Tax Type
BPOL Tax
Description
Sales to welding contractors were retail sales
Topic
Local Power to Tax
Date Issued
10-20-1998
October 20, 1998
Re: Final State Determination - BPOL Appeal
Dear*******
Based on the appeal filed by***** (the Company) of the Business, Professional and Occupational License (BPOL) tax assessment filed with the Department of Taxation, a final determination has been decided pursuant to Code of Virginia § 58.1-3703.1(A)(5)(c). This final determination addresses the question of whether or not the ******** correctly classified the Company as a retailer of supplies and equipment for BPOL tax purposes.
In the appeal procedure for BPOL tax assessments, a local assessment is presumed correct unless proven incorrect, according to Code of Virginia § 58.1--3703.1 (A)(5)(a). Consequently, the taxpayer has the burden of proof to show that the local assessment is not correct. If the taxpayer does not carry this burden of proof, then the local assessment will stand as is. Copies of cited documents are included for your review.
FACTS
The Company sells welding equipment, welding supplies, and industrial gases to businesses and some individuals. The majority of these businesses are contractors that provide specialized services in the areas of road building, equipment maintenance, pipeline servicing, heavy equipment specialty hauling, mechanical contracting, industrial general contracting, steel building fabricating, and speciality contracting. (These contractor descriptions were submitted by the Company.) The contractors do not appear to be in the business of constructing for themselves. The price of the Company's merchandise is determined by the quantity sold, which the Company calls "bracket pricing.'
Based on audit results, the ***** determined that the Company should have a retail
sales license and a service license in addition to its wholesale license based on the different business activities that the Company provides. The Company is appealing only the determination of the retail sales license.
The Company claims that its sales to businesses are primarily wholesale because the Company sells to customers who resell the welding products and to customers who are institutional, commercial, industrial, or governmental users. As a result, the Company asserts that those sales fall within the definition of wholesale for BPOL tax purposes and should be taxed accordingly. The Company further concludes that the retail sales classification has no application to its business activities at all.
ANALYSIS
The Code of Virginia does not define "retail " or "wholesale' for BPOL tax purposes. However, the guidelines published by the Department of Taxation define both terms.1 In § 1, 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, and industrial users, which are classified as wholesale sales.' Department of Tax'n, Guidelines for Business, Professional and Occupational License Tax Imposed by City, County and Town Ordinances, (Jan. 1, 1997) [hereinafter Guidelines] at 8 (emphasis added). The term "wholesale sale' is defined as
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- a sale of goods, wares, and merchandise for resale by the purchaser, including sales when the goods, wares, and merchandise will be incorporated into goods for sale, and also includes sales to institutional, commercial, industrial, and governmental users, which, because of the facts and circumstances surrounding the sale including the quantity, price, or other terms, indicate that they are consistent with sales at wholesale. (Underline and bold emphasis added.)
Id. at 9. In the comment section on page three of the Guidelines, further explanation attributes this definition to the former § 58-304 that defined the term - wholesale merchants - for the purpose of the state license tax.
It is clear that sales to institutional, commercial, industrial, or governmental users must be at wholesale to qualify as a wholesale sale for BPOL tax purposes. In other words, the definition of "wholesale' does not include a merchant who sells at retail to institutional, commercial, or industrial users. Dickerson G.M.C., Inc. v. Commonwealth, 206 Va. 339, 343, 143 S.E.2d 863, 866 (1965); 1990 Op. Va. Att'y Gen. 220, 222.
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. Dickerson, 206 Va. at 342, 143 S.E.2d at 865; Department of Tax'n, Ltr. Op. (Feb. 21, 1991). 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. Guidelines, at 99, 104; Department of Tax'n, Ltr. Op. (Feb. 21,1991).
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. Guidelines, at 8, 9; VAC 10-210-6080. The additional factor of character or type of purchaser comes into play for BPOL tax purposes.
According to the Guidelines, 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. Id. At 104-106. This "wholesale use' by such purchasers has been described as incorporating the good into an assembly, processing, or manufacturing operation. Id. at 105. Examples of this use are bulk sales for maintenance of a purchaser's facilities or equipment and sales of materials to incorporate into a purchaser's product. Dickerson, 206 Va. at 342, 143 S.E.2d at 865-66 (citing Roland Elec. Co. v. Walling, 326 U.S. 657, 674 (1946)); Department of Tax'n, Ltr. Op. (Feb. 21, 1991); 1990 Op. Va. Att'y Gen. 220, 221. These examples illustrate that an institutional, commercial, industrial, or governmental purchaser of wholesale goods must use them in such purchaser's processing or fabrication process or to maintain the purchaser's own business operations.
Quantity is a sales term that may help to distinguish between a retail sale and a wholesale sale in some instances but not in all. In some situations, low volume sales may denote retail sales and high volume sales may denote wholesale sales. "It is a well-recognized concept in the automotive trade industry that sales of trucks in nonfleet quantities to persons for business or commercial use and not for resale purposes have always been regarded as retail; sales of trucks for resale or in fleet quantities are not considered retail.' Dickerson, 206 Va. at 342-43, 143 S.E.2d at 866 (citation omitted).
Price, while not the determinative factor, may be one of the factors to distinguish between retail and wholesale sales. The fact that a merchant sells goods, wares, or merchandise at wholesale prices, which may be at cost or at less than cost, does not prevent the seller from being classified as a retail merchant if the sales fall within the definition of a retail sale. Guidelines, at 99. Further, sales to commercial or industrial users may be at retail if made at a price or for a purpose that does not constitute a wholesale sale. 1990 Op. Va. Att'y Gen. 220, 222.
In a situation in which a business sells at both retail and wholesale and the price of a good sold to the ultimate consumer is higher than the price of a good that is sold for resale purposes, then the price differentiation is an important distinction. However, it is clear that the sales of a merchant who sells only for resale purposes qualifies as wholesale, regardless of the price. Department of Tax'n, Ltr. Op. (May 14, 1981). When a business does sell to both retail users and institutional, commercial, industrial, or governmental users, the merchant must substantiate the lesser price to institutional, commercial, industrial, or governmental users for such sales to qualify as wholesale sales. Id.
The Company, in this situation, bases the price of the goods on the quantity sold and does not consider whether the purchaser is the ultimate user or a reseller. Since any customer (i.e., a retail user or an institutional, commercial, industrial, or governmental user) may have a quantity discount, the price, in this instance, does not provide a distinguishing element for our determination.
In presenting this appeal, the Company has failed to show that a retail license is not appropriate. The Company had the burden to prove that its sales were made only to resellers or made at wholesale to institutional, commercial, industrial, or governmental users that incorporated the welding supplies and equipment in a productive process, such as assembly, manufacturing, or processing operations. To do so, it needed to show sufficient factors that distinguished retail sales from wholesale sales, which were not shown.
The distinguishing factors in this case are the type of purchaser of the Company's welding supplies and equipment and the purchaser's use of such merchandise. The Company asserts that it sells its welding supplies and equipment to contractors who are commercial and industrial users, which made these sales at wholesale. However, such purchasers are not the type of users that the wholesale definition addresses. The wholesale definition applies to certain users that incorporate merchandise in their "productive processes.' Here, the contractors use this merchandise to provide contractor services to their customers.
The Company submitted a descriptive list of its typical customers, which are described as commercial and industrial contractors. These contractors provide services to customers that may be institutions, commercial or industrial businesses, or governments. Consequently, the contractors are the ultimate consumers of the welding products because they use this merchandise for their own purposes, which is to provide a specific type of service to their customers.
Because the Company's customers are not the type of purchasers that qualify as such users that have productive processes (e.g., assembly, manufacturing, or processing), the sales are not at wholesale. This determination does not preclude the wholesale classification from applying to other appropriate sales of the Company's merchandise. This appeal is directed at the sales made to the list of contractors that the Company submitted. Because those sales are made at retail, the assessment for retail license and taxes stands as is.
If you have any questions about this final BPOL determination, please call *****, Tax Policy Analyst, at *****.
1The definition of "wholesale' is narrower for sales and use tax purposes than for BPOL tax purposes. For sales and use tax purposes, a "wholesaler' is a merchant who sells for resale only. If the merchant sells to any user or consumer of the product, then the merchant is a retailer of such sales. If the merchant fails to keep adequate records that delineate sales into retail and wholesale categories, then the merchant will be taxed as a retailer. Title 23 VAC 10-210-6080.
Rulings of the Tax Commissioner