Tax Type
Intangible Personal Property Tax
Description
Capital not otherwise taxed
Topic
Property Subject to Tax
Date Issued
07-31-1984
July 31, 1984
Re: §58-1118 Application/Capital Not Otherwise Taxed
Dear *************
This will reply to your letter of April 2, 1983 in which you submit an application for relief of an assessment issued to as the result of an audit of capital not otherwise taxed.
FACTS
The national headquarters of the ***** (hereinafter *****) was audited for taxable years 1979, 1980, and 1981, revealing a failure to remit the state tax on capital not otherwise taxed. ***** was audited as a service organization and was assessed tax accordingly.
***** contends that it is engaged as a wholesale merchant and consequently is not subject to such tax. This contention is based upon the fact that ***** has paid local business license tax to the County of ***** as a wholesale merchant and has not previously been subjected to an audit of capital not otherwise taxed. Having relied on the determination of local tax authorities and previous departmental action, ***** requests relief from the assessment issued by the department.
DETERMINATION
§ 58-410 of the Code of Virginia provides that "all capital of any trade or business of any person, firm or corporations, except the capital of any trade or business which is otherwise specifically taxed or specifically exempt from taxation! shall be deemed to be intangible personal property." Such property is segregated for state taxation only under the provisions of Virginia Code § 58-405.
Inasmuch as the capital of merchants is segregated for local taxation only under the provisions of Virginia Code §§ 58-9, 58-10, 58-832, and 58-833, such capital is obviously excluded from the imposition of the state tax upon intangible personal property noted above.
Accordingly, we must determine here whether the activities of ***** are mercantile in nature. The Virginia Supreme Court has held that "a 'merchant' in the sense of our tax statutes, 'is a dealer in goods, wares, and merchandise, who has the same on hand for sale and present delivery"' Commonwealth v. Wytheville Knitting Mills Employees Welfare Association 195 Va 663, 669, 79 S.E. 2d 621, 624 (1954) and White v. Commonwealth 78 Va. 484, 485. In addition, is classified as a "wholesale merchant" for purposes of the ***** County business license taxation, the definition of which has generally been deemed by the department to be "every merchant who sells to other persons for resale only or who sells at wholesale to institutional, commercial or industrial users."
***** is engaged in furnishing supplies, printed matter, resale items, etc., to both its own regional division offices and non-affiliated clubs. The transactions in which such items pass to non-affiliated clubs are obviously wholesale sales; however, the same is not true with respect to transfers of tangible personal property to division offices. Such offices are not separate corporations but rather are part of the corporate structure thus transactions between the two are merely intracompany transfers and are not mercantile in nature.
While ***** is engaged in some mercantile activities, such activities constitute a rather small portion of ***** overall operations. The department has long held that "dual businesses" such as ***** which engage in more than one class of business, all or any portion of which is subject to taxation, shall segregate items within their records which constitute taxable capital. Where it has been impractical to segregate such items, the department has permitted dual businesses to apportion total capital based upon the percentage of gross receipts derived from the portion of the business subject to the tax on intangible personal property to the total gross receipts of the business.
The department's auditor found in the instant case that 13.6 percent of the income of ***** was derived from wholesale sales during 1982. This information was obtained from ***** consolidated income statement. Accordingly, the department's auditor prorated total capital based on this percentage and revised the audit of ***** to exclude that portion of capital originally assessed.
Although ***** is subject in this case to the tax on capital not otherwise taxed, I find basis for the removal of ***** inventory from taxable capital. Virginia Code § 58-412 provides that "[p]ersonal property, tangible in fact, used or employed in all trades and businesses taxable on capital under this chapter, other than the manufacturing, mining, radio or television broadcasting, dairy, dry cleaning or laundry businesses, shall not be held to be capital under § 58-411." Inventory held by ***** for use by its division offices clearly falls within the exemption above.
Therefore, the audit assessment issued to ***** will be revised to delete tax assessed on inventory items held for the use of ***** division offices. In addition, I find basis for the relief of penalty assessed to ***** in this case. However, the balance of the assessment relating to other taxable capital remains due and payable. A revised notice of assessment will be issued shortly.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner