Tax Type
BPOL Tax
Local Taxes
Description
Flooring sellers and installers
Topic
Local Power to Tax
Date Issued
01-14-1999
January 14, 1999
Re: Request for Advisory Opinion
Business, Professional, & Occupational License (BPOL) Tax
Dear ****
This will respond to your letter transmitted by facsimile requesting an advisory opinion as to the local license taxation of sellers and installers of carpet and vinyl flooring under different scenarios. I apologize for the delay in responding to your request.
Although the BPOL tax is a local license tax that is imposed and administered by local officials, the Virginia Department of Taxation may promulgate guidelines and issue advisory opinions on a limited basis according to Virginia statute. The Department, however, is not required to interpret local ordinances.
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. Copies of cited sources are enclosed for your review.
FACTS
A merchant sells carpet and vinyl flooring from a showroom situated in Locality A. The merchant maintains no stock on hand other than remnants. Customers make their selections from samples of carpet and vinyl flooring. You ask several questions which I will address in the order you present them.
OPINION
Question One
In this example, the merchant contracts to sell and install carpet in Locality B. The merchant subcontracts the installation of the carpet to another company. You ask whether or not the merchant is subject to license taxation as a retail merchant in Locality A.
In answering this question, I will assume that there is no issue that sales are made at retail as opposed to wholesale.
The gross receipts of a retail merchant are attributed to the definite place of business where sales solicitation activities occur. If sales solicitation activities do not occur at a definite place of business, then the gross receipts of the retailer are attributed to the definite place of business from which the sales solicitation activities are directed or controlled. Code of Virginia
§ 58.1-3703.1(A)(3)(a)(2).
In this example, the merchant does not have a definite place of business in Locality B, and its sales solicitation activities occur or are directed or controlled from its definite place of business in Locality A. Accordingly, the gross receipts from the sales of carpet would be subject to taxation in Locality A. (In Question Two below the classification of the taxpayer as a contractor is ruled out. This explains why the taxpayer's gross receipts from sales to customers residing in Locality B are not taxable in Locality B pursuant to a license tax on contractors).
You also ask whether or not the merchant's gross receipts include the installation costs passed on to its customer. Code of Virginia § 58.1-3700.1 defines gross receipts as "the whole, entire, total receipts, without deduction." A gross receipts tax is based upon receipts, not net income. Public Document 97-52. The determinative question is whether or not the costs passed through to the merchant's customers are derived from the transactions with others and from the exercise of a licensable privilege. Public Document 97-167.
The legal issues regarding a BPOL tax on costs passed through to customers are discussed in Public Document 97-52. In that opinion, a funeral home, as part of the services it provided, contracted with others to provide goods and services to its customers such as the spraying of caskets, the opening and closing of graves, and placing obituaries in the newspaper. The funeral home, not the customer, contracted for these services and paid for the services. The funeral home passed on the costs of these services, without markup, to its customers. Because these services are a necessary expense of doing business as a funeral home, gross receipts related to the payment for these services are derived from the exercise of the licensable privilege of operating a funeral home and must be included in the funeral home's gross receipts.
Certain monies received by an agent for reimbursement of costs incurred on behalf of a principal are not included in the agent's gross receipts. 1985-1986 Op. Att'y Gen. 281. However, a business which is not an agent of its customer may not exclude from its gross receipts monies it receives from its customer as payment for expenses incurred with third parties having no contractual relationship with the customer. Alexandria v. Morrison-Williams Associates. Inc., 223 Va. 349 (1982).
In this example, the flooring merchant has incorporated installation into its sale. The merchant, not the customer, enters into a contract with the installer. The merchant is not acting as an agent of its customer in this capacity. As a result, payments received by the merchant from the customer on account of installation costs are a necessary expense of doing business as a flooring merchant and must be included in gross receipts.
You next ask whether the company installing the flooring in Locality B is subject to license taxation. Guidelines § 5.2 includes flooring installation among the occupations considered contracting. A contractor is subject to license taxation in a jurisdiction if he "has a definite place of business in [the] jurisdiction" or is subject to Code of Virginia § 58.1-3715. Code of Virginia § 58.1-3703.1(A)(1). Under Code of Virginia § 58.1-3715, a contractor with a principal office or any branch office in Virginia who earns gross receipts of $25,000 or more in a year in a locality is subject to license taxation in the locality regardless of the duration of the business activity. Thus, the company installing the flooring in Locality B would be subject to license taxation as a contractor if it meets one or both of these conditions.
Question Two
Same facts as Question One except that the merchant itself installs the carpet in Locality B. You ask whether or not the merchant would be subject to license taxation as a contractor in Locality B.
Guidelines § 5.3 provides that
an installation by a merchant is not considered contracting where he delivers and installs an appliance or other merchandise he sells when the installation uses existing openings and connections . . . Other factors which may be considered in making the determination of whether or not a merchant's installation of goods constitutes contracting are as follows: (i) whether the installation is merely ancillary to the retail sales of the merchant, as opposed to constituting a substantial portion of what is sold in the transaction; (ii) does the merchant hold himself out as able to perform contractor's activities; and (iii) does the merchant install his own merchandise only, or does he also install the goods of others.
Example D in § 5.3 of the BPOL Guidelines states that "a merchant who sells floor coverings (whether the covering be carpet, linoleum, tile or other covering) and installs the floor covering as part of or incidental to the sale . . . is not contracting but [rather making] a retail or wholesale sale." Accordingly, the gross receipts from installation by the merchant in this example would be subject to license taxation in Locality A as constituting gross receipts from a retail business. This conclusion assumes that the merchant does not hold himself out as able to perform contractor's activities, only installs the floors he sells, and the installation of flooring is not a substantial portion of what is sold in the transaction. The answer to this example could be different if these are not the facts.
In this example, because the merchant is a retailer and not a contractor, gross receipts, including gross receipts related to installation, are attributed to the definite place of business where sales solicitation activity occurs. This is Locality A; therefore, the merchant is not subject to license taxation in Locality B.
Questions Three and Four
Same facts as in Questions One and Two except that the product is vinyl flooring instead of carpet.
You ask whether the conclusions reached in the first two examples would differ if the product was vinyl flooring instead of carpet. Example D in § 5.3 of the BPOL Guidelines indicates that carpet and vinyl flooring should be treated similarly for the BPOL tax purposes. As a result, the conclusions reached above also hold true for the sale and installation of vinyl flooring.
Question Five
Finally, the merchant also sells carpet and vinyl flooring to hospitals, schools, governments and contractors. The sales price is the same for industries and individual consumers. No quantity discount is given. You ask whether these sales are retail or wholesale. I will first outline the law as it relates to the distinction between retail and wholesale sales for BPOL tax purposes.
The Code of Virginia does not define "retail " or "wholesale" for BPOL tax purposes. However, these terms are defined in the Guidelines promulgated by the Department. In § 1 of the Guidelines, 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." Guidelines at 8. A "wholesale sale" is defined as
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 sales such as the quantity, price, or other terms, indicate that they are consistent with sales at wholesale.
Id. at 9. This definition is derived from the definition of "wholesale merchant" set forth in former Code of Virginia § 58-304 for the purposes of the state license tax repealed in 1966. Guidelines at 9.
It is clear that not all sales to institutional, commercial, industrial, or governmental users qualify as wholesale sales for BPOL tax purposes. The definition of "wholesale sale" does not include sales 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. This issue was addressed in Public Document 98-160, which opined
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 characteristics 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.
Price, in and of itself, is not normally a determining factor distinguishing retail and wholesale sales. Department of Tax'n, Ltr. Op. (Feb. 21, 1991). For example, the fact that a merchant sells goods 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. Likewise, the sales of a merchant who sells only for resale purposes qualify as wholesale, regardless of the price. Department of Tax'n, Ltr. Op. (May 14, 1981).
However, there are situations in which price can be an important factor. For example, a business which sells to both retail and institutional, commercial, industrial or governmental users and charges the latter a lower price must be able to substantiate the lower price to the institutional, commercial, industrial or governmental user in order to qualify such sales as wholesale sales. Department of Tax'n, Ltr. Op. (May 14, 1981). Likewise, "if sales at the same price and quantity are made to purchasers who are clearly retail consumers this may indicate that all sales are at retail." Department of Tax'n, Ltr. Op. (Feb. 21, 1991).
The determination of whether or not a sale is retail or wholesale requires a consideration of all of the facts and circumstances surrounding the sale. Your question does not present sufficient detail regarding the characteristics of the purchasers, the purchasers' uses of the merchandise, and the quantities of the product sold to make this determination. The failure of a flooring merchant, which has retail sales, to offer a quantity discount or to discount the sales price when selling to institutional, commercial, industrial, or governmental users is a factor which suggests that its sales to institutional, commercial, industrial, or governmental users may be retail sales but it is not, in and of itself, conclusive.
I hope that the above information will be beneficial to you. Although I believe this letter conforms with the requirements of the law, it is written only for your guidance. If you have other questions, please do not hesitate to contact *****, Tax Policy Analyst, in my Office of Tax Policy.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP13190D
1 Subsequent to the issuance of Public Document 97-52, Code of Virginia § 58.1-3732.3 was enacted to provide an exclusion from the gross receipts of funeral homes for the reimbursement of certain business expenses.
2 The 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