Tax Type
BPOL Tax
Local Taxes
Description
Exceptions; Manufacturing
Topic
Local Power to Tax
Date Issued
08-23-1999
August 23, 1999
This will respond to your letter requesting an advisory opinion on two local license tax issues. I apologize for the delay in responding to your request.
The local license fee and tax are imposed and administered by local officials. Section 58.1-3701 of the Code of Virginia authorizes the department to promulgate guidelines and issue advisory opinions on local license tax issues. Additionally, § 58.1-3703.1(A)(5) authorizes the department to receive taxpayer appeals of certain local license tax assessments and to issue determinations on such appeals. However, in no case is the department required to interpret any local ordinance. Code of Virginia § 58.1-3701. The following opinion has been made subject to the facts presented to the department as summarized below. Any change in these facts or the introduction of facts by another party may lead to a different result.
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. I have enclosed copies of cited material for your review.
Issue One=Beginning Businesses
FACTS
You state that a business has operated in your locality for several years. The business was previously owned by a corporation (the "Corporation'), but is now owned by a limited liability company (the "LLC'). The business did not change location, officers or its principal business activity. The Corporation ceased activities on December 31, 1996 and the LLC commenced activities on January 1, 1997.
The LLC calculated its license year 1997 license tax liability based on the Corporation's calendar year 1996 gross receipts. However, after experiencing a substantial drop in gross receipts in 1997, the LLC requested a refund on the grounds that, as a beginning business, its 1997 license tax should have been based on its actual 1997 gross receipts. Your request for guidance does not present any additional information regarding the business, its operations or its owners. Regarding license year 1997, you ask whether the LLC should be treated as an ongoing business subject to tax based on the Corporation's 1996 receipts or as a beginning business subject to tax based on its actual 1997 receipts.
OPINION
A business which is subject to license taxation on its gross receipts calculates its tax liability for the license year using its base year gross receipts. "License year' means the calendar year for which a license is issued for the privilege of engaging in business. Code of Virginia § 58.1-3700.1. "Base year' means "the calendar year preceding the license year . . . unless the local ordinance provides for a different period for measuring the gross receipts of a business, such as for beginning businesses . . . .' Id. Many local ordinances provide that a beginning business must calculate its license tax liability for its first year based on its estimated first year receipts. At the end of the first license year, the business's license tax liability is adjusted to reflect actual first year receipts.
Code of Virginia § 58.1-3703.1 (the uniform ordinance provisions) provides that "[e]very person shall apply for a license for each business or profession when engaging in a business . . . .' As the LLC is a person or entity which is different from the Corporation, it must be regarded as a beginning business and its 1997 license tax liability will be based on its own 1997 gross receipts.
Issue Two-Manufacturing
FACTS
The facts presented indicate that Company A purchases raw material, and then subcontracts with Company B to manufacture products from that raw material. The finished product is then returned to Company A as inventory, or to a distributor, who sells the product. Though Company A purchases the raw material and controls how much is manufactured, Company A does no actual manufacturing itself. You ask whether or not Company A is a manufacturer.
OPINION
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, App. B at 1. In accordance with the public policy of Virginia to encourage manufacturing, this test is applied liberally. Prentice v. City of Richmond, 197 Va. 724 (1956). For a business to be considered a "manufacturer,' the manufacturing portion of the business activity must be a substantial portion of the total business. Guidelines, App. B at 2.
The facts you present are insufficient for me to make a determination regarding the classification of the taxpayer as a manufacturer. I am enclosing a copy of Public Document 97-470, which discusses a manufacturer which produces its goods by assembling components made to its specifications by others. I am also enclosing a copy of Public Document 99-14, which discusses a manufacturer which does not hold title to the raw materials it uses or the goods it produces.
Although I believe this letter conforms with the requirements of the law, it is written only for your guidance. If you have other questions, you may contact ***** Tax Policy Analyst, in my Office of Tax Policy at *****.
Rulings of the Tax Commissioner