07-178 | Virginia Tax

Tax Type

BPOL Tax

Description

Taxpayer not leasing facilities at the terminal and no definite place of business

Topic

Basis of Tax

Local Taxes Discussion

Pass-Through Entities

Date Issued

11-14-2007

November 14, 2007

Re: Appeal of Final Local Determination
Locality: *****
Taxpayer: *****
Business, Professional and Occupational License 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 an assessment of Business, Professional and Occupational License (BPOL) taxes issued to the Taxpayer by the ***** (the "City") for tax years 2002 through 2005.

The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of 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 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 operates a retail and wholesale petroleum business. Its wholesale petroleum business supplies the Taxpayer's own retail business operations and also sells petroleum products to third party customers. The wholesale business delivers products through terminals owned by unrelated third parties at which the Taxpayer has "lifting" privileges with respect to the temporary storage of the petroleum products.

The Taxpayer's petroleum products are delivered to the terminal by an interstate pipeline that is also owned by a third party. At the terminal's fuel-loading racks, drivers of trucks that are owned either by the customer or a common carrier enter an electronic code that permits them to access the terminal and load them for ultimate delivery to the Taxpayer's customers.

The Taxpayer's customers have an agreement with the Taxpayer to buy certain types of fuel at the terminal at a "posted price," which is set daily and posted on the Taxpayer's website. The Taxpayer is notified electronically of purchases made by its customers, and invoices its customers on a daily basis.

The owner of the terminal (the "Owner") is compensated for its business activity by the Taxpayer in accordance with a "thru-put agreement" negotiated by the Owner and the Taxpayer. This agreement stipulates the following:

1. The Taxpayer shall pay the Owner a monthly fee based on the number of gallons that are distributed to the Taxpayer's customers;
2. The Taxpayer shall pay the Owner an additional fee for the addition of a generic gasoline additive; and
3. The Taxpayer and the Owner agree to indemnify one another against claims arising out of negligence.

The City determined that the Taxpayer is a wholesaler of petroleum products that maintains a "lease agreement" with the Owner for the storage of its products. The City found the Taxpayer's situation to be analogous to that of the taxpayer in City of Richmond v. Petroleum Marketers, Inc., 221 Va. 372, 269 S.E.2d 389 (1980), and as such, the Taxpayer was subject to the City's BPOL tax. The City also assessed the Taxpayer with a 10% late penalty fee, finding that the Taxpayer's failure to file as a wholesaler was in direct conflict with the Virginia Supreme Court's (the "Court") decision.

The Taxpayer contests the assessment, arguing that it does not have a definite place of business in the City; and the thru-put agreement does not constitute a lease agreement. Moreover, the Taxpayer does not believe it is subject to the penalty because it relied on current provisions in the Code of Virginia and administrative authorities.

ANALYSIS

Situs of Gross Receipts

The Taxpayer represents itself as operating a wholesale and retail petroleum products business. Virginia Code § 58.1-3703.1 A 1 provides that a taxpayer must have a definite place of business within the taxing jurisdiction in order to be subject to the local BPOL tax. The City's ordinance calls for wholesalers to be taxed on purchases. The situs of such taxpayers is the definite place of business at which or from which deliveries of goods, wares and merchandise are made to customers. See Va. Code § 58.13703.1 A 3 a (2).

Definite Place of Business

Virginia Code § 58.1-3700.1 3 defines a "definite place of business" as:

- an office or a location at which occurs a regular and continuous course of dealing for thirty consecutive days or more. A definite place of business for a person engaged in business may include a location leased or otherwise obtained from another person on a temporary or seasonal basis and real property leased to another.

Some characteristics that may help determine whether the location is a definite place of business include, but are not limited to, the following on-site activities: (1) a continuous presence; (2) having an office with a phone; (3) the reception of mail; (4) having employees; (5) record keeping; (6) and advertising or otherwise holding oneself out as engaging in business at the particular location. The Taxpayer's business has none of the above characteristics. See P.D.s 97-201 (4/25/1997), 98-204 (8/13/1999) and 99-234 (4/13/1999).

In the present case, the Taxpayer 1) did not have a continuous presence at the terminal; 2) did not have an office with a telephone at the terminal; 3) did not receive mail at the terminal; 4) did not have employees on site at the terminal; 5) did not maintain records at the terminal; and 6), and did not hold itself out as engaging in business at the terminal.¹ In short, the Taxpayer did not meet any of the criteria used in defining a definite place of business for local license tax purposes in the tax years at issue.

Nonetheless, the City contends that presence of the Taxpayer's petroleum products in the third party's facility in the City is tantamount to a "location" within the City for purposes of the BPOL tax. I disagree. The City also contends that the Taxpayer's advertisements for its services satisfy the requirement of "holding oneself out for business." Closer examination reveals that the Taxpayer's website directs one to 15 different distribution centers in Virginia, none of which is in the City. In other words, for business purposes, the Taxpayer does not have a location in the City, nor does it hold itself out as a wholesaler within the City.

The facts presented in this appeal are substantially the same as those facts presented in a request for an advisory opinion and subsequently published in Public Document (P.D.) 06-97 (9/29/2006). That opinion found that the taxpayer did not have a definite place of business in the locality, and while the deliveries of fuel were made to the terminal, it was the owner of the terminal, rather than the taxpayer, who had a definite place of business in the locality. The facts presented in the Taxpayer's case bring me to the same conclusion.

Lease Agreement

In finding that the Taxpayer was subject to its BPOL tax, the City relied on its determination that the Taxpayer's thru-put agreement was in essence a lease agreement similar to the agreement in Petroleum Marketers. The City decided that, under the arrangement the Taxpayer had with the Owner, the Taxpayer conducted a continuous course of dealing in the City for 30 consecutive days or more. Relying on this analysis, the City found that the Taxpayer did have a definite place of business within its jurisdiction.

I do not agree that the decision in Petroleum Marketers is controlling in the Taxpayer's situation. Petroleum Marketers was decided before the new definition of definite place of business was incorporated into the statute in 1997². Furthermore, the Virginia Supreme Court did not analyze the issue of a definite place of business in Petroleum Marketers. Instead, the decision addressed where the taxpayer's sales of petroleum occurred, whether at the location where the contracts were executed or the location where the petroleum was delivered. The issue, law and facts in the Taxpayer's appeal are different from those in Petroleum Marketers.

A lease is defined as "A contract by which a rightful possessor of real property conveys the right to use and occupy the property in exchange for consideration, usually rent. The term can also embrace the concepts of the right to sublease." See Black's Law Dictionary 907 (8th Edition 2004). The Virginia Supreme Court has held that a lease grants the tenant "exclusive possession" of property. See Hickman v. Melson, 200 Va. 693, 697, 107 S.E.2d 387, 389 (1959).

A "throughput" or thru-put agreement is defined as "An agreement to put a specified amount of product per period through a particular facility." Money Glossary. com.

The Department has analyzed the thru-put agreement. The agreement basically provides for the receipt, temporary commingled storage, and distribution of the Taxpayer's petroleum products. Although the City argues the agreement was a contract for the lease of storage space, the Taxpayer did not have the right to use and occupy the property. Instead, the agreement would be more accurately characterized as a service agreement between the Taxpayer and the Owner, whereby the Owner provided temporary commingled storage space through which the Taxpayer's products were transferred to its customers. The Taxpayer did not lease any facilities from the Owner.

DETERMINATION

Under the specific facts as presented, it is my determination that the Taxpayer was not leasing facilities at the terminal in the City and did not have a definite place of business in the City. As such, the Taxpayer was not subject to the City's BPOL tax for tax years 2002 through 2005. In short, the Taxpayer correctly relied upon existing BPOL statutes and administrative rulings in determining that it was not required to obtain a local business license. Because the Taxpayer has no definite place of business in the City and is not liable for the BPOL tax, it is not liable for any penalties due. See Va. Code § 58.1-3916.

If you have any questions regarding this determination, you may call ***** Office of Policy and Administration, Appeals and Rulings at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-938275617H

1 One of the Taxpayer's other businesses sitused in another Virginia locality is listed in the telephone book. Its business at the terminal is not, however.
2 See P.D. 06-97 for further discussion of this issue.

Rulings of the Tax Commissioner