Tax Type
BPOL Tax
Description
Low budget entertainment videos subject to licensure
Topic
Local Power to Tax
Date Issued
09-08-1997
September 8, 1997
Re: Request for Advisory Opinion: BPOL
Dear*********
This will respond to your letter of July 31, 1997, requesting an advisory opinion.
The license tax is a local tax which is imposed and administered by local officials. The Code of Virginia limits the involvement of the Department of Taxation to promulgating guidelines and issuing advisory opinions. However, the department shall not be required to interpret any local ordinance.
While addressing the questions raised in your letter, this response is intended to provide advisory guidance only and does not constitute a formal or binding ruling.
FACTS
You have inquired as to whether or not a corporation which produces low budget entertainment videos should be subject to licensure in your jurisdiction. This video producer has rented a facility within your jurisdiction to conduct its operations. Completed video productions will be duplicated and distributed to local video stores for retail sale and for rentals.
OPINION
Provided your local ordinance imposes a BPOL tax on wholesalers, I conclude that the video producer should be subject to licensure in your jurisdiction as a wholesaler of videotapes to the extent that it is producing videotapes for sale to video retailers.
Subject to the limits in § 58.1-3703 C Code of Virginia, localities may charge a fee for issuing BPOL licenses and may levy, assess and collect BPOL license taxes on businesses, trades, professions occupations and callings, and upon the persons, firms and corporations engaged therein within the locality. In order to be subject to licensure, the video producer must have a definite place of business in your locality and be engaged in an enterprise which requires its time, attention and labor for the purpose of earning a livelihood.
The facts that you have presented indicate that the video producer has rented facilities in your jurisdiction for the production of its video products. Provided the video producer has maintained its presence at that location for the previous 30 days, it has established a definite place of business in your jurisdiction. The video producer is "engaged in business" in that it is undertaking the production and sale of videotapes for the purpose of making a profit.
Wholesalers are discussed on page 104 of the 1997 BPOL Guidelines. Wholesale trade is generally indicated where the transaction under scrutiny is for resale or the sale appears to be institutional in nature as indicated by the price, quantity or nature of goods sold. In this case, videos sold to the video stores will be offered at retail to consumers. Others will be added to the stores’ rental selections. Since sale of inventory to a retailer is typically classified as wholesaling, the sales to the video stores for resale would be classified as such. The fact that the retailers subsequently place some of the tapes they purchase in their rental inventory would not change the wholesale nature of the sale.
Video Producer is Not an Exempt Manufacturer
Although the video producer will be creating and selling a "product," i.e. the videotapes, it does not have the necessary characteristics to be considered a manufacturer for purposes of the BPOL exemption. The term "manufacturing" is not defined in the BPOL statute. However, a number of Virginia Supreme Court cases, including County of Chesterfield v. BBC Brown Boveri, 238 Va. 64 (1989), have defined the term with respect to local taxation. These cases have made it clear that a business that merely processes material is not necessarily a manufacturer. The Supreme Court has held, for example, that a business which grades and blends gravel mixtures is an industrial processor but not a manufacturer for purposes of the BPOL exemption. Solite Corp. v. King George County, 220 Va. 661 (1980). In Money Point Land Holding Corp. Va Jacobson Metals Co. v. City of Chesapeake, (letter opinion dated 2/14/95), the Circuit Court held that a business that shredded junk cars and sorted the metal products derived was engaged in processing and not manufacturing.
In deciding the foregoing cases, the courts have established that the key distinguishing characteristic of a manufacturer is in the nature of the processes it employs whereby there is a transformation of one or more materials into a finished good of substantially different character. There must be a substantial, well signified, transformation in farm, usability, quality and adaptability rendering the original material more valuable for use than it was before.
In this case, the video producer is engaged in a process where it is creating and recording video images on tape. This process is not industrial in nature and there is no substantial transformation of any good or material to anything of a different character.
Although the video producer also makes copies or "dubs" of its productions, this activity appears to be subordinate to the principal activity of producing video entertainment. A business which was engaged solely in the business of producing video copies or "dubs" for other video producers, depending on the facts and circumstances, could be considered to be a manufacturer for purposes of the BPOL exemption.
Rates and Calculation of Tax
Ordinarily, the license tax imposed on wholesalers must be measured by purchases rather than gross receipts. 1 The maximum tax rate is 5¢ per $100 of purchases. However, where a wholesaler is producing its own goods, the wholesaler has the option to either report the cost of manufacture 2 of the goods offered for sale as its purchases or report the gross receipts from the sale of the goods if the wholesaler cannot determine the cost of manufacture or chooses not to disclose the cost of manufacture.
The model ordinance provisions require that the purchases of a wholesaler be sitused at the definite place of business at which or from which the purchased goods are delivered to customers. Assuming the video producer elects to be taxed on its purchases, situs for these purchases would be the definite place of business from which the tapes are delivered to the video producer's customers. Presumably, this would be the rented space located in your locality. In the event that the video producer elects to be taxed on its gross receipts, the "sales solicitation rule" would apply; i.e., gross receipts would be attributed to the definite place of business at which the sales solicitation is made or from which the sales solicitations are directed or controlled if solicitation activities do not occur at any definite place of business.
I hope that the above information will be beneficial to you. Although I believe this letter conforms with the law, it is written only for your guidance. If you have any further questions or comments, please do not hesitate to let me know.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12791D1
1 If the locality imposed a license tax measured by gross receipts on a wholesaler as of January 1, 1964, it may continue to do so. See, Code of Virginia § 58.1-3716.
2 Manufacture" for purposes of this provision would include assembly and processing work which is not included in the concept of industrial manufacturing for purposes of the exemption from the BPOL tax.
Rulings of the Tax Commissioner