Tax Type
BPOL Tax
Description
Exceptions; Machinery design and fabrication business.
Topic
Local Power to Tax
Date Issued
12-05-1997
December 5, 1997
Re: Request for Advisory Opinion: BPOL
Dear***************
This will respond to your letter of October 23, 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 concerning the proper BPOL treatment of a business, (the "Taxpayer"), which provides new or upgraded machinery for various businesses in your jurisdiction. In most instances the Taxpayer studies the processes of its customer and designs improvements using computer aided design ("CAD"). After the design phase, the Taxpayer contracts with suppliers and fabricators to obtain components of the new machine which it then assembles and delivers to the customer's site. The Taxpayer also provides any necessary training for the customer's personnel in operating the new or improved equipment.
OPINION
Subject to the limits in Code of Virginia § 58.1-3703 C, 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. Under Code of Virginia § 58.1-3703 C. 4. "manufacturers" are exempt from the tax to the extent that they are selling manufactured goods, at wholesale, at the place of manufacture. Guidance on identifying manufacturing businesses and a discussion of the exemption from the BPOL tax that manufacturers enjoy is provided in Appendix B of the 1997 BPOL Guidelines.
The definition of "manufacturing" does not appear 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 license 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. t/a 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 not manufacturing.
In deciding the foregoing cases, the courts have established that the key inquiry in distinguishing a manufacturer from a processor is whether there is a transformation of new material to a finished good of substantially different character. There must be a substantial, well signified, transformation in form, usability, quality and adaptability rendering the original material more valuable for use than it was before.
In this case, the Taxpayer's central business activity is the design and sales of machinery improvements or new machinery to improve the efficiency of its customer's operations. Although the design process is detailed and highly technical, the creation of the component parts of the machinery designed is performed by other businesses. The Taxpayer produces its goods by assembling components made to its specifications by others.
The 1997 BPOL Guidelines point out that in some cases assembly of purchased components may constitute manufacturing. For example, a Virginia Circuit Court held that assembly of purchased components into personal computers was manufacturing. County of Fairfax v. Datacomp Corp. Factors that suggest that a business may be engaged in a manufacturing operation include the following:
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- (I) The assembly process is complex and uses numerous parts.
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- (ii) After assembly the components cannot be recognized without previous knowledge.
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- (iii) The components are not readily usable for any purpose other than incorporation into the finished product.
The facts presented are not specific as the exact nature of the machinery that the Taxpayer sells. However, given the fact that CAD is used in the design phase, it appears certain that the machinery incorporates a level of complexity in function and design that requires the use of computers. Given this inherent complexity, it would also appear that parts incorporated in the overall assembly of the new or redesigned machine would not be readily distinguishable by one not familiar with the machinery design. This would especially be true of the electrical components which are incorporated into the machinery and interconnected when the machinery is installed on-site.
Further, it appears from the description of the Taxpayers business that its new machinery and machinery redesign projects encompass custom work performed on a case by case basis. It is therefore likely that components manufactured for use in one project would have no use other than for incorporation in the particular project for which it was designed.
Finally, in order to fall under the manufacturing exemption for BPOL purposes the Taxpayer must be selling its goods "at wholesale at the place of manufacture". The Guidelines address the definition of wholesaling at page 9 and make it clear that a wholesale is not necessarily a sale for resale. Sales to the ultimate consumer where such consumer is a institutional, commercial, industrial or governmental user are also deemed wholesales for purposes of the manufacturing exemption. In this case, it is clear that the equipment manufactured by the Taxpayer will be used for industrial or commercial purposes. Additionally, there is no indication that the Taxpayer is selling from any location other than its plant. Based on the foregoing, it is my opinion that the design and fabrication business you described should be classified as a manufacturer for local license tax purposes and thus exempt from the tax.
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/13099D
Rulings of the Tax Commissioner