June 30, 2015
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business, Professional and Occupational License (BPOL) 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 request a refund of Business, Professional and Occupational License (BPOL) taxes paid by the Taxpayer to the ***** (the "County") for the 2010 and 2011 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 section and regulations cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.
FACTS
The Taxpayer was a distributor of heating, ventilation and air-conditioning (HVAC) equipment, parts and supplies. Most of the Taxpayer's customers were businesses that installed and serviced HVAC systems for their own residential or commercial customers. The Taxpayer states that it also made a small amount of sales to industrial or governmental customers but that it did not sell to the general public.
The Taxpayer classified itself as a retailer on its BPOL returns filed with the County for the 2010 and 2011 tax years. Subsequently, the Taxpayer filed amended returns reclassifying itself as a wholesaler and requesting refunds. The County denied the refund requests. In its final determination, the County held that the Taxpayer was a retailer because it did not offer discounts based on the volume of products sold and the Taxpayer's customers did not use the products in a productive process. The Taxpayer appeals the County's determination to the Tax Commissioner, contending that it was a wholesaler because it sold to its customers for resale, its pricing system was more indicative of wholesale trade and the products were used in a productive process.
ANALYSIS
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 of the Virginia Administrative Code (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?
On its original 2010 and 2011 BPOL tax returns, the Taxpayer classified itself as a retail merchant. Under Title 23 VAC 10-500-10, a "retail sale" is defined as "a sale of goods, wares and merchandise for use or consumption by the purchaser or for any purpose other than resale by the purchaser, but does not include sales at wholesale to institutional, commercial, industrial, and governmental users that are classified as wholesale sales." While no single factor, such as price, purpose, or place, can always distinguish between wholesale and other types of sales, retail merchants typically purchase inventory for resale and sell such inventory to an individual consumer for the consumer's own personal use. See Title 23 VAC 10-500-350 B.
One of the definitions of "commercial" is "having profit as a chief aim." See American Heritage Dictionary 297 (2nd Col. Ed. 1985). Undoubtedly, one of the primary goals of any for-profit business, including HVAC contracting businesses, is to generate profits. As such, the Taxpayer's HVAC contractor customers would be considered commercial users of the goods the Taxpayer sold to them.
Factors used to discern the difference between a retail and wholesale sale are the characteristics of the purchaser and the purchaser's use of the merchandise and, to a lesser degree, the price and quantity of the product sold. See Dickerson G.M.C., Inc. v. Commonwealth, 206 Va. 339, 342, 143 S.E.2d 863, 865 (1965); Department of Tax'n, Ltr. Op. (Feb. 21, 1991); Public Document (P.D.) 98-160. Since this determination is based on the facts and circumstances surrounding a sale, price and quantity, by themselves, are not determinative of whether a sale is made at wholesale. See P.D. 98-160.
Under the first two factors, the characteristic of the purchaser and the purchaser's use of the merchandise may be closely related elements. In the basic definition for both BPOL tax and sales and use tax purposes, the ultimate user of a product is usually one who buys at retail, while a purchaser who buys to resell a product is always a wholesaler. Title 23 VAC 10-500-350 B; Title 23 VAC 10-210-6080. The additional factor of character or type of purchaser comes into play for BPOL tax purposes.
Productive Process
According to the BPOL regulations, an institutional, commercial, industrial, or governmental user who purchases a good may have purchased the good at wholesale only if the use of the good is determined to be for wholesale purposes. See Title 23 VAC 10-500-350. This "wholesale" use was described in P.D. 98-160 as incorporating the good into a productive process such as an assembly, manufacturing or processing operation. In that case, the Department held that welding supplies and equipment purchased by contractors and used to supply contracting services to their customers were not used in a productive process. Instead, the contractors were considered to be the ultimate consumers of the welding products because they used the merchandise for their own purposes, which was to provide services to their customers. As such, the sales of the welding supplies and equipment were considered not to be at wholesale.
P.D. 98-160 did not expressly define productive process but appeared to limit it to assembly, manufacturing, processing or similar operations. Similarly, the Department noted that the locality in P.D. 02-59 (4/19/2002) seemed to restrict the concept of "productive process" to an actual manufacturing process. In that case, however, the Department observed that "productive" includes the creation of goods and services to produce wealth and value and "process" includes the method, mode or operation whereby a result or effect is produced.
In its final determination, the County reasoned that the Taxpayer's customers were similar to the welding contractors in P.D. 98-160 because they purchased products from the Taxpayer to provide HVAC contracting services to customers. Because the Taxpayer was performing a service and not reselling to another consumer, the County reasoned that the Taxpayer could not be considered a wholesale merchant.
HVAC contractors typically provide services that produce wealth in the form of business earnings and value for their customers in the form of functioning HVAC systems on their properties. Applying the definition of "productive process" in P.D. 02-59, the products purchased from the Taxpayer were likely used in a productive process by HVAC contractors.
Sales to Government or Industrial Entities
The Taxpayer also indicates that some sales were made to government and industrial entities. The information provided is not detailed enough to indicate whether the products purchased from the Taxpayer by these entities were used in a productive process. Title 23 VAC 10-500-350 C, however, provides that businesses who sell goods to government, institutional, business or industrial entities for their consumption, use or incorporation in an assembly, manufacturing or processing operation are typically subject to the BPOL tax on wholesalers. The use of "or" in this regulation means that consumption and use are separate from "incorporation in an assembly, manufacturing or processing operation." Typically, if the products are not being incorporated into an assembly, manufacturing or processing operation, they would be used or consumed by such entities for business needs as supplies or equipment. In contrast with retail sales which are typically made to individual consumers to satisfy their own wants or needs, wholesale sales involve sales of goods to be used for such business purposes. See Roland Electrical Co. v. Walling, 326 U.S. 657, 674, 66 S.Ct. 413, 421 (1946). As such, it is likely that any sales made to government and industrial entities were for wholesale purposes.
In addition, the standard of Title 23 VAC 10-500-350 C would also apply to HVAC contractors because they are business entities. One of the Department's reasons for holding that the sales to the welding contractors were not at wholesale in P.D. 98-160 was that the contractors should be considered the ultimate consumers of the products. This reasoning is consistent with the treatment of sales to contractors for sales and use tax purposes. See Title 23 VAC 10-210-410. The BPOL tax, however, is a local tax that is separate and distinct from the Commonwealth's retail sales and use tax. Consequently, sales and use tax regulations are not authoritative in BPOL tax cases. See Public Document (P.D.) 09-139 (9/21/2009). In this case, even if the HVAC contractors could be considered to be the consumers of the products like the welding contractors in P.D. 98-160, Title 23 VAC 10-500-350 C indicates that businesses who sell goods to other businesses for their consumption or use are still typically subject to BPOL tax as wholesalers.
The principles set forth in the regulation were adopted from the BPOL Guidelines promulgated by the Department. In fact, the 1997 BPOL Guidelines, issued prior to P.D. 98-160, include identical language with the regulation concerning the consumption of products by a business entity. While citing P.D. 98-160, P.D. 04-13 (4/30/2004) interpreted wholesale sales to include sales to institutional, commercial, industrial or governmental entities that "use the goods they purchase for consumption, use or resale in the normal course of their business." The interpretation in P.D. 04-13 is more consistent with the policy established by regulation than the conclusion reached in P.D. 98-160.
Sales to the General Public
If the Taxpayer sold products to the general public, it would be reasonable to conclude that at least some of the Taxpayer's customers were individuals purchasing products for personal use, which would be indicative of retail trade. The County contends that the Taxpayer has not proven it did not sell to the general public. The County states that the Taxpayer's facility in the County had a parts counter that was open daily for customers to order and pick up parts and supplies, and there was no indication the general public was prohibited from placing orders.
As evidence of its business practices, the Taxpayer submitted internal policies and training materials from before and after the period at issue. These documents indicate that the Taxpayer's policy was to sell parts and equipment only to HVAC contractors.
After carefully considering the arguments and all of the information presented concerning the Taxpayer's business operations, it is my determination that the preponderance of the evidence indicates that the Taxpayer did not sell to the general public. Even if some such sales were made, there is no indication that it was a clearly identifiable separate business activity that was not merely ancillary to the Taxpayer's wholesale business and that would have required separate licensure and classification. See Title 23 VAC 10-500-110 B.
Pricing
Pricing, while not the determinative factor, may be one of the factors to distinguish between retail and wholesale sales. Selling products in quantity at a discount or contracting with a purchaser prior to making a sale would be consistent with wholesale sales. See P.D. 02-59 (4/19/2002).
In its final determination, the County stated that its evaluation of the Taxpayer's data indicated that customers had received the same discounts without taking into account the quantities purchased. The Taxpayer states, however, that its pricing methodology involved a complex evaluation of a number of factors, including product cost, competitive factors, and customer profile. The Taxpayer also states that it actively negotiated with customers to remain competitive. As evidence, the Taxpayer submitted an analysis of the sales of its top twenty products in 2011 to seven different customers, four of which were the highest volume customers and three of which were lower volume customers. In almost every case, each customer received a different price. The highest volume customers also generally received lower prices than the lower volume customers. Even if the Taxpayer did not discount prices based on volume in all cases, establishing an individualized pricing system was similar to contracting with purchasers prior to sale and thus was more indicative of wholesale trade.
Out-of-State Deduction
Under Va. Code § 58.1-3732 B 2, a deduction from gross receipts or gross purchases is permitted for "[a]ny receipts attributable to business conducted in another state or foreign country in which the taxpayer . . . is liable for an income or other tax based upon 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 Title 23 VAC 10-500-80 A 2.
The statute clearly states that a wholesaler or distribution house subject to license tax measured by purchases is permitted a deduction under Va. Code § 58.13732 B 2. This deduction is limited to the cost of the purchases for sales attributable to business conducted in another state or foreign country where the wholesaler is subject to income tax and is required to file an income tax return. See Example 1 in Title 23 VAC 10-500-80 B.
To determine the deduction, receipts must first be assigned or sitused to a definite place of business. Then, from those assigned receipts, the Taxpayer may take a deduction under Va. Code § 58.1-3732 B 2, provided that it can identify receipts attributable to business conducted in another state in which it filed an income tax return and income tax was paid. See P.D. 10-228 (9/29/2010) and P.D. 10-229 (9/29/2010). The Taxpayer, however, would only be able to deduct the cost of purchases for deliveries made to customers in states where the Taxpayer filed state income or income-like tax returns. A deduction would not be permitted for costs of purchases sold to customers from such states that picked up the products at the Taxpayer's facility in the County.
DETERMINATION
The information provided indicates that almost all of the Taxpayer's customers were HVAC contractors that most likely would have used the products sold by the Taxpayer in a productive process as that term was defined in P.D. 02-49. Any sales of products to government or industrial customers also would have likely been for their consumption or use as supplies or equipment to satisfy business needs (as opposed to the personal needs of an individual consumer). As such, those sales would also have been more characteristic of wholesale trade. In addition, there is no indication that the Taxpayer sold products to the general public or was otherwise engaged in a retail trade substantial enough to rise to the level of a separate business for BPOL classification purposes. Finally, the pricing system described by the Taxpayer, although not determinative, was more indicative of a wholesaler. As such, I find that the Taxpayer should have been classified as a wholesale merchant for the tax years at issue. The County, therefore, is directed to reclassify the Taxpayer and issue the appropriate refunds.
Furthermore, the Taxpayer may 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. The Taxpayer, however, must submit appropriate documentation to the County to substantiate any deductions. In addition, the Department notes that the Taxpayer did not raise the deduction issue in its local appeal. As such, any refund claim based on the deduction will be subject to the applicable statute of limitations.
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5630712509.M