Document Number
11-91
Tax Type
BPOL Tax
Description
Vertically integrated manufacturer
Topic
Classification
Local Taxes Discussion
Manufacturing Exemption
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 ***** (the "City") for tax years 2005 through 2008.

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 operates a business in the City that processes poultry, soybeans and grain products, soybean meal and oil, and animal feed. The Taxpayer had been filing BPOL tax returns classified as a business service. In December 2008, the Taxpayer filed refund requests for the 2005 through 2008 tax years asserting that it was a vertically integrated manufacturer entitled to the manufacturer's exemption from the BPOL tax. In its final local determination, the City concluded that the Taxpayer's operations were properly classified as a business service and upheld the original assessments.

The Taxpayer appeals the local determination to the Tax Commissioner, contending it was a vertically integrated manufacturer that was not subject to tax on its wholesale sales. It also avers that it transferred all of its assets and operations located in the City to ***** (VALLC), a separate but affiliated entity, in April 2007 and was no longer subject to the BPOL tax after that time.

ANALYSIS


Jurisdiction

In its response to the appeal to the Tax Commissioner, the City asserts that the Department lacks jurisdiction to address the Taxpayer's appeal because there was no appealable event at the local level. The City contends that the Taxpayer's appeal was filed pursuant to Va. Code § 58.1-3983.1, and the Taxpayer's appeal was not timely filed in accordance with Va. Code § 58.1-3703.1 A 6.

Virginia Code § 58.1-3703.1 A 5 provides that a taxpayer assessed with a local license tax as a result of an appealable event may file an administrative appeal with the commissioner of revenue or other local assessing official. An appealable event includes an increase in the assessment of a BPOL tax, the denial of a refund, or the assessment arising out of the local official's:
  • 1. examination of records, financial statements, books of account or other information for the purpose of determining the correctness of an assessment;
    2. determination regarding the rate or classification applicable to a licensable business;
    3. assessment of tax when no return has been filed by a licensable business; or
    4. denial of an application for correction of erroneous assessment resulting from the filing of an amended BPOL application.

In this case, the Taxpayer was denied a refund because the City declined to change the Taxpayer's classification. Such a determination constitutes an appealable event.

With regard to the form of the Taxpayer's appeal, Title 23 of the Virginia Administrative Code (VAC) 10-500-720 provides that a complete appeal contains analysis of how the local assessing officer misinterpreted or misapplied factors or legal authority and provides facts, issues and local authority that the taxpayer believes the local assessing officer failed to take into consideration. It must also include copies of the complete application for review to the local assessing officer and the locality's final local determination. The Department cannot find any provision in the statutes or regulations that would prohibit the consideration of an appeal merely because a taxpayer or a locality cited an inapplicable section of the Code of Virginia so long as all of the other criteria are met. The Taxpayer's appeal to the Department contained all of the necessary elements.

As to the timeliness of the appeal, Va. Code § 58.1-3703.1 A 6 provides that any taxpayer may appeal a final local determination to the Tax Commissioner within 90 days of the issuance of a final local determination. The City issued its final local determination on July 13, 2010. The 90th day for filing an appeal fell on October 11, 2010, which was a federal and state holiday. Therefore, the Taxpayer had until the next business day, or October 12, 2010, to file its appeal. See Title 23 of the Virginia Administrative Code 10-­500-670. The appeal was delivered to the Department on October 12, 2010, which was within the 90-day period. Therefore, the appeal was timely filed.

Vertically Integrated Manufacturers

The Department has previously addressed the issue as to whether the Taxpayer is a vertically integrated manufacturer with regard to the business tangible personal property (BTPP) tax and machinery and tools (M&T) tax in Public Document (P.D.) 08-80 (6/6/2008). Despite this ruling, the City maintains that the Taxpayer's soybean processing operations are separate and distinct from its grain import and export business and, therefore, subject to a separate BPOL tax.

The issue of whether the particular activities of a taxpayer in a jurisdiction can be separated from the company as a whole for purposes of taxation was addressed by the Virginia Supreme Court in City of Winchester v. American Woodmark, 250 Va. 451, 464 S.E.2d 148 (1995). In that decision, the Court found that the applicable law did not require capital be used in a manufacturing facility in the locality in order to be used in a manufacturing business. This ruling was based in part on County of Chesterfield v. BBC Brown Boveri, 238 Va. 64 (1989), in which the Court found:
    • When a party is engaged in both manufacturing and non-manufacturing activities, it will nonetheless be classified as a manufacturer for tax purposes if the manufacturing portion of its business is substantial.

In P.D. 02-1 (1/04/2002), the Department found that the activities of the taxpayer constituted a single business and must be treated as such for purposes of BPOL taxation. The Department found that a taxpayer had factually demonstrated the substantiality of the manufacturing portion of its business. Further, the Department determined that the activities of the taxpayer constituted a single business and must be treated as such for purposes of local business license taxation.

Thus, if the Taxpayer is a vertically integrated business, the activities that occurred at the Taxpayer's facility in the City are not the sole consideration for the purposes of BPOL taxation. If the Taxpayer can show that it conducted substantial manufacturing activities as a single business, the facility in the City would be considered to be part of a manufacturing business.

The City, however, argues that the Commissioner may not rely on other public documents because the facts are not exactly the same as the facts in the Taxpayer's situation. Article X, § 1 of the Constitution of Virginia provides that all taxes must be uniform upon the same class of taxpayers. To assist taxpayers and localities with this mandate, Virginia Code §§ 58.1-3701 and 58.1-3703.1 A 6 grant the Tax Commissioner the authority to issue advisory opinions and determinations of BPOL appeals, respectively. The Department publishes the opinions and determinations for this purpose. The Department recognizes there may be differences in facts in certain situations that may impact the application of a prior determination; however, the Department will continue to cite and rely on its previous opinions and determinations interpreting the tax laws unless and until they are modified or reversed by a court or the General Assembly.

Manufacturing

Virginia localities are prohibited from imposing a license fee or tax on a manufacturer for the privilege of manufacturing and selling goods, wares arid 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 Supreme Court of Virginia 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 Title 23 of the Virginia Administrative Code (VAC) 10-500-520 B and BBC Brown Boveri. 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.

In P.D. 08-80, the Tax Commissioner determined that for the 2002 through 2006 tax years, the Taxpayer was a manufacturer for property tax purposes. This determination was made by applying the same three-part test enumerated in BBC Brown Boveri that is applied in determining whether a taxpayer is a manufacturer for purposes of the BPOL tax. As such, provided that the City finds that the Taxpayer's facts and circumstances were the same as they were in the 2002 through 2006 tax years, the Taxpayer would be a manufacturer for purposes of the BPOL tax.

Change of Business

The Taxpayer contends that even if it were not exempt from the BPOL tax, its BPOL liability in the City would have ended in April 2007 because it transferred all of its business assets and operations to VALLC. Under certain conditions, a business may be entitled to a refund for a prorated portion of the BPOL tax paid for the tax year in which such business exercised its licensable privilege for only a fraction of the year. See Va. Code § 58.1-3710.

The City contends that the Tax Commissioner cannot address this issue in its appeal determination because it was not raised in its appeal to the City. Under Title 23 VAC 10-500-760, a locality is permitted 30 days from the date of the receipt of an appeal to the Tax Commissioner to file a written response to such appeal or a written request to address new issues raised by the taxpayer. Localities are not required to make such a request.

The Department has the option to request that a locality issue a new final determination in order to address new issues raised in a taxpayer's appeal. See Title 23 VAC 10-500-760 3. Accordingly, the Department is not prohibited from considering new issues raised by a taxpayer.

The City's response to the Taxpayer's appeal did not include a request to be permitted to reconsider the new issues, nor did it address the new issues. Further, Va. Code § 58.1-3710 is clear with regard to discontinuing operations and the proration of license taxes. As such, the Department finds it is not necessary to request a new final local determination from the City.

DETERMINATION


In P.D. 08-80, the Tax Commissioner determined that the Taxpayer was a vertically integrated manufacturer for the 2005 and 2006 tax years based on information submitted to the Department at that time. As such, the Taxpayer must provide documentation satisfactory to the City demonstrating that it was a vertically integrated manufacturer for the 2005 tax year through April 2007, and that it permanently ceased operations in April 2007.

Accordingly, I am remanding this case back to the City with instructions to hold collection action on the BPOL tax assessments pending receipt of the required documentation. Such documentation must be sent within 30 days from the date of this letter. If the required documentation does not demonstrate that the Taxpayer was a vertically integrated manufacturer for the 2005 tax year through April 2007, and it permanently ceased operations in April 2007, or if the documentation is not provided within the time allowed, the BPOL tax assessments will be considered correct.

If you have any questions concerning this determination, you may contact ***** in the Office of Tax Policy, Appeal and Rulings, at *****.
                • Sincerely,


                • Craig M . Burns
                  Tax Commissioner




AR/1-4577288081.B


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46