Tax Type
BPOL Tax
Description
Taxpayer's method of situsing gross receipts attributable to its business in the County
Topic
Basis of Tax
Classification
Date Issued
12-05-2007
December 5, 2007
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
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 "County") for tax years 1999 through 2006.
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 regulations 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, headquartered in ***** (State A), provides electronic parts catalogs and related technology business services for more than 70 equipment manufacturers (the "Clients"). The Taxpayer states that on behalf of its Clients, it provides approximately 81,000 catalog subscriptions worldwide to 29,000 dealers (the "Customers") and distributors in manufactured equipment parts.
The Clients furnish the Taxpayer with raw data for use in the making of electronic parts catalogs. This is described by the Taxpayer as "one part" of creating the end product that is sold to a Customer. The Customer also pays the Taxpayer subscription fees for any of the Client's proprietary software it will need to order products from that Client.
The Taxpayer's business in the County is described as that of data conversion. Utilizing its proprietary software, the Taxpayer's office in the County converts raw data received from its Clients into electronic files that are returned to the Client for approval. The Client also subscribes to the necessary proprietary software for use in direct communication with the Customers and distributors. Upon approval, the electronic files are sent to the Taxpayer's headquarters in State A. The converted data files are either burned onto CD's or otherwise reproduced for publication on the Client's website. This process occurs either at the Taxpayer's office in State A or is contracted out to a third party.
All of the transactions between the Taxpayer, its Clients and Customers are made at retail. Sales solicitation, orders and billings are performed in the Taxpayer's office in State A. Additionally, all marketing activity and the creation of the proprietary software occurs either at the Taxpayer's office in State A or at an office other than the office in the County.
The Taxpayer never filed for a business license in the County even though it has had a definite place of business in the County since 1999. Upon "discovery" of the Taxpayer's business in 2006, the County assessed the Taxpayer for BPOL taxes plus interest and penalties for tax years 1999 through 2006. The County based its assessment on payroll figures provided to it by the Taxpayer even though the Taxpayer provided the County with both payroll and direct gross receipts information.
The Taxpayer appeals the assessment, contending that its activities in the County constituted manufacturing for purposes of the BPOL tax. Alternatively, if it is not found to be a manufacturer, the Taxpayer disputes the payroll apportionment methodology used by the County in calculating the Taxpayer's assessment.
ANALYSIS
Classification
Virginia localities are prohibited from imposing a license fee or tax on a manufacturer for the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture. See Va. Code § 58.1-3703 C 4.
The BPOL statutes do not define the term "manufacturer"' for purposes of the local business license tax. However, the Virginia Supreme Court has developed a test involving three essential elements in determining whether a manufacturing activity is being undertaken. These elements are: (1) original material, referred to as raw material; (2) a process whereby the original material is changed; and (3) a resulting product, which by reason of being subject to such processing is different from the original material. See County of Chesterfield v. BBC Brown Boveri, 238 Va. 64 (1989). In summary, for BPOL tax purposes, a manufacturer means one engaged in a processing activity whereby the original materials are transformed into a product that is substantially different in character from the original materials.
The Taxpayer's cites several public documents concerning the Virginia sales and use tax exemption for manufacturers to support its position. It is important to note that local taxes have their own characteristics, separate and distinct from the sales and use tax. There are occasions in which the facts of the case are such that the provisions of the sales and use tax law and the BPOL tax law are quite similar for purposes of the application of the law. See, for example, P.D. 99-200 (7/23/99). The facts of each situation determine the extent to which the situations are analogous for purposes of application of the BPOL tax.
Data processing, computer and systems development services are categorized as "business services" for purposes of the BPOL tax. See 2000 BPOL Guidelines § 5.5.2. The Department has previously ruled that the conversion of data into an electronic format is considered to be a business service. See Public Document (P.D.) 04-45 (8/13/2004).
In the present case, the original data was converted, reformatted and indexed in such a fashion as to enhance its usefulness. The essential substance and character of the original data was not changed. It has merely been subjected to a process that made data retrieval more manageable. The Taxpayer's Clients could, in all probability, have performed the same functions in-house should they so desire.
Further, in order to be exempt under the BPOL tax, a manufacturer must also sell its goods, wares and merchandise at wholesale at the place of manufacture. See Va. Code § 58.1-3703 C 4. The Taxpayer received data provided by the Client, converted the data into a format that can be read by the Taxpayer's proprietary software, and then provided the software and the data to the Client and its Customers for a fee. The data and software were provided to the user, not a wholesaler. Consequently, the Taxpayer did not sell goods at wholesale.
Situs of Gross Receipts
The BPOL tax is gross receipts based tax imposed upon an entity for the privilege of engaging in business in a locality. Virginia Code § 58.1-3703.1 A 3 a (4) provides that the situs of gross receipts from the performance of services "shall be attributed to the definite place of business at which the services are performed or, if not performed at any definite place of business, then to the definite place of business from which the services are directed or controlled." Under Va. Code § 58.1-3703.1 A 3 b, if a licensee has more than one definite place of business and it is "impractical or impossible to determine to which definite place of business gross receipts should be attributed under the general rule, the gross receipts of the business shall be apportioned between the definite places of businesses on the basis of payroll."
The Taxpayer has proposed a methodology of determining those gross receipts directly attributable to its business in the County and provided some documentation to show the amounts of receipts attributable to its business in the County. Because the use of payroll methodology is only to be used when it is impossible to determine the situs of a taxpayer's gross receipts, the County must strongly consider the proposed methodology in determining the correct assessment against the Taxpayer.
DETERMINATION
Based on the evidence presented, it is my determination that the Taxpayer's business in the County is appropriately classified as that of a "business service" for purposes of the BPOL tax. I am remanding this appeal to the County for a redetermination of the methodology used in calculating the Taxpayer's gross receipts for BPOL tax purposes. If the Taxpayer's method of situsing gross receipts attributable to its business in the County appears to be correct, statutorily, that is the method that must be used.
If you have any questions regarding this determination, you may call *****, Office of Policy and Administration, Appeals and Rulings at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-1263053371H
Rulings of the Tax Commissioner