Document Number
08-40
Tax Type
BPOL Tax
Description
City contends that the Taxpayer holds itself out as providing interior design services and should be classified as a business service
Topic
Classification
Local Taxes Discussion
Date Issued
04-17-2008
April 17, 2008





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 2004 through 2007.

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, regulations 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 certified interior designer licensed by the Commonwealth of Virginia and holds itself out as an interior design service in the telephone directory. In addition to an office located in the City, the Taxpayer has a small showroom (roughly 400 square feet) for display of household furnishings and a supply of various catalogs from which customers can order furniture and other furnishings.

The Taxpayer's customers generally are people looking for expertise in interior design. Other customers are people who view the displays in the Taxpayer's showroom and order specific furnishings from the various manufacturer catalogs the Taxpayer has available in its workroom. According to the information provided, the Taxpayer's sole employee is the owner, so when she leaves the definite place of business for consulting appointments, the showroom is closed to the public.

The City contends that the Taxpayer holds itself out as providing interior design services and should be classified as a business service for purposes of the BPOL tax. In its final local determination, the City found that the Taxpayer's sale of furniture at retail was ancillary to the Taxpayer's primary business of providing interior design consulting services. Therefore, all the Taxpayer's gross receipts were assessed at the business services rate.

The Taxpayer disputes the City's classification, contending that it is engaged in two separate businesses: that of providing design consulting services, and the retail sales of furniture ordered by its clients for which the Taxpayer collects and remits the state and local sales tax to the state.

ANALYSIS


Classifications

The BPOL tax is imposed on businesses and professionals for the privilege of doing business in a locality. The tax is imposed at different rates according to classification. See Va. Code § 58.1-3706 A.

"Interior Decorating" is classified as a "personal services business" under the 2000 BPOL Guidelines § 5.5.2. While interior designers are considered to be professionals for state licensing purposes, they are not listed as such under the 2000 BPOL Guidelines §§ 5.4.4.1 and 5.4.4.2. Because this list is "all encompassing," interior designers must be considered as a business service for BPOL tax purposes. See 2000 BPOL Guidelines § 5.5.2.

While not controlling, the North American Industry Classification System (NAICS) definitions of industries offers a useful description of interior designers. They are defined in code 541410 as "establishments primarily engaged in planning, designing and administering projects in interior spaces to meet she physical and aesthetic needs of people . . . ."

Retailers of home furnishings often employ either interior designers or interior decorators, the latter of which are riot subject to state licensing requirements. The NAICS defines establishments in the furniture and home furnishings stores subsector in code 442 as those that "retail new furniture and home furnishings from fixed point-of-sale locations. Establishments in this subsector usually operate from showrooms and have substantial areas for the presentation of their products. Many offer interior decorating services in addition to the sale of products." [Emphasis added.] That is, while these establishments may provide some interior decorating services, they are primarily devoted to the sale of home furnishings, and as such, have substantial space devoted to the display of goods for retail sale.

While the NAICS classifications may serve as useful guideposts for determining classifications for BPOL tax purposes, it is important to remember that only one NAICS code is assigned to an enterprise or establishment, while a separate BPOL license may be required for each identifiable business. 2000 BPOL Guidelines § 2.13.

Multiple Businesses

Virginia Code § 58.1-3703.1 A 1 provides that a separate license shall be required for each definite place of business and for each business a taxpayer is operating. The Taxpayer claims that it is essentially engaged in two businesses: that of providing services as an interior designer and that of a retail seller of home furnishings, and asks that each business be classified separately for purposes of the BPOL tax.

Local commissioners of the revenue are charged with the responsibility of classifying and assessing taxpayers at the appropriate rate for purposes of the BPOL tax. The local commissioner of the revenue must make the determination as to whether a taxpayer is engaged in a single business or in two businesses, each of which could operate independently of the other. In order to make this determination, the commissioner of the revenue must be provided with documentation demonstrating the substantiality of each business. See 1994 Op. Va. Att'y Gen. 99.

The Department has previously addressed a similar issue in Public Document (P.D.) 99-88 (4/23/99), in which the sales of tangible personal property could be part of a service or a retail sale. In this determination, a case involving a service station that was engaged in both the servicing of automobiles and the sale of automotive parts, the Department found that the sale of parts directly used in the servicing of the automobile were to be regarded as a part of the business service and assessed accordingly. Those parts sold directly to customers and not involved in the servicing of an automobile were to be regarded as retail sales for purposes of the BPOL tax.

In the case of the Taxpayer, establishing the existence of two separate business activities would require documentation of gross receipts attributed to each of the following business activities: (1) interior design consulting fees not associated with the purchase of home furnishings; (2) consulting fees and associated purchases of furnishings; and (3) home furnishing purchases from either the showroorn samples or the manufacturer's catalogs. Under the BPOL tax, gross receipts earned from the first two activities would be subject to the business and personal services tax rate, and those receipts associated with the third activity, provided they were substantial, could be subject to the retail sales tax rate.

The facts presented in this case indicate that the Taxpayer might be operating multiple businesses. Specifically for this case, a determination must be made as to whether or not, based on the facts and circumstances, the retail sales of furnishings are subordinate, subservient, auxiliary or in aid of the interior design services the Taxpayer provides. It is incumbent upon the Taxpayer to furnish this information to the local commissioner of the revenue if its application for a dual classification is to be examined.

Ancillary Business

The City has assessed the Taxpayer at a single tax rate as a business service. In so doing, the City states that the sale of furnishings is ancillary to the Taxpayer's primary business as an interior designer. In P.D. 97-257 (6/11/97), the Tax Commissioner defined the use of "ancillary" for purposes of the BPOL tax as referring to:
    • business activities, which are subordinate, subservient, auxiliary, or in aid of the businesses [sic] principal business activity... To the extent 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.

In general, the sale of goods specifically associated with the expertise of a professional can be considered to be ancillary to the professional's primary business. The Taxpayer's situation as an interior designer independently holding itself out for business is entirely different from that of an interior designer or interior decorator employed by a retail home furnishings establishment. In the latter situation the interior designer would be providing services that would likely be considered ancillary to the sale of home furnishings.

Retail Sales and the BPOL tax

Sales of tangible goods generally are subject to the Commonwealth's retail sales and use tax, as this is a transaction based tax on the sale of tangible personal property. The Taxpayer contends that because it collects and remits the retail sales on all of the furniture it sells, both in her capacity as an interior designer and over the counter sales, all sales of home furnishings should be assessed at the retail rate.

The BPOL tax is a local tax that is separate and distinct from the Commonwealth's retail sales and use tax. It is not a transaction based tax; rather, it is a tax based on the privilege of engaging in business. The fact that the retail sales and use tax is collected on the sales of home furnishings (and the Taxpayer's consulting fees) does not mean that the sales of the furnishings should be taxed at the retail rate for purposes of the BPOL tax. For BPOL tax purposes, the sales of home furnishings directly related to the Taxpayer's role as an interior designer are a part of the business service the Taxpayer provides. The furnishings sold directly to customers not involving the Taxpayer's expertise as an interior designer may be considered retail sales for BPOL tax purposes. These sales, however, must be substantial if the Taxpayer is to be granted a second BPOL license as a retail merchant.

DETERMINATION


Based on the evidence presented, the Taxpayer may be engaged in multiple businesses. The Taxpayer, however, did not provide the City with sufficient information to prove the existence of the separate and substantial retail sales activities. I am, therefore, remanding this case back to the City with the instruction to reconsider the Taxpayer's appeal. If the Taxpayer can provide the City with sufficient documentation regarding the three sets of records outlined above, and review of such documentation proves that the Taxpayer's business of retail sales of furniture is more than an ancillary activity, the City must adjust its assessment accordingly.

The Taxpayer shall provide the City with such documentation within 45 days of the date of this letter. Otherwise, the City's final determination stands.

If you have any questions regarding this opinion, you may contact the Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,


                • Janie E. Bowen
                  Tax Commissioner



AR/1-1987750966H



Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46