Tax Type
BPOL Tax
Description
Tax as wholesale merchant; receipts attributable to business conducted in another state
Topic
Exemptions
Local Taxes Discussion
Out of State Tax Credits
Date Issued
02-03-2012
February 3, 2012
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 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 the 2011 tax year.
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
For the 2011 tax year, the Taxpayer was a manufacturer that operated a facility in the City. The Taxpayer purchased chemicals from affiliates located outside of the City and resold them at wholesale at its City manufacturing plant, along with chemicals manufactured in the City facility.
In tax years prior to 2011, the Taxpayer's BPOL tax was solely based on wholesale sales from the sale of chemicals manufactured by the Taxpayer's affiliates. However, the Taxpayer did not apply for a license tax for the 2011 tax year, asserting that the wholesale activities were ancillary to the Taxpayer's manufacturing operations, and exempt from the BPOL tax. The City issued a final determination that the Taxpayer was required to obtain a separate wholesale license because the Taxpayer's sales of chemicals manufactured by its affiliates were not made from the place of manufacture.
The Taxpayer appeals the local determination to the Tax Commissioner, contending the Taxpayer's resale product lines are vertically integrated to its manufacturing operation and the wholesale sales in question were ancillary to the manufacturing operations. The Taxpayer maintains it is operating a single manufacturing business selling at wholesale at the place of manufacture.
In addition, if it is determined to be subject to the BPOL tax, the Taxpayer requests an opinion as to whether it may deduct gross receipts from sales to customers in other states or foreign countries.
ANALYSIS
Multiple Businesses
Both the City and the Taxpayer confirm that the Taxpayer was a manufacturer eligible for the exemption from the BPOL tax under Va. Code § 58.1-3703 C 4 for gross receipts resulting from the sales of chemicals at wholesale at the place of manufacture. The dispute in this case involves whether the Taxpayer's wholesale sale of chemicals manufactured at facilities located outside the City give rise to a separate licensable activity.
Virginia Code § 58.1-3703.1 A 1 provides that a separate license will 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.
In order to obtain multiple licenses, a business must be engaged in clearly identifiable separate business activities and not merely activities ancillary to the primary business. In Public Document (P. D.) 97-257 (6/11/1997), the Department concluded that the term "ancillary" refers to business activities that are subordinate, subservient, auxiliary, or in aid of the business' principal business activity. Distinguishing between an ancillary activity and an activity that rises to the level of a separate business can often be accomplished by determining if the activity under scrutiny exists independently of the principal business. In general, an activity for which no separate charge is made will be presumed to be ancillary to the activity for which a charge is made, but separately stating charges for different activities will not create a presumption that each such activity is a separate business. See Title 23 of the Virginia Administrative Code (VAC) 10-500-110 B.
Under Title 23 VAC 10-500-360, the wholesale activity of a manufacturing business will be considered ancillary so long as the actual sales are made at the place of manufacture and the wholesale activity does not rise to the level of becoming a separate business. See also P.D. 04-160 (10/1/2004), P.D. 03-36 (4/15/2003), and P.D. 99-300 (11/18/1999).
The Taxpayer asserts that the sales at issue constituted a substantially smaller percentage of its total sales than the manufacturers in P.D. 04-160. The determination of whether a taxpayer's activities are either ancillary or significant enough to function as a separate business relies on more than the substantiality of sales. An evaluation as to whether the activity can exist independently from a taxpayer's manufacturing business or merely enhances the sales of the manufactured product must be made.
According to the Taxpayer, products were purchased from its affiliates because it was less expensive than manufacturing them at the City's facility. Further, the evidence suggests that customers could have obtained the products without going through the Taxpayer's City facility. The evidence suggests that the Taxpayer's wholesale business of selling chemicals manufactured at other facilities was a significant additional activity.
Out-of-State Deduction
Virginia Code § 58.1-3732 B 2 provides a deduction for receipts "attributable to business conducted in another state or foreign country in which the taxpayer is liable for income or other tax based on income." The regulations further explain that the taxpayer must be liable for an income or an income-like tax in the other state and file a return in that state to take advantage of the deduction. See 23 VAC 10-500-80 A 2. Accordingly, in those instances in which a taxpayer has a definite place of business in Virginia and does business in other states where it is liable for an income or income-like tax, and files a tax return in those states, a deduction is allowed for the receipts sitused at such definite place of business and derived from customers located in those states. See P.D. 08-86 (6/6/2008).
DETERMINATION
Based on the evidence and for the reasons set forth above, I find that the Taxpayer's sales of the products purchased from affiliated entities at wholesale in the City are not ancillary to the Taxpayer's manufacturing business in the City. Accordingly, it is may determination that the Taxpayer is subject to a license tax as a wholesale merchant in the City for the 2011 tax year. Furthermore, the Taxpayer would be entitled to the deduction provided under Va. Code § 58.1-3732 B 2 for receipts attributable to business conducted in another state or foreign country, provided it demonstrates that it is liable for an income or income-like tax, and files a tax return in those states or foreign country. The Taxpayer must file its application for a license with the City in order to make the necessary adjustments.
If you have any questions concerning this determination, you may contact ***** in the Office of Tax Policy, Appeal and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-4821136917.B
Rulings of the Tax Commissioner