Sales and Use Tax - Retail Sales, Situs of Sales
September 26, 2018
Re: Request for Advisory Opinion
Business, Professional and Occupational License Tax
Request for Ruling
Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request an advisory opinion on behalf of certain subsidiaries of your client, ***** collectively (the “Taxpayers”), regarding the situs of their gross receipts for purposes of the Business, Professional and Occupational License (BPOL) tax. In addition, the Taxpayers seek a ruling regarding the proper situs of sales for Virginia retail sales and use tax purposes.
The local license fee and tax are imposed and administered by local officials. Virginia Code § 58.1-3701 authorizes the Department to issue advisory opinions on local license tax issues. The following BPOL opinion and sales and use tax ruling are made subject to the facts presented to the Department as summarized below. Any change in these facts or the introduction of new facts may lead to a different result.
FACTS
The Taxpayers produce ready-mix concrete at different plants located in Virginia. The Taxpayers have instituted a shared services process for responding to customer orders. Customers who wish to place an order call a local telephone number that is automatically routed to the shared call center (the “Center”) for that geographic region. The Center then forwards the information to the appropriate local plant where the order is fulfilled. At the plant, the ingredients for the concrete are placed in a mixing truck and mixing begins. Mixing continues until the product is delivered to the job site.
Although the ordering process is handled through the Center, any issues related to a specific order are handled by a local or regional manager of the local office that filled the order. The Taxpayers request an opinion concerning where the Taxpayers’ gross receipts should be sitused for BPOL tax purposes and a ruling regarding where sales should be sitused for sales and use tax purposes.
BPOL OPINION
Manufacturing
Virginia localities are prohibited from imposing a license fee or tax on a manufacturer for the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture. See Virginia Code § 58.1-3703 C 4.
The BPOL statutes do not define the term “manufacturer” for purposes of the local business license tax. However, the Supreme Court of Virginia (the “Court”) 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. See Title 23 of the Virginia Administrative Code (VAC) 10-500-520 B and County of Chesterfield v. BBC Brown Boveri, 238 Va. 64, 380 S.E.2d 890 (1989). As such, for BPOL tax 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.
The Attorney General of Virginia has opined that the production of ready-mix concrete is a manufacturing process for purposes of the BPOL tax. See 1975-1976 Op. Att’y Gen. Va. 363. In addition, a manufacturer’s place of manufacture is the site where raw materials are subjected to the process that changes the raw materials into the new product. The ingredients that comprise the ready-mix concrete are mixed together in a truck at the Taxpayers’ local plants. Thus, the plants would be the places of manufacture. The mixture of the product in transit is an ancillary activity. See Public Document (P.D.) 97-146 (3/27/1997). Ancillary activities are part of the manufacturing function, but do not rise to the level of becoming a separate business activity. For purposes of the BPOL tax, therefore, the Taxpayers are manufacturers operating from plants located in Virginia. The next question is whether the Taxpayers are making wholesale or retail sales, or some combination of both.
Classification
The BPOL tax is imposed on businesses and professionals for the privilege of doing business in a locality. The tax is imposed at different rates according to the classification of an enterprise. See Virginia Code § 58.1-3706 A. These classifications are regulated under Title 23 VAC 10-500-10 et seq. Classification of a specific business must be determined based on consideration of all the facts and circumstances. Some of the factors to be considered include:
- What is the nature of the enterprise’s business?
- How does the enterprise generate gross receipts?
- Where does the enterprise conduct its business?
- Who are the enterprise’s customers?
- How does the enterprise hold itself out to the public?
- What is the enterprise’s North American Industry Classification System NAICS) code?
Factors used to discern the difference between a retail and wholesale sale are the characteristics of the purchaser and the purchaser’s use of the merchandise and, to a lesser degree, the price and quantity of the product sold. See Dickerson G.M.C., Inc. v. Commonwealth, 206 Va. 339, 342, 143 S.E.2d 863, 865 (1965); Department of Tax’n, Ltr. Op. (Feb. 21, 1991); P.D. 98-160 (10/20/1998). Since this determination is based on the facts and circumstances surrounding a sale, price and quantity, by themselves, are not determinative of whether a sale is made at wholesale. See P.D. 98-160.
Under the first two factors, the characteristic of the purchaser and the purchaser’s use of the merchandise may be closely related elements. In the basic definition of BPOL tax, the ultimate user of a product is usually one who buys at retail, while a purchaser who buys to resell a product is always a wholesaler. Title 23 VAC 10-500-350 B. The additional factor of character or type of purchaser comes into play for BPOL tax purposes.
It appears that some, if not most, of the Taxpayers’ sales are made to government, industrial or commercial customers. Such sales are likely wholesale, even if made to commercial customers, such as contractors, working on residential projects. For a further discussion of this issue, see P.D. 15-145 (6/30/2015) and P.D. 15-159 (8/13/2015). To the extent wholesale sales are made from the place of manufacture, they would be exempt. Any retail sales, however, would not be exempt. See P.D. 97-146.
Wholesale Sales
As long as a manufacturer’s wholesale function is ancillary to the manufacturing function, it does not rise to the level of becoming a separate business activity and the manufacturer is not subject to BPOL tax as a wholesaler. See Title 23 VAC 10-500-360. The regulation specifically addresses a scenario in which manufactured goods are distributed from the place of manufacture but the sales function is performed in different jurisdictions. The regulation states:
Even though in this case sales activity is taking place in other jurisdictions, the activity does not rise to the level of a separate wholesale business because the goods to be sold remain at the place of manufacture. All sales activity is directed towards delivery of the goods from the place of manufacture to the customer and thus within the statutory exemption for manufacturing.
See Title 23 VAC 10-500-360 A 2. Similarly, the Department has found that if a manufacturer has sales representatives who conduct sales activity away from the place of manufacture, and it ships goods pursuant to orders filled by such sales persons, the sales activity does not rise to the level of a separate wholesale business because the sales activity is directed toward the delivery of goods from the place of manufacture. See P.D. 97-183 (4/16/1997). To the extent the Taxpayers are making wholesale sales through its Center representatives, gross receipts derived from such sales would be exempt from BPOL tax.
Retail Sales
As stated above, the Taxpayers are not exempt from BPOL tax to the extent they make retail sales. The gross receipts of a retailer are attributed to the definite place of business at which sales solicitation activities occur, or if sales solicitation activities do not occur at any definite place of business, then to the definite place of business from which sales solicitation activities are directed or controlled. See Virginia Code § 58.1-3703.1 A 3 a 2.
Sales solicitation is the act or acts directly related to selling particular items or goods to a particular person. Sales solicitation, however, does not include nonsolicitation activities prior or subsequent to sales solicitation activities. See Title 23 VAC 10-500-10. Taking customer orders is considered a sales solicitation activity. See P.D. 97-317 (7/30/1997).
Because customer orders are taken at the Center, sales solicitation activities are occurring there, at least to some extent. It is unclear, however, whether any sales solicitation activities also occur at the plants or elsewhere. While it is likely that any retail sales would be sitused to the Center because sales solicitation activities are occurring there, the location where sales solicitation activities are occurring is ultimately a question of fact. The Taxpayers should examine all of the activities to determine where sales solicitation activities take place.
SALES AND USE TAX RULING
The Taxpayers maintain that the situs for sales of ready-mix concrete should be the location where delivery of the concrete occurs. To support this contention, the Taxpayers cite several public documents issued by the Department that discuss the application of the tax to the sale and delivery of ready-mix concrete.
The Taxpayers state that the manufacture or processing of ready-mix concrete continues during delivery and that the product is not ready for sale until it reaches its delivery destination. For this reason, the Taxpayers state that sales of ready-mix concrete should be sitused to the location where delivery occurs.
Title 23 of the Virginia Administrative Code (VAC) 10-210-2070 addresses situs of sale for purposes of sourcing the retail sales and use tax. Subsection B of this regulation states, in part, that:
Sales by dealers located in Virginia are generally subject to the sales tax and sourced to the city or county of the place of business of the dealer collecting the tax, without regard to the city or county of possible use by the purchaser …. [t]he remote sale (by telephone, Internet, or mail order) of tangible personal property from an in-state dealer with a place of business in Virginia is sourced to the location in which the order was first taken, even if the goods are ultimately delivered to the purchaser at another location.
A “place of business” is defined in Title 23 VAC 10-210-2070 A, in part, as “the business location in Virginia that first takes the purchaser’s order, whether in person, by purchase order, or by letter or telephone, regardless of the location of the merchandise or the point of acceptance of the order or shipment.”
In a meeting with members of my staff, the Taxpayers indicated that the Center is located in Virginia. Based on the information presented, the Center is the location that first takes customer orders. As such, the situs of the Taxpayers’ sales is the location of the Center. Title 23 VAC 10-210-2070 clearly establishes that Virginia sellers do not source the retail sales tax to the location in which delivery or use of the property sold occurs.
The public documents relied on by the Taxpayers discuss the manufacture of concrete during delivery and how this activity affects the application of the sales tax to charges for services in connection with sales of concrete, such as delivery, holding, short load and fuel surcharges. The documents cited, i.e., Public Documents (P.D.) 82-65 (5/13/82), 90-104 (7/3/90) and 13-100 (6/11/13), do not address situs of sales issues for sales of ready-mix concrete. Title 23 VAC 10-210-2070 sets out the proper policy and should be relied on by the Taxpayers for determining the situs of sales of ready-mix concrete.
The Taxpayers should note that the Department recently issued P.D. 18-3 (1/5/18), which discusses call centers and situs of sales. P.D. 18-3 addresses a call center operated in Virginia by a third party entity that is not related to the seller, also located in Virginia. Because the entity operating the call center is not related to the seller, the situs of the sales is the seller’s location that first receives the sales order from the unrelated call center. In cases where a call center, related or unrelated to the seller, is located outside the state of Virginia, sales orders taken by the call center for Virginia customers are sourced to the location where delivery of the product takes place. This policy is consistent with the out-of-state dealer provisions of Title 23 VAC 10-210-2070.
The Code of Virginia sections, regulations and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.
If you have any questions regarding the BPOL portion of this ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****. For any questions regarding the retail sales and use tax issue addressed herein, please contact ***** in the same office at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1235.MS