Tax Type
BPOL Tax
Local Taxes
Description
Application of BPOL Tax to Manufacturers
Topic
Local Power to Tax
Local Taxes Discussion
Date Issued
11-18-1999
November 18, 1999Re: 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 applicability of the local license (BPOL) tax to certain manufacturers. I apologize for the delay in our response.
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, 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 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.
You state that the Business is engaged in the business of manufacturing raw ingredients used in the processing of pharmaceutical products in the ****** (the "City"). The products are used by other companies in the processing of finished brand name pharmaceutical products. The Business is considering relocating some of its business functions away from the place of manufacture.
The Business is contemplating using a separate office building within the City to house part or all of its finance, transportation coordination, information technology, and customer service functions. The transportation coordination function would include the coordination of the shipment of raw materials to the manufacturing plant and the delivery and pickup of the finished product from warehouses on premises.
The customer service department possibly would be located at the new office building as well. The customer service department would be responsible for taking follow-up orders based on existing contracts previously negotiated, answering routine questions regarding delivery and shipments, and forwarding other inquiries to the appropriate officers and technically-trained service staff. You state that customer service employees are not and will not be trained on the characteristics, use, and other attributes of the products made by the Business, nor do they negotiate or establish pricing terms or approve orders. In summary, customer service representatives take orders from the Business' customers on their existing contracts and enter such orders into a computer system to facilitate delivery of the Business' products.
You state that sales would be initiated by technically-trained sales representatives who make sales throughout the world, but whose only definite place of business is at the place of manufacture in the City. You also state that the negotiation and approval of all product sales occurs by more senior management level employees who are all located at the manufacturing facility, coupled with the use of sales representatives. The terms of the contract and agreed upon prices/delivery dates would be entered into a computer system at the place of manufacture. This information would be available to all salespersons and customer service personnel.
You also ask if the Business could be subject to BPOL tax liability as a result of its moving the business functions discussed above to a location different from that of its place of manufacture. Finally, you ask if storage of a portion of the Business' finished goods at a location away from the place of manufacture would prohibit the Business, as a manufacturer, from qualifying for the exemption available pursuant to Code of Virginia § 58.1-3703(C)(4).
Certain Manufacturers Exempt from Local License Taxes
Under Code of Virginia § 58.1-3703(C)(4) manufacturers who engage in the "privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture" are exempt from BPOL fees and taxes. The department has previously opined that a business must engage in both manufacturing and selling its manufactured goods to benefit under this section (in this opinion, the department clarified what the term "selling" means under § 58.1-3703(C)(4)). See Public Document ("P.D.") 99-14 (January 19, 1999).
You represent that the taxpayer is a manufacturer. As a result, l will assume, but not conclude, for purposes of the remainder of this opinion that the Business is a manufacturer currently selling its manufactured goods at wholesale. The question therefore is whether or not a manufacturer who makes wholesale sales of its manufactured goods loses its exemption under § 58.1-3703(C)(4) when it moves certain business functions away from the place of manufacture.
Selling Functions at the Place of Manufacture
The facts presented to the department indicate that the Business' sales representatives do not maintain a definite place of business apart from the place of manufacture. These representatives make sales by traveling across the country and elsewhere promoting the Business' product. Additionally, you state that the negotiation and approval of all product sales ultimately occurs at the place of manufacture by senior management. Under these facts, it is evident that even if some business functions are moved away from the place of manufacture, all or most of the selling activities and selling functions (i.e., above a de minimis level) will still take place at the place of manufacture. As a result, under these facts, it is my opinion that the Business would still be manufacturing and selling its manufactured goods at wholesale at the place of manufacture. Thus, the City would be prohibited from assessing local license taxes and fees for the selling activities being undertaken by this Business at its place of manufacture.
Perhaps the department would reach a different result if the customer service department engaged in sales solicitation activities. However, you represent that sales solicitations only occur at one definite place of business, the place of manufacture. Moreover, the customer service department only works to support or fill existing contracts, as opposed to soliciting new contracts. This point is emphasized by your stipulation that customer service department personnel are not trained or knowledgeable about the Business' products to allow them to negotiate or participate in the solicitation of new sales.
Business Functions Performed at New Office Building
In P.D. 99-92 (April 30, 1999), the department addressed the applicability of Code of Virginia § 58.1-3703(C)(5), which closely parallels the conditions and limitations of § 58.13703(C)(4). Section 58.1-3703(C)(5) prohibits a Virginia locality from assessing local license taxes and fees "[o]n a person engaged in the business of severing minerals from the earth for the privilege of selling the severed mineral at wholesale at the place of severance...." In this opinion, the department answered the question of how, or if, this limitation in assessing tax at the place of severance limits or restricts a locality's ability to assess local license taxes and fees at a taxpayer's place of business other than the place of severance, i.e., at a separate definite place of business other than the place of severance. P.D. 99-92 provides guidance in answering the quest ion of the local license tax liability of a business away from its place of manufacture.
In P.D. 99-92, the department found that "[a]n activity which is ancillary or subordinate or auxiliary to a licensable business must be treated for BPOL tax purposes as part of the primary licensable business." The department recognized that certain internal functions which are not being performed for persons other than the taxpayer are ancillary or auxiliary to the taxpayer's primary licensable business.
In this case, it must first be determined whether the functions to be moved away from the Business' place of manufacture are ancillary or auxiliary to the Business' manufacturing operations, or are independent so as to arise to a separate licensable business. The Business is planning to move its finance, transportation coordination, information technology, and customer service functions to a separate office building within the City. These functions, as described above, are being performed in support of the Business' manufacturing operations. As such, these functions do not arise to a separate licensable business. Rather, they are an extension of the Business' manufacturing operations.
Applicability of BPOL Taxes and Fees to the New Office Building
As the finance, transportation coordination, information technology, and customer service functions are ancillary to the Business' manufacturing operations, the Business' manufacturing activities or functions will take place at the Business' manufacturing plant and at the contemplated new office building within the same jurisdiction. Because Code of Virginia § 58.1-3703(C)(4) only prohibits the imposition of a BPOL tax or fee on wholesale sales at the place of manufacture, this raises a question as to the Business' liability for its functions that take place away from the manufacturing plant.
Generally speaking, there should be no gross receipts attributable to or generated by this Business' finance, transportation coordination, information technology, and customer service functions. This is because these functions are being offered only to the Business and not to the public at large. Additionally, the Business does not charge its customers for any direct fees relating to the performance of these functions. Moreover, a merchant selling its goods generally will have its gross receipts attributed or sourced based on the definite place(s) of business where its sales solicitations occur (retailers) or the definite place(s) of business at which or from which deliveries of its goods are made to customers (wholesalers). Code of Virginia § 58.1 -3703.1(A)(3). As discussed above and under the facts presented, the Business will not engage in sales solicitations at its new office building and will not deliver goods from that location. As a result, it is my opinion that the City may not levy a license tax or fee on the Business for the finance, transportation coordination, information technology, and customer service functions described above that it may perform at a location apart from its place of manufacture, as long as they are within the same taxing jurisdiction.
Storage of Finished Manufactured Goods at a Separate Warehouse Away from the Place of Manufacture.
Section 58.1-3703(C)(4) of the Code of Virginia exempts manufacturers "for the privilege of manufacturing and goods wares and merchandise at wholesale at the place of manufacture" from BPOL fees and taxes. This exemption is further clarified in the BPOL Guidelines § 7.3, which state:
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
Business, Professional and Occupational License (BPOL) Tax
Dear ***
This is in response to your letter requesting an advisory opinion on the applicability of the local license (BPOL) tax to certain manufacturers. I apologize for the delay in our response.
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, 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 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.
FACTS
You state that the Business is engaged in the business of manufacturing raw ingredients used in the processing of pharmaceutical products in the ****** (the "City"). The products are used by other companies in the processing of finished brand name pharmaceutical products. The Business is considering relocating some of its business functions away from the place of manufacture.
The Business is contemplating using a separate office building within the City to house part or all of its finance, transportation coordination, information technology, and customer service functions. The transportation coordination function would include the coordination of the shipment of raw materials to the manufacturing plant and the delivery and pickup of the finished product from warehouses on premises.
The customer service department possibly would be located at the new office building as well. The customer service department would be responsible for taking follow-up orders based on existing contracts previously negotiated, answering routine questions regarding delivery and shipments, and forwarding other inquiries to the appropriate officers and technically-trained service staff. You state that customer service employees are not and will not be trained on the characteristics, use, and other attributes of the products made by the Business, nor do they negotiate or establish pricing terms or approve orders. In summary, customer service representatives take orders from the Business' customers on their existing contracts and enter such orders into a computer system to facilitate delivery of the Business' products.
You state that sales would be initiated by technically-trained sales representatives who make sales throughout the world, but whose only definite place of business is at the place of manufacture in the City. You also state that the negotiation and approval of all product sales occurs by more senior management level employees who are all located at the manufacturing facility, coupled with the use of sales representatives. The terms of the contract and agreed upon prices/delivery dates would be entered into a computer system at the place of manufacture. This information would be available to all salespersons and customer service personnel.
You also ask if the Business could be subject to BPOL tax liability as a result of its moving the business functions discussed above to a location different from that of its place of manufacture. Finally, you ask if storage of a portion of the Business' finished goods at a location away from the place of manufacture would prohibit the Business, as a manufacturer, from qualifying for the exemption available pursuant to Code of Virginia § 58.1-3703(C)(4).
OPINION
Certain Manufacturers Exempt from Local License Taxes
Under Code of Virginia § 58.1-3703(C)(4) manufacturers who engage in the "privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture" are exempt from BPOL fees and taxes. The department has previously opined that a business must engage in both manufacturing and selling its manufactured goods to benefit under this section (in this opinion, the department clarified what the term "selling" means under § 58.1-3703(C)(4)). See Public Document ("P.D.") 99-14 (January 19, 1999).
You represent that the taxpayer is a manufacturer. As a result, l will assume, but not conclude, for purposes of the remainder of this opinion that the Business is a manufacturer currently selling its manufactured goods at wholesale. The question therefore is whether or not a manufacturer who makes wholesale sales of its manufactured goods loses its exemption under § 58.1-3703(C)(4) when it moves certain business functions away from the place of manufacture.
Selling Functions at the Place of Manufacture
The facts presented to the department indicate that the Business' sales representatives do not maintain a definite place of business apart from the place of manufacture. These representatives make sales by traveling across the country and elsewhere promoting the Business' product. Additionally, you state that the negotiation and approval of all product sales ultimately occurs at the place of manufacture by senior management. Under these facts, it is evident that even if some business functions are moved away from the place of manufacture, all or most of the selling activities and selling functions (i.e., above a de minimis level) will still take place at the place of manufacture. As a result, under these facts, it is my opinion that the Business would still be manufacturing and selling its manufactured goods at wholesale at the place of manufacture. Thus, the City would be prohibited from assessing local license taxes and fees for the selling activities being undertaken by this Business at its place of manufacture.
Perhaps the department would reach a different result if the customer service department engaged in sales solicitation activities. However, you represent that sales solicitations only occur at one definite place of business, the place of manufacture. Moreover, the customer service department only works to support or fill existing contracts, as opposed to soliciting new contracts. This point is emphasized by your stipulation that customer service department personnel are not trained or knowledgeable about the Business' products to allow them to negotiate or participate in the solicitation of new sales.
Business Functions Performed at New Office Building
In P.D. 99-92 (April 30, 1999), the department addressed the applicability of Code of Virginia § 58.1-3703(C)(5), which closely parallels the conditions and limitations of § 58.13703(C)(4). Section 58.1-3703(C)(5) prohibits a Virginia locality from assessing local license taxes and fees "[o]n a person engaged in the business of severing minerals from the earth for the privilege of selling the severed mineral at wholesale at the place of severance...." In this opinion, the department answered the question of how, or if, this limitation in assessing tax at the place of severance limits or restricts a locality's ability to assess local license taxes and fees at a taxpayer's place of business other than the place of severance, i.e., at a separate definite place of business other than the place of severance. P.D. 99-92 provides guidance in answering the quest ion of the local license tax liability of a business away from its place of manufacture.
In P.D. 99-92, the department found that "[a]n activity which is ancillary or subordinate or auxiliary to a licensable business must be treated for BPOL tax purposes as part of the primary licensable business." The department recognized that certain internal functions which are not being performed for persons other than the taxpayer are ancillary or auxiliary to the taxpayer's primary licensable business.
In this case, it must first be determined whether the functions to be moved away from the Business' place of manufacture are ancillary or auxiliary to the Business' manufacturing operations, or are independent so as to arise to a separate licensable business. The Business is planning to move its finance, transportation coordination, information technology, and customer service functions to a separate office building within the City. These functions, as described above, are being performed in support of the Business' manufacturing operations. As such, these functions do not arise to a separate licensable business. Rather, they are an extension of the Business' manufacturing operations.
Applicability of BPOL Taxes and Fees to the New Office Building
As the finance, transportation coordination, information technology, and customer service functions are ancillary to the Business' manufacturing operations, the Business' manufacturing activities or functions will take place at the Business' manufacturing plant and at the contemplated new office building within the same jurisdiction. Because Code of Virginia § 58.1-3703(C)(4) only prohibits the imposition of a BPOL tax or fee on wholesale sales at the place of manufacture, this raises a question as to the Business' liability for its functions that take place away from the manufacturing plant.
Generally speaking, there should be no gross receipts attributable to or generated by this Business' finance, transportation coordination, information technology, and customer service functions. This is because these functions are being offered only to the Business and not to the public at large. Additionally, the Business does not charge its customers for any direct fees relating to the performance of these functions. Moreover, a merchant selling its goods generally will have its gross receipts attributed or sourced based on the definite place(s) of business where its sales solicitations occur (retailers) or the definite place(s) of business at which or from which deliveries of its goods are made to customers (wholesalers). Code of Virginia § 58.1 -3703.1(A)(3). As discussed above and under the facts presented, the Business will not engage in sales solicitations at its new office building and will not deliver goods from that location. As a result, it is my opinion that the City may not levy a license tax or fee on the Business for the finance, transportation coordination, information technology, and customer service functions described above that it may perform at a location apart from its place of manufacture, as long as they are within the same taxing jurisdiction.
Storage of Finished Manufactured Goods at a Separate Warehouse Away from the Place of Manufacture.
Section 58.1-3703(C)(4) of the Code of Virginia exempts manufacturers "for the privilege of manufacturing and goods wares and merchandise at wholesale at the place of manufacture" from BPOL fees and taxes. This exemption is further clarified in the BPOL Guidelines § 7.3, which state:
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Assuming the warehouse is a storage facility which conducts no other business functions, its existence in another jurisdiction does not provide this other jurisdiction with grounds to levy a license tax on the facility. Mere storage of completed goods is ancillary to manufacturing regardless of where the storage takes place.
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
Rulings of the Tax Commissioner