Tax Type
BPOL Tax
Description
Taxpayer properly classified as a business service provider
Topic
Basis of Tax
Classification
Local Taxes Discussion
Date Issued
07-23-2014
July 23, 2014
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 on behalf of ***** (the "Taxpayer") with the Department of Taxation. You request a refund of Business, Professional and Occupational License (BPOL) taxes paid by the Taxpayer to the ***** (the "County") for the 2011 through 2013 tax years.
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 Laws, Rules and Decisions section of the Department's web site.
FACTS
During the tax years at issue, the Taxpayer was engaged in the business of selling prewritten and custom software at a definite place of business located in the County. In addition, the Taxpayer would provide fee-based training and offer maintenance contracts to its software customers.
The Taxpayer's primary product is software that enables the user to analyze, build, inspect, automate, report, and reverse design precision parts and tools. This measurement software was sold and delivered to customers on memory sticks. Customers include industrial companies and retailers that resell the software, or bundle it with hardware. In addition, the Taxpayer also develops custom software projects for use in manufacturing production processes and provides maintenance and training services for its products.
The Taxpayer was classified as a business service provider by the County for purposes of the BPOL tax. The Taxpayer requested its classification be changed to a retail and wholesale business. The County concluded that the Taxpayer was properly classified as a business service provider for purposes of the BPOL tax and the Taxpayer filed an appeal.
The County issued a final determination concluding that the Taxpayer's software sales were a business service because they did not meet the definition of either a retail or wholesale sale under the Virginia retail sales tax statutes and regulations. Further, the County cited the BPOL guidelines to support its conclusion as to the Taxpayer's business classification. The Taxpayer appealed the County's final determination to the Department, contending it should be properly classified and taxed as a retailer and a wholesaler because it sold its software through a tangible medium.
ANALYSIS
Retail Sales and the BPOL tax
The County agreed that prewritten software was tangible personal property pursuant to Va. Code § 58.1-602. However, because the Taxpayer was not registered for collecting and remitting the sales and use tax to Virginia, its products were not tangible and, therefore, not sales at retail or wholesale.
The BPOL tax is a local tax that is separate and distinct from Virginia'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 Department has repeatedly held that Virginia retail sales and use tax regulations and policies are not reliable resources for evaluating local tax issues. See Public Document (P.D.) 04-45 (8/13/2004), P.D. 09-93 (6/11/2009), P.D. 09-139 (9/21/2009), P.D. 11-44 (3/23/2011), P.D. 12-220 (12/21/2012), and P.D. 13-25 (3/5/2013). The mere fact that a taxpayer is not registered for Virginia sales and use tax does not preclude it from being properly classified as a retailer or wholesaler for BPOL tax purposes.
BPOL Regulations
Legislation enacted by the General Assembly in 1996 directed the Department to issue and update the BPOL Guidelines in order to provide a current interpretation of Va. Code § 58.1-3700 et seq. After July 1, 2001, the BPOL Guidelines became be subject to the Administrative Process Act and accorded the weight of a regulations under Va. Code § 58.1-205. As such, the guidelines were promulgated into regulations effective July 21, 2008. See Title 23 of the Virginia Administrative Code (VAC) 10-500-10 et seq. These regulations incorporated the statutory and administrative changes that have occurred since guidelines were last issued and, therefore, supersede the guidelines cited by the County.
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 A. These classifications are regulated 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 does the enterprise generate gross receipts?
3. Where does the enterprise conduct its business?
4. Who are the enterprise's customers?
5. How does the enterprise hold itself out to the public?
6. What is the enterprise's North American Industry Classification System (NAICS) code?
Computer Developers
Under Title 23 VAC 10-500-500, "computer and systems development services" are classified as "business services" and may be subject to the BPOL tax as set forth in Va. Code § 58.1-3706 A 4. Also see Public Document (P.D.) 99-296 (11/17/1999). In P.D. 04-183 (10/08/2004), however, a taxpayer engaged in the business of selling computer hardware and software was classified as a retail or wholesale business. The question in this case is whether a software developer could be a retailer or wholesaler.
Custom Software
Among its business activities, the Taxpayer offered custom software development solutions to address measurement applications and custom integration for manufacturing processes. According to the Taxpayer, this process involved working with customers by developing small steps until customer requirements are satisfied. Such activities appear to be the type of activities addressed in P.D. 99-296 and Title 23 VAC 10-500-500.
Prewritten Software
The Taxpayer contends that the sale of this prewritten measurement software product was either at retail or wholesale because the software was delivered to its customers on memory sticks. Under Title 23 VAC 10-500-10, a "retail sale" and a "wholesale sale" are defined in pertinent part as "a sale of goods, wares and merchandise." Based solely on this analysis, the memory sticks with the computer software included could be considered goods, wares or merchandise.
In Black's Law Dictionary 1008 (8th Edition 2004), the term "merchandise," is defined as "an article of trading or class of objects in which trade is carried on by physical transfer; collectively, mercantile goods, wares or commodities, or any subjects of regular trade, animate as well as inanimate." This definition goes on, however, to exclude a number of items, including "intangibles such as software." This would appear to support Title 23 VAC 10-500-500, which classifies computer and systems development as business services.
Further, unlike the business in P.D. 04-183, which sold computer hardware and software, the Taxpayer developed and maintained the measurement software. Generally, businesses that develop sophisticated software consider their product to be valuable intellectual property, which needs to be protected. Consequently, purchases of software include a licensing agreement, which limits the use and redistribution by the buyer. Thus, unlike most sales of tangible personal property (i.e., computer hardware), which can be bought and sold freely, the buyer does not have unfettered control over the software once the license agreement is executed.
Training and Maintenance Contracts
The Taxpayer also offered fee-based training and annual maintenance contracts for its software products. In order to assist customers, the Taxpayer offered training classes. Classes were available at the definite place of business in the County or at the customer's location. Classes were available for standard software topics but could be tailored to meet the customer's needs.
These maintenance contracts allowed customers to take advantage of technical support services and software upgrades and updates. The Taxpayer continuously released updates to the software in order to add new features, meet customer needs, and maintain current systems requirements. These new releases appear to have been included in the original purchase price of the software. Again, activities related to the maintenance contracts would typically be classified as a service for BPOL tax purposes, unless the activity was considered ancillary to another business activity.
For BPOL tax purposes, "services" mean things purchased by a customer that do not have physical characteristics, or that are not goods, wares, or merchandise. See Title 23 VAC 10-500-10. Activities, such as training and maintenance contracts, would be considered to be business services unless they are ancillary to a principal business.
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 gross receipts generated under each license are subject to tax in accordance to the rates provided for each business classification. See Va. Code § 58.1-3706 A.
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 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 VAC 10-500-110 B.
DETERMINATION
The facts presented in this case indicate the Taxpayer's principal business consisted of developing the measurement software. The Department's analysis indicates this activity, as conducted by the Taxpayer, most closely resembles that of a business service provider. In addition, the Taxpayer also provided customer software services, training and maintenance contracts. Accordingly, the Department concurs with the County's final local determination. As such, the BPOL tax assessments for the 2011 through 2013 tax years are upheld.
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5630712631B
Rulings of the Tax Commissioner