Tax Type
BPOL Tax
Local Taxes
Description
Manufacturing
Topic
Local Power to Tax
Date Issued
12-09-1999
December 9, 1999
Re: Request for Advisory Opinion Business, Professional and Occupational License (BPOL) Tax
Dear******:
This will respond to your letter requesting that the department reconsider its opinion in Public Document (P.D.) 97-427 (October 24, 1997). 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 is based on 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 materials for your review.
OVERVIEW
As the facts you present to the department differ significantly from the facts upon which the department based its opinion in P.D. 97-427, it would be inappropriate to reconsider P.D. 97-427. Accordingly, the following opinion is based solely on the facts which follow.
FACTS
This opinion addresses the local license taxation of ***** (the "Old Business') and ***** (the "New Business'). The Old Business dyed textiles and applied performance enhancing treatments to them at its plant in the ***** (the "City'). The New Business recently acquired the assets of the Old Business and has continued these activities.
The Old Business
The Old Business dyed textiles and applied performance enhancing treatments to them. Its customers owned the textiles and were charged for the processing.
In the first step of this process, the Old Business "pre-engineered' the textiles by developing manufacturing specifications which ensured that the textiles would be suitable for the process. These specifications were provided to the overseas manufacturers which produced the textiles for the customers of the Old Business. The textiles, or "prepared for dyeing' goods ("PFDs'), produced overseas were oversized, misproportioned, undyed and lacked performance enhancing treatments.
Once it received possession of the PFDs, the Old Business dyed them and added performance enhancing treatments for flame retardency, soil release, moisture control, ozone protection, ultraviolet protection and water repellency. The resulting products were specialty textiles which were properly sized, dyed and endowed with performance enhancing qualities.
At no time did the Old Business manufacture or own the PFDs or the original materials used to produce them. Nor did the Old Business own the PFDs, the work in progress or the finished products. The Old Business kept some PFDs, owned by its customers, on hand to meet customer demand and insured these PFDs against risk of loss while in its possession. However, the only inventory owned by the Old Business consisted of buttons, thread, snaps, zippers, and similar clothing accessories which were consumed or used on an as-needed basis for repairing or replacing accessories on PFDs that did not meet quality control standards.
The New Business
The New Business undertakes the "pre-engineering,' dyeing and performance enhancing processes previously undertaken by the Old Business. The New Business, however, may also own the PFDs.
You ask whether or not these businesses are exempt from license taxation under Code of Virginia § 58.1-3703(C)(4).
OPINION
Code of Virginia § 58.1-3703(C)(4) prohibits a Virginia locality from imposing a license fee or levying a license tax "[o]n a manufacturer for the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture.' In P.D. 99-14 (January 14, 1999), the department interpreted this statute to prohibit a locality from taxing a single business privilege, the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture. In order to determine whether or not a business is subject to license taxation, it must be determined: (1) whether or not the business engages in manufac- turing, and (2) whether or not it sells goods at wholesale at the place of manufacture.
Manufacturing
P.D. 99-14 reflects that manufacturing is determined using a three-element test. Manufacturing requires that: (1) an original material (2) be processed and (3) changed substantially into a product of a different character from the original material. In accordance with the public policy of Virginia to encourage manufacturing, a local assessing officer must liberally construe each element of this test when considering whether a particular business activity is manufacturing. See P.D. 98-154 (October 16, 1998).
It is not disputed that both the Old Business and the New Business meet the first two elements of the manufacturing test. It is the third element, whether or not the finished product is one which has been changed substantially into a product of a different character from the original material, which is in dispute.
In 1996, the Attorney General addressed the question of whether or not embroidering patterns and screen printing images on tee shirts constitutes manufacturing for purposes of the local tangible personal property tax. While emphasizing that it is the local assessing officer who must ultimately determine whether a business activity is manufacturing, the Attorney General opined that a local assessing officer may properly conclude that embroidering and screen printing images on pre-purchased tee shirts is manufacturing. 1996 Op. Va. Att'y Gen. 214.
While the present case involves different facts, the business activity of dyeing and enhancing textiles for flame retardency, soil release, moisture control, ozone protection, ultraviolet protection and water repellency is one which changes the original materials into a product of a different character as much as the business activity of embroidering and screen printing images on tee shirts. Accordingly, it is my opinion that the processes carried out by the Old Business and the New Business constitute manufacturing.
Sales of Goods, Wares and Merchandise at Wholesale
As it is the public policy of Virginia to encourage manufacturing, the words "selling goods, wares and merchandise at wholesale' must be liberally interpreted. Generally, a business engaged in manufacturing is not subject to local license taxation. There are exceptions, however, to this general rule. For example, in P.D. 97-146 (March 27, 1997), it was determined that manufacturers selling at retail are subject to license taxation. Also, in P.D. 99-14, it was determined that manufacturers which do not own original materials, work in progress or finished goods, and which only ship goods at the instruction of the title holder of the goods, do not sell goods at wholesale and are subject to license taxation. These exceptions exist because Code of Virginia § 58.1-3703(C)(4) only exempts a specific privilege undertaken by a manufacturer and does not provide a blanket exemption for manufacturers. See also P.D. 98-154.
Old Business
The facts regarding the Old Business are essentially the same as those addressed in P.D. 99-14. The Old Business did not own the original materials (i.e., raw materials or fibers used in making PFDs), work in progress (i.e., the PFDs) or the finished goods. At most, the only goods sold by the Old Business were buttons, thread, snaps, zippers, and similar clothing accessories used to repair or replace defective parts on PFDs. Even under the most liberal interpretation of Code of Virginia § 58.1-3703(C)(4), it cannot be concluded that the Old Business sold goods, wares and merchandise. Accordingly, it is my opinion that the Old Business was not exempt from local license taxation under Code of Virginia § 58.1 -3703(C)(4).
New Business
It is anticipated that the New Business will own the PFDs. The City should review the activities of the New Business to determine whether or not one legal entity will both own the PFDs and perform the manufacturing functions previously performed by the Old Business. It is my opinion that the New Business is exempt from license taxation under Code of Virginia § 58.1-3703(C)(4) to the extent that it is selling goods owned by it at wholesale from the place of manufacture which have been subject to the manufacturing process described above. To the extent, however, that the New Business is engaged in other licensed activities, it is not exempt from license taxation under Code of Virginia § 58.1-3703(C)(4).
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 at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP16998D
Re: Request for Advisory Opinion Business, Professional and Occupational License (BPOL) Tax
Dear******:
This will respond to your letter requesting that the department reconsider its opinion in Public Document (P.D.) 97-427 (October 24, 1997). 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 is based on 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 materials for your review.
OVERVIEW
As the facts you present to the department differ significantly from the facts upon which the department based its opinion in P.D. 97-427, it would be inappropriate to reconsider P.D. 97-427. Accordingly, the following opinion is based solely on the facts which follow.
FACTS
This opinion addresses the local license taxation of ***** (the "Old Business') and ***** (the "New Business'). The Old Business dyed textiles and applied performance enhancing treatments to them at its plant in the ***** (the "City'). The New Business recently acquired the assets of the Old Business and has continued these activities.
The Old Business
The Old Business dyed textiles and applied performance enhancing treatments to them. Its customers owned the textiles and were charged for the processing.
In the first step of this process, the Old Business "pre-engineered' the textiles by developing manufacturing specifications which ensured that the textiles would be suitable for the process. These specifications were provided to the overseas manufacturers which produced the textiles for the customers of the Old Business. The textiles, or "prepared for dyeing' goods ("PFDs'), produced overseas were oversized, misproportioned, undyed and lacked performance enhancing treatments.
Once it received possession of the PFDs, the Old Business dyed them and added performance enhancing treatments for flame retardency, soil release, moisture control, ozone protection, ultraviolet protection and water repellency. The resulting products were specialty textiles which were properly sized, dyed and endowed with performance enhancing qualities.
At no time did the Old Business manufacture or own the PFDs or the original materials used to produce them. Nor did the Old Business own the PFDs, the work in progress or the finished products. The Old Business kept some PFDs, owned by its customers, on hand to meet customer demand and insured these PFDs against risk of loss while in its possession. However, the only inventory owned by the Old Business consisted of buttons, thread, snaps, zippers, and similar clothing accessories which were consumed or used on an as-needed basis for repairing or replacing accessories on PFDs that did not meet quality control standards.
The New Business
The New Business undertakes the "pre-engineering,' dyeing and performance enhancing processes previously undertaken by the Old Business. The New Business, however, may also own the PFDs.
You ask whether or not these businesses are exempt from license taxation under Code of Virginia § 58.1-3703(C)(4).
OPINION
Code of Virginia § 58.1-3703(C)(4) prohibits a Virginia locality from imposing a license fee or levying a license tax "[o]n a manufacturer for the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture.' In P.D. 99-14 (January 14, 1999), the department interpreted this statute to prohibit a locality from taxing a single business privilege, the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture. In order to determine whether or not a business is subject to license taxation, it must be determined: (1) whether or not the business engages in manufac- turing, and (2) whether or not it sells goods at wholesale at the place of manufacture.
Manufacturing
P.D. 99-14 reflects that manufacturing is determined using a three-element test. Manufacturing requires that: (1) an original material (2) be processed and (3) changed substantially into a product of a different character from the original material. In accordance with the public policy of Virginia to encourage manufacturing, a local assessing officer must liberally construe each element of this test when considering whether a particular business activity is manufacturing. See P.D. 98-154 (October 16, 1998).
It is not disputed that both the Old Business and the New Business meet the first two elements of the manufacturing test. It is the third element, whether or not the finished product is one which has been changed substantially into a product of a different character from the original material, which is in dispute.
In 1996, the Attorney General addressed the question of whether or not embroidering patterns and screen printing images on tee shirts constitutes manufacturing for purposes of the local tangible personal property tax. While emphasizing that it is the local assessing officer who must ultimately determine whether a business activity is manufacturing, the Attorney General opined that a local assessing officer may properly conclude that embroidering and screen printing images on pre-purchased tee shirts is manufacturing. 1996 Op. Va. Att'y Gen. 214.
While the present case involves different facts, the business activity of dyeing and enhancing textiles for flame retardency, soil release, moisture control, ozone protection, ultraviolet protection and water repellency is one which changes the original materials into a product of a different character as much as the business activity of embroidering and screen printing images on tee shirts. Accordingly, it is my opinion that the processes carried out by the Old Business and the New Business constitute manufacturing.
Sales of Goods, Wares and Merchandise at Wholesale
As it is the public policy of Virginia to encourage manufacturing, the words "selling goods, wares and merchandise at wholesale' must be liberally interpreted. Generally, a business engaged in manufacturing is not subject to local license taxation. There are exceptions, however, to this general rule. For example, in P.D. 97-146 (March 27, 1997), it was determined that manufacturers selling at retail are subject to license taxation. Also, in P.D. 99-14, it was determined that manufacturers which do not own original materials, work in progress or finished goods, and which only ship goods at the instruction of the title holder of the goods, do not sell goods at wholesale and are subject to license taxation. These exceptions exist because Code of Virginia § 58.1-3703(C)(4) only exempts a specific privilege undertaken by a manufacturer and does not provide a blanket exemption for manufacturers. See also P.D. 98-154.
Old Business
The facts regarding the Old Business are essentially the same as those addressed in P.D. 99-14. The Old Business did not own the original materials (i.e., raw materials or fibers used in making PFDs), work in progress (i.e., the PFDs) or the finished goods. At most, the only goods sold by the Old Business were buttons, thread, snaps, zippers, and similar clothing accessories used to repair or replace defective parts on PFDs. Even under the most liberal interpretation of Code of Virginia § 58.1-3703(C)(4), it cannot be concluded that the Old Business sold goods, wares and merchandise. Accordingly, it is my opinion that the Old Business was not exempt from local license taxation under Code of Virginia § 58.1 -3703(C)(4).
New Business
It is anticipated that the New Business will own the PFDs. The City should review the activities of the New Business to determine whether or not one legal entity will both own the PFDs and perform the manufacturing functions previously performed by the Old Business. It is my opinion that the New Business is exempt from license taxation under Code of Virginia § 58.1-3703(C)(4) to the extent that it is selling goods owned by it at wholesale from the place of manufacture which have been subject to the manufacturing process described above. To the extent, however, that the New Business is engaged in other licensed activities, it is not exempt from license taxation under Code of Virginia § 58.1-3703(C)(4).
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 at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP16998D
Rulings of the Tax Commissioner