Tax Type
BPOL Tax
Local Taxes
Description
Related business entities
Topic
Local Power to Tax
Date Issued
01-19-1999
January 19, 1999
Re: Business, Professional, and Occupational License (BPOL) Tax;
Advisory Opinion Request
Dear ****
You requested an advisory opinion concerning two BPOL tax issues: (1) whether or not commonly owned, but separately incorporated, business entities are required to have separate BPOL licenses; and (2) if so, whether or not any exemptions apply.
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.
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
****** ("Company A") and ***** ("Company B") qualify as two separate Subchapter S corporations that are owned by the same person. Both companies file separate business tax returns and documents, but are located at the same address, use the same management personnel and equipment, and perform their business activities for third party manufacturers unrelated to either Company A or Company B.
Company B has entered into a contract with ***** ("Company C"). Under the contract, Company C furnishes Company B with original materials and equipment, located on Company B's premises, to process Company C's finished products. Under the contract, Company C retains title to both the original materials and finished goods.
Both Company C and Company B will furnish the equipment necessary to produce Company C's products. The equipment furnished by Company C will remain the property of Company C. At least once a year, Company C will physically inventory its equipment, original materials, and finished goods situated on Company B's premises.
Processing services provided by Company B include slitting; sheeting; lepel/antistat treating sheet structures; maintaining customer sample programs; cutting staple and flocks; inspecting, testing, sampling, packaging, storing, and shipping; stitchbonding; bolding, printing, and converting; and developing new products and processes. Specifications describing finished-product requirements plus instructions for sampling and testing of finished goods are provided by Company C.
Company B is compensated in the form of a reimbursement for direct labor, indirect labor, operation and maintenance costs, utilities, business licenses, local privilege taxes, and other operating expenses. In addition to reimbursement of costs, Company C pays a monthly management fee to Company B to cover Company B's profit, home office administration expenses, travel expense of management, and other non-operating costs.
The first question is whether or not Company A and Company B are subject to BPOL license fee and tax requirements as separate entities. Currently, the local assessing officer imposes separate license and tax requirements on each company.
The second question is whether Company B is a manufacturer undertaking the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture. A locality is prohibited by Code of Virginia § 58.1-3703 C(4) from assessing a BPOL fee or tax upon such manufacturers. This is a common issue with Company A, which also processes original materials into finished goods.
OPINION
Companies A and B are subject to separate BPOL license and fee requirements
Subject to limits set forth in Code of Virginia § 58.1-3703 C, localities may charge a fee for issuing BPOL licenses or may levy a license tax on a business for the privilege of engaging in business at a definite place within the locality. Code of Virginia §§ 58.1--3700 and 58.1-3703 A (copies enclosed). Business means "a course of dealing which requires the time, attention and labor of the person so engaged for the purpose of earning a livelihood or profit. It implies a continuous and regular course of dealing, rather than an irregular or isolated transaction." Code of Virginia § 58.1-3700.1; Department of Tax'n, Guidelines for Business, Professional, and Occupational License Tax, 4 (Jan. 1, 1997) (copies enclosed). A definite place of business means "an office or a location at which occurs a regular and continuous course of dealing where one holds one's self out or avails one's self to the public for thirty consecutive days or more, exclusive of holidays and weekends." Id. A rebuttable presumption that an entity is a business includes any entity that advertises its services or products or is required to file business or trade tax returns, schedules, and documents. Id.
In this case, since Company A and Company B hold themselves out separately for business and are required to file business tax returns or documents as separate entities, each is subject to the BPOL fee or tax requirements of the locality. The common ownership and shared-use of office space and personnel do not prevent the individual application of the license fee or tax requirements to each company. Consequently, each company may be required to pay a BPOL license fee or gross receipts tax, unless the local assessing officer is prohibited by Code of Virginia § 58.1-3703 from assessing a BPOL fee or tax upon the companies.
Local assessing official may impose a BPOL fee or tax on Company B
Code of Virginia § 58.1-3703 C(4) (copy enclosed) prohibits a local assessing officer from imposing a license fee or levying any license tax "[o]n a manufacturer for the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture." Companies A and B, through counsel, contend that this provision does not require that manufacturers must own the products they manufacture in order to enjoy the tax protections granted by § 58.1-3703 C(4). The local assessing officer contends that Companies A and B are not wholesale merchants and, therefore, do not qualify for the tax protections provided under § 58.1-3703 C(4).
The taxpayer argues that § 58.1-3703 C(4) has been interpreted as to not require the selling of goods, wares and merchandise. The taxpayer asserts that this was the holding of the Supreme Court of Virginia in County of Chesterfield v. BBC Brown Boveri, Inc., 238 Va. 64, 380 S.E.2d 890 (1989) (copy enclosed). This overlooks the fact that BBC Brown Boveri, Inc. engaged in both manufacturing and non-manufacturing activities and, as a result of its manufacturing activities, sold turbine rotors, generator rotors, compressor rotors, machine shafts, industrial equipment used to roll aluminum, and mechanisms for high pressure steam pipes. In BBC Brown Boveri, Inc., the Supreme Court held that the taxpayer's non-manufacturing activities, its service and repair of defective units belonging to utility companies, were ancillary or subordinate to the taxpayer's manufacturing activities and sales of the goods manufactured.
The language of § 58.1-3703 C(4) is clear with respect to the restrictions placed upon Virginia's localities. As provided by this subdivision, a Virginia locality may not impose a BPOL license fee or tax on the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture.
Manufacturing activities are determined by using a three-element analysis, which requires that: (1) an original material (2) be processed and (3) changed substantially into a product of a different character from the original material. Guidelines for Business, Professional, and Occupational License Tax, App. B at 1 (copy enclosed). The local assessing officer has conceded that the processing services provided by Company B satisfy the three-element manufacturing test outlined in the Guidelines. As a result, the only issue for purposes of this opinion is whether Company B sells goods, wares and merchandise at wholesale at the place of manufacture.
Title to the original materials and finished goods always remains with Company C. Indeed, under the contract between Company C and Company B, Company C can physically remove some or all of its original materials, finished goods, and equipment from Company B's premises if it receives an offer from another vendor to perform the processing services at a lower cost to Company C (Company B has a right to match the competing offer).
Company B is reimbursed by Company C for its direct labor, indirect labor, and operation and maintenance costs. The contract also provides reimbursement to Company B for business licenses, local privilege taxes, and other similar taxes. Moreover, the contract stipulates that Company B's profit for providing processing services will come from a monthly management fee paid by Company C.
Shipments of original materials and finished goods are to be made by Company B upon written direction from Company C. Company B is also prohibited from using, reusing, selling, or otherwise disposing of any original materials, processed materials not meeting specifications, or finished goods unless otherwise agreed to in writing by Company C's Contract Administrator.
Based upon these facts, it is my opinion that Company B does not sell goods, wares and merchandise at wholesale at a place of manufacture. This is because Company B has no goods of its own to sell, it receives a monthly fee for performing manufacturing activities as opposed to receiving compensation for the sale of goods, and it ships materials and goods only in accordance with instructions from the title holder of the goods.
Because Company B does not meet the selling requirement of Code of Virginia § 58.1-3703 C(4), the local assessing officer may assess a BPOL license fee or tax on Company B in the same manner as it could on any other services business. The department has previously opined that not all manufacturers enjoy the tax protection provided by § 58.1-3703 C(4). In P. D. 97-146, the department concluded that a license fee or tax may be imposed upon a manufacturer selling goods, wares and merchandise at retail. Similarly, a local assessing officer is not prohibited from imposing a local license fee or tax upon a person who engages in manufacturing activity but who does not sell goods at wholesale at the place of manufacture.
Assessment of BPOL fee or tax on Company A
The local assessing officer acknowledges that Company A manufactures and sells goods, wares, and merchandise. For business license tax purposes, he has classified Company A as both a manufacturer and a provider of business services. In making this type of determination, a local assessing officer must consider whether a taxpayer's non-manufacturing activities are ancillary to its manufacturing activities. If Company A's non-manufacturing activities are ancillary to its manufacturing activities, all of Company A's business activities should be classified as manufacturing.
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, and the final determination is with the locality.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP13493C
Rulings of the Tax Commissioner