Document Number
11-83
Tax Type
BPOL Tax
Description
Application for a dual classification; Interior designer and Seller of home furnishings
Topic
Classification
Local Taxes Discussion
Records/Returns/Payments
Date Issued
06-02-2011


June 2, 2011






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 "City") for 2004 through 2009 tax years. I apologize for the delay in the Department's response.

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, i.e., 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 corporation with two shareholders. One shareholder is a certified interior designer licensed as such by the Commonwealth.

The Taxpayer provides design, consultation and similar services to its customers. The Taxpayer maintains a small showroom where it displays household furnishings as well as the catalogs, samples and swatches. The showroom is closed to the public when the certified interior designer is out of the office. Customers can also order items through catalogs and procure installation and upholstery services from a third-party source. Catalog prices are not made available for client review. Items that are purchased by the Taxpayer at wholesale prices are marked up and resold to customers. The Taxpayer takes title to all items prior to their resale.

Along with the sale of the furniture and furnishings, the Taxpayer provides design consultation services, which are not separately charged. The Taxpayer does charge an hourly fee for design, consulting or other services with respect to items of property that it does not sell. The information presented indicates these separate charges for design services represented less than 1% of the Taxpayer's total gross receipts for the tax years at issue.

The Taxpayer believes it should properly be classified as a retail merchant for BPOL tax purposes. It cites several authoritative definitions and Virginia court cases defining a merchant. It also argues that it should be classified as a retailer because approximately 99.5% of its gross receipts come from the sales of goods, wares and merchandise for use or consumption of the purchaser. In the alternative, it argues that if separately stated services constitute a separate business, then it should be required to have multiple licenses pursuant to Va. Code § 58.1-3703.1 A 1.

The City contends that because the Taxpayer holds itself out to the public as an interior decorator and is marketed to the public as an interior designer in advertisements, newspaper articles and other seminar and event announcements, it should be classified as a business service. The City also argues that the NAICS description describes interior designers as services providers and Title 23 of the Virginia Administrative Code (VAC) 10-500-500 defines interior decorating as a business service.

ANALYSIS


Limitations on Appeals of Local Tax Assessments

The Taxpayer filed a request for reclassification in September 2009. Virginia Code § 58.1-3980 provides that any person aggrieved by an assessment of local taxes:

    • may, within three years from the last day of the tax year for which such assessment is made, or within one year from the date of the assessment, whichever is later, apply to the commissioner of the revenue or such other official who made the assessment for a correction thereof. [Emphasis added.]

The last day of the tax year for which the 2004 assessment was made was December 31, 2004. As such, the Taxpayer would have needed to file the amended return for the 2004 tax year by December 31, 2007 to meet the limitations period. Likewise, the last day the Taxpayer could have filed a refund claim for 2005 was December 31, 2008.

When the City received the Taxpayer's initial request for reclassification in February 2007, it responded by initiating an audit. The final local determination issued in September 2007 affirmed the original assessments for the 2004 through 2007 tax years.

The Taxpayer's refund claims for the 2004 and 2005 tax years were made in September 2009, well after the period of limitations had expired for making such a claim. The Taxpayer avers that the City issued a new final determination with regard to all the tax years at issue in April 2010. I disagree. That letter responded to another request for reclassification of the Taxpayer's business and reiterated the Commissioner of the Revenue's prior determinations after complying with the Tax Commissioner's instructions to review any new documentation that might support issuance of a second business license classification. As such, the Department will not address these claims because they were filed beyond the statute of limitations.

Appealable Event

Under Va. Code § 58.1-3703.1 A 5 a an "appealable event" includes an increase in a local license tax assessment payable by a taxpayer, the denial of a refund, or an assessment of tax where none previously was assessed, arising out of the local taxing authority's:
  • 1. examination of the books and records of a licensable business;
    2. determination regarding the rate or classification of a licensable business;
    3. assessment of tax when no return has been filed by the taxpayer; or
    4. denial of an application for correction of assessment attendant to the filing of an amended return.

The Taxpayer's request for reclassification in February 2007 was appropriately handled as an appealable event by the City. The City issued its final determination with regard to the Taxpayer's request for the 2004 through 2007 tax years in September 2007. The Department issued its final determination in April 2008, issued as Public Document (P.D.) 08-40 (4/17/2008). Based on the statute, these determinations would not constitute an appealable event under Va. Code § 58.1-3703.1 A 5 a.

Likewise, the actions taken by the City to follow the Department's instructions pursuant to P.D. 08-40 would not trigger an appealable event. Furthermore, the Department's subsequent letter in July 2008 affirming that the City had complied with the Department's instructions does not constitute an appealable event.

The Taxpayer timely filed another request for reclassification with regard to the 2006 and 2007 tax years in September 2009. In reviewing the documentation and meeting notes associated with this request, very little additional documentation or evidence was provided with regard to these tax years. Instead, all of the invoices and substantially all of the other documentation submitted were for transactions that occurred in 2008 and 2009. While I recognize your continuing disagreement with the City's assessments, P.D. 08-40 constitutes the Department's final determination with regard to the 2006 and 2007 tax years.

Classification

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 the classification of an enterprise. See Va. Code § 58.1-3706. The classifications are explained under Title 23 VAC 10-500-10 et seq. Classification of a specific business must be determined based on consideration of all the facts and circumstances. Some of the factors to be considered include:

1. What is the nature of the enterprise's business?
2. How the enterprise generates gross receipts.
3. Where the enterprise conducts its business.
4. Who are the enterprise's customers?
5. How the enterprise holds itself out to the public.
    • 6. The enterprise's North American Industry Classification System
      (NAICS) code.

"Interior Decorating" is classified as a "personal services business" under Title 23 VAC 10-500-500. While interior designers are considered to be professionals for state licensing purposes, they are not listed as such under Title 23 VAC 10-500-450. Because this list is "all encompassing," interior designers must be considered as a business service for BPOL tax purposes.

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 the physical and aesthetic needs of people . . . ."

Retailers of home furnishings often employ either interior designers or interior decorators, the latter of which are not 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, the NAICS code of a business does not control, or even create a presumption as to the correct classification for BPOL purposes. See Title 23 VAC 10-500-140.

The Taxpayer has provided photographs of the showroom displaying household furnishings and a separate office/workroom with a voluminous supply of catalogs and fabric samples. As noted in P.D. 08-40, the Taxpayer is not open for regular business hours, but is closed randomly depending on when the owner has consulting appointments away from the definite place of business.

The Taxpayer asserts its operations are analogous to the company in P.D. 09-139 (9/21/2009) in that its primary business is making retail sales of furniture and furnishings. However, there are some differences between the operations of the company in P.D. 09-139 and the Taxpayer.

As indicated above, all the facts and circumstances of a business must be considered in determining its classification. Because no facts were provided concerning how the company in .P.D. 09-139 held itself out to the public, its NAICS code, or professional designations held by its owners or operators, the ruling was issued without consideration of such items. Unlike the company in P.D. 09-139, the individual primarily responsible for operating the Taxpayer is a certified interior designer licensed by the Commonwealth of Virginia.

Further, the Taxpayer's business name, which includes the terms "Interior Designs," appears in the largest print at top of the advertisement. In addition, the Taxpayer holds itself out as an interior design service in the local online and print telephone directory. These advertisements leave little doubt that the Taxpayer is advertising the expertise in interior design as its primary business.

Thus, even if the Taxpayer only derives a small portion of its gross receipts from interior design business, it appears that the City's classification of the Taxpayer as a business service is correct.

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. Local tax officials are responsible for making 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 local tax official must be provided with documentation demonstrating the substantiality of each business. See 1994 Op. Va. Att'y Gen. 99.

The Taxpayer claims that it is engaged in two businesses: that of providing services as an interior designer and that of a retail seller of home furnishings. The Taxpayer asks that each business be classified separately for purposes of the BPOL tax.

As prescribed in P.D. 08-40, the Taxpayer would have to establish the existence of two separate business activities by providing 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 showroom samples or the manufacturer's catalogs.

The Taxpayer now indicates that no consulting fees were charged in association with the purchase of home furnishings. While this would appear to contradict the finding of the Department in P.D. 08-40, the documentation provided did not indicate that the Taxpayer charged a separate consulting fee in association with sales of furnishings or that consulting fees were included in the prices of home furnishings. Provided none of records indicate that the Taxpayer was engaged in all three of the business activities indicated above, the Taxpayer would only need to provide documentation of gross receipts attributed to (1) interior design consulting fees and (2) home furnishing sales from either the showroom samples or catalogs.

DETERMINATION


As indicated above, the Department cannot address the Taxpayer's claims with regard to the 2004 through 2007 tax years. Accordingly, this determination addresses the 2008 and 2009 tax years.

The facts presented in this case indicate that the Taxpayer appears to be operating multiple businesses. Based on the limited information provided, the retail sales of furnishings appear to constitute a majority of the business conducted by the Taxpayer. Such activity would not be considered to be subordinate, subservient, auxiliary or in aid of the interior design services the Taxpayer provides. It is, however, incumbent upon the Taxpayer to furnish sufficient documentation to the City in order for its application for a dual classification to be accepted.

I am, therefore, remanding this case back to the City with the instruction to reconsider the Taxpayer's appeal with regard to the 2008 and 2009 tax years. If the Taxpayer can provide the City with sufficient documentation regarding multiple businesses as 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 assessments accordingly.

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


                • Craig M. Burns
                  Tax Commissioner



AR/1-4460505519.B


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46