer, so long as the sale of its own goods is the predominant activity. Here, it comprises 75 percent of the sales at wholesale.

Accordingly, based on the facts presented in this case, the Taxpayer is clearly a manufacturer. Unlike the vending machines used for retail sales in Coca-Cola, which were considered to be a separate business activity not essential to the business of manufacturing, the distribution and sales of the Taxpayer's products "expedite the manufacturing business" and are integral to the Taxpayer's manufacturing business. As such, for purposes of personal property taxation, it is my determination that the property located at the CSC facility should be classified as intangible, segregated for state taxation only, under the provisions of Va. Code § 58.1-1101. I am remanding this to the County for correction of the assessment in accordance with the finding of this determination.

If you have any questions about 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/52968H
1This argument was presented by the city and dismissed by the Circuit Court of the City of Winchester in American Woodmark Corp. v. City of Winchester, 34 Va. Cir. 421 (1994), the circuit court case preceding Woodmark.

2Citing City of Norfolk v. Griffin Brothers, 120 Va. 524, 91 S.E. 640 (1917), the City of Winchester Circuit Court noted, "The Commissioner of the Revenue may not vivisect a business into its component activities in order to maximize taxes." See American Woodmark Corp. v. City of Winchester, 34 Va. Cir. 421, 435 (1994).

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46