Document Number
04-183
Tax Type
BPOL Tax
Description
Selling computer hardware and software
Topic
Local Taxes Discussion
Date Issued
10-08-2004


October 8, 2004


Re: Final Local Determination
Taxpayer: *****
Locality: *****
Business, Professional and Occupational License (BPOL) tax

Dear *******************:

This final state determination is issued upon the application for correction filed by you on behalf of ***** (the "Taxpayer"), with the Department of Taxation. You appeal a final local determination upholding an audit assessment of BPOL taxes made by the Commissioner of the Revenue of the ***** for tax years 2000, 2001 and 2002.

The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.
FACTS

The Taxpayer is engaged in the business of selling computer hardware and software to governmental and nongovernmental entities. It has a storefront location in the City through which it sells its products. The Taxpayer has been an authorized vendor to the federal government since 1989. The blanket purchase agreement (BPA) the Taxpayer has with the ***** (the "Agency") authorizes the Taxpayer to accept orders from specified unit personnel by telephone or fax machine. The agreement contains pricing and purchase limitations.

Historically, the Taxpayer held both a wholesale and a retail business license issued by the City. After completion of an audit in 2000, the City reclassified all of the Taxpayer's sales as sales at retail. The Taxpayer disputes this reclassification, contending that the correct classification of its business for purposes of the BPOL tax should be a dual classification as a wholesaler and as a retailer.

The Taxpayer also contends for the first time on appeal that the deduction in Va. Code § 58.1-3732 B 1 for sales of computer hardware and software to government agencies applies to its business.
ANALYSIS

Wholesale Sales

For purposes of business license taxation, the 2000 BPOL Guidelines define wholesalers as taxpayers who are engaged in "the business of selling goods to a government, institutional, business, or industrial entity for consumption, use or incorporation in an assembly, manufacturing or processing operation." [Emphasis added.] The Guidelines further amplify the description of a wholesale sale, noting the importance of both price and quantity in determining whether a sale is made at wholesale. See 2000 BPOL Guidelines § 5.3.

The importance of price and quantity in the determination of a taxpayer's classification for the purposes of the BPOL tax is discussed in Public Document (P.D.) 98-160 (10/20/98):
    • Factors used to discern the difference between retail and wholesale sales 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. [Dickerson G.M.C., Inc. v. Commonwealth, 206 Va. 339, 343, 143 S.E.2d 863, 866 (1965)]; Department of Tax'n, Ltr. Op. (Feb. 21, 1991).

A review of a sample of the orders placed by the Agency under the provisions of the BPA indicates that the orders are in quantity, and they are priced below the retail selling price. The Taxpayer's records demonstrate that for sales tax purposes, the Taxpayer's sales to governmental entities comprised 65%, 59.7% and 61.3% of its total sales in tax years 2000, 2001 and 2002, respectively.

In this case, the Taxpayer has supplied evidence on appeal that justifies its claims that it sells significant portions of its goods at wholesale to governmental institutions for their use. Furthermore, these sales meet both the "quantity" and "price" criteria often used in determining a taxpayer's classification as a wholesaler for purposes of the BPOL tax.

As a "storefront" business, however, the Taxpayer also engages in a significant amount of retail trade. As a wholesaler and a retailer, the Taxpayer is required to purchase a separate license for each business unless it elects to obtain one license for both businesses (wholesale sales and retail sales). See Va. Code § 58.1-3703.1 A 1. If the Taxpayer were to choose the option of being taxed on all of its businesses at a single rate, it would be taxed at the highest applicable rate.

Deduction for Sales of Computer Hardware and Software to Governmental Entities

The Taxpayer asks the Department to review its sales of computer hardware and software to determine if such sales qualify for the deduction provided for in Va. Code § 58.1-3732 B 1. This section provides a deduction from taxable gross receipts for:
    • Any amount paid for computer hardware and software that are sold to a United States federal or state government entity provided that such property was purchased within two years of the sale to said entity by the original purchaser who shall have been contractually obligated at the time of purchase to resell such property to a state or federal government entity. This deduction shall not occur until the time of resale and shall apply to only the original cost of the property and not to its resale price, and the deduction shall not apply to any of the tangible personal property which was the subject of the original resale contract if it is not resold to a state or federal government entity in accordance with the original contract obligation. [Emphasis added.]

In order to qualify for the deduction provided for in Va. Code § 58.1-3732 B 1, the Taxpayer must provide the local commissioner of the revenue with evidence to substantiate that it indeed is entitled to take the deduction. Guidelines for substantiating qualifications for the deduction were established in P.D. 04-20 (6/2/04):
    • 1. The Taxpayer must produce records indicating that the hardware or software was purchased within two years of its sale to the federal or municipal government.
    • 2. The deduction may only be taken for the original cost of the equipment, not its resale price.
    • 3. Because the deduction may only be applied to the tax year in which the equipment was sold to the governmental entity, the timing of any sales needs to be substantiated.

Each case is fact specific, and the question whether the Taxpayer qualifies for the deduction provided for in Va. Code § 58.1-3732 B 1 is a question that must first be addressed by the local assessing official. See 1994 Report of the Attorney General, 99, 104 (10/28/94 ).

DETERMINATION


From the evidence presented, I find that, for purposes of BPOL taxation, the Taxpayer is engaged in two separate businesses, as a wholesaler and a retailer. As such, at the election of the Taxpayer to be issued two licenses, the City must assess the Taxpayer based on the gross receipts attributed to each business classification and adjust its assessment for the tax years in dispute accordingly.

The question raised by the Taxpayer regarding the applicability of the deduction in Va. Code § 58.1-3732 B 1 to its business must be returned to the City for consideration. It is incumbent upon the Taxpayer to supply the relevant information to the City, in accordance with the guidelines established in P.D. 04-20.

If you have any questions regarding this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
                    • Sincerely,


                    • Kenneth W. Thorson
                      Tax Commissioner


AR/50293H


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46