Tax Type
BPOL Tax
Local Taxes
Description
Exceptions; Software design, development, and copying
Topic
Local Power to Tax
Date Issued
11-17-1999
November 17, 1999
Re: Request for Advisory Opinion Business, Professional and Occupational License (BPOL) Tax
Dear ****
This is in response to your letter requesting an advisory opinion on the proper application of the BPOL tax to a computer software business (the "Business"). I apologize for the delay in responding to your letter.
The local license tax and fee are imposed and administered by local officials. Code of Virginia § 58.1-3701 authorizes the department to promulgate guidelines and issue advisory opinions on local license tax issues. Additionally, Code of Virginia § 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 with the exception of those appeals in which a local ordinance is relevant to the appeal of an assessment. Code of Virginia § 58.1-3701. The following determination is based on the facts presented to the department by the Taxpayer and the City as summarized below.
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.
FACTS
The Taxpayer who prompted your questions actually has two Businesses. The first, "Business A," is described by the Taxpayer as being primarily engaged in the design and development of programming software. The second, "Business B," has an exclusive license with Business A to make copies of the newly developed software. It pays Business A a royalty for each copy of the software that it supplies to the market.
Business B has several functions. It purchases blank disks upon which it copies the software, makes the labels and packaging for the disks, creates artwork for the technical manual, out sources the design and printing of the four color manual and packaging materials, packages the in-house computer-generated technical instructions with the manual cover, formats disks and labels, and ships the software package to buyers. Business B also advertises the product and solicits sales through various trade journals.
The taxpayer is considering locating in your county. You ask what is the proper classification of the two businesses for BPOL tax purposes.
OPINION
Software Development
Business A would be classified as a business service under the provisions of the BPOL Guidelines, which state: "(e)ngineering, design, research and development and computer software development typically are not manufacturing." Page 3 of Appendix B. Rather, data processing, computer and systems development services are typically classified as "business services," and may be subject to the BPOL tax as outlined in Code of Virginia § 58.1--3706(A)(4). BPOL guidelines, page 121.
Manufacturing
Business B, as described above, does engage in transforming the disks into useable software, the making of the labels and the packaging materials for the shipping of the software materials. Pursuant to BPOL Guidelines Appendix B, page 3 (and example 6 in BPOL Guidelines Appendix B, page 6), while the development of computer software is not manufacturing, the production of boxes containing the software on disks and related materials may be manufacturing.
The Supreme Court of Virginia has developed a test involving three essential elements in determining whether a manufacturing activity is being undertaken. These elements are: (1) original material, referred to as raw material; (2) a process whereby the original material is changed; and (3) a resulting product, which by reason of being subject to such processing, is different from the original material. County of Chesterfield v. BBC Brown Boveri, 238 Va. 64 (1989). In summary, for BPOL purposes, a manufacturer means one engaged in a processing activity whereby the original materials are transformed into a product that is substantially different in character from the original materials. All three elements must be present if a business is to be classified as a manufacturer. To qualify for the manufacturing exemption in Code of Virginia § 58.1-3703(C)(4), the manufacturing component of a business must be substantial.
Based on the description of its activities, Business B contracts out a great deal of the production process. While it does manufacture labels and assembles the various component
parts to create the final software package, it also is involved in retail or wholesale sales of its final package. However, the determination of the substantiality of each activity in which Business B is engaged is ultimately the responsibility of the local commissioner of the revenue.
Certain Manufacturers Exempt from Local License Taxes
Code of Virginia § 58.1-3703(C)(4) provides that no county, city, or town shall impose a license fee or levy any license tax on a manufacturer for the privilege of manufacturing and selling goods, wares and merchandise at wholesale from the place of manufacture.
If you determine that Business B is a manufacturer under the substantially test noted above, it is exempt from the BPOL tax to the extent that it is making wholesale sales of its product. The determinative questions are whether Business B's sales are retail or wholesale, and if the sales are wholesale, whether or not they are being made at the place of manufacture.
Affiliated Corporations
Code of Virginia § 58.1-3703(C)(10) provides an exemption from local license taxation for certain transactions between corporations which belong to an "affiliated group" of corporations. "Affiliated group" is defined in Code of Virginia § 58.1-3700.1. You have not provided me with sufficient information to determine whether or not this exemption is available to the Company.
I hope that this information is useful to you. Although I believe that this letter conforms with the requirements of the law, it is only written for your guidance. If you have any other questions, please do not hesitate to contact ********* at*****************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/21435H
Rulings of the Tax Commissioner