Document Number
21-4
Tax Type
BPOL Tax
Description
Classification : Manufacturer - Sustainability
Topic
Appeals
Date Issued
02-02-2021

February 2, 2021

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 by you on behalf of ***** (the “Taxpayer”) with the Department of Taxation. You appeal the classification of the Taxpayer by ***** (the “City”) for purposes of the Business, Professional and Occupational License (BPOL) tax.

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, regulation 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

The Taxpayer operates a plant in the City that produces fertilizer additives that are sold to fertilizer companies to be incorporated into fertilizer. Raw materials that include copper, zinc, manganese, magnesium, iron and boron are mixed in a specific ratio pursuant to customer needs. These materials are then fed via conveyor into a rotating granulator drum at a preset rate. Sulfuric acid is also introduced into the drum at a preset rate. A reaction occurs between the acid and dry materials causing heat and a partial conversion of oxides to sulfates and granulation of the product. Water is added as needed to aid the reaction and improve granulation size. The mixture is then dried, cooled and screened. An anti-dust oil is added to retard dust exposure. Oversized materials are crushed and returns to the screening process. Undersized material is returned to the granulator in order for it to reach sufficient size.

The Taxpayer is currently classified as a processor by the City for BPOL tax purposes. The Taxpayer appeals the classification contending that it should be classified as a manufacturer. 

ANALYSIS

BPOL - Manufacturing

Virginia localities are prohibited from imposing a license fee or tax on a manufacturer for the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture. See Virginia Code § 58.1-3703 C 4.

The local business tax statutes do not define the term “manufacturer” for purposes of the local business license tax. However, the Supreme Court of Virginia (the “Court”) 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 County of Chesterfield v. BBC Brown Boveri, 238 Va. 64, 380 S.E.2d 890 (1989). As such, for local business 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. 

The Taxpayer contends that because the oxides in the raw materials react with the sulfuric acid and partially convert to a sulfates, there is a transformation into a product of substantially different character. Citing Richmond v. Dairy Co., 156 Va. 63, 157 S.E. 728 (1931) and Solite Corporation v. County of King George, 220 Va. 661, 261 S.E.2d 535 (1980), the City asserts that the Taxpayer’s plant is merely engaged in processing because the raw materials are micronutrients and the end product is micronutrients. 

The City primarily relies on Department of Taxation v. Orange-Madison Cooperative Farm Service, 220 Va. 655, 261 S.E.2d 532 (1980) and 1976-1977 Op. Atty. Gen. Va. 283 as authority regarding its conclusion that the Taxpayer’s operation constitutes processing. In Orange-Madison, a fertilizer plant blended nitrogen, potash, phosphate and other chemicals by machinery into fertilizer. The Court held that this constituted industrial processing rather than manufacturing for purposes of a sales tax exemption. The Department has repeatedly held that the BPOL tax is a local tax that is separate and distinct from Virginia’s retail sales and use tax. See Public Document (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), P.D. 13-25 (3/5/2013) and P.D. 15-19 (2/11/2015). Nothing in the facts of the case indicates that any sort of heat or chemical reaction occurred to transform raw materials into a substantially different product.

In 1976-1977 Op. Atty. Gen. Va. 283, the Attorney General opines that when a farm supply merchant who purchases fertilizer ingredients and blends them to make a mixture is not a manufacturer for property tax purposes. In this opinion, like the taxpayer in Orange-Madison, the farm supply merchant merely blended fertilizer ingredients to make a specific fertilizer mixture. No activity occurred that transformed the fertilizer ingredients. 

Like many products, numerous types of fertilizers produced in a variety of processes are available for flora health and growth. The cases cited by the City cannot be expected to cover the classification of every businesses that produces fertilizer. Instead, the activities of each business must be analyzed in light of the applicable ordinances, statutes and regulations in order to make an accurate classification determination. 

In P.D. 04-21 (6/2/2004), a taxpayer combined lye soap stock with sulfuric acid and heat. The resulting endothermic chemical reaction produced an edible fatty acid and glycerin. The Department determined that the taxpayer’s activity was manufacturing for purposes of local tax because the lye stock soap was subjected to a process that transformed the soap into edible feed stock oil and glycerin that was substantially different in character then the original material. 

The distinguishing factor here was that the chemical reaction occurs when the metal oxides were subjected to the sulfuric acid. As a result, a portion of the oxides are transformed into sulfate, a salt that is water soluble. The remaining oxide, a binary compound of an element and oxygen, takes longer to breakdown in water. Depending on the needs of the customer, 30 to 40 percent of the finished product is sulfate with the remaining 60 to 70 percent being oxides. The combination allows crops to absorb nutrients over an extended period of time, with the sulfates being absorbed first followed by the oxides. Without a product substantially different in character from the oxides, nutrients may not be absorbed in time to produce a desirable crop.

DETERMINATION

Based on the information provided, the Taxpayer mixes raw materials, subjects them to a chemical process, and the resultant product is substantially different that the raw materials. As such, I find that the Taxpayer is a manufacturer for BPOL tax purposes. 

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/3566.B

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Last Updated 04/09/2021 08:05