09-94 | Virginia Tax

Tax Type

BPOL Tax

BTPP Tax

Description

Taxpayer produces both framed and unframed colored prints and paintings

Topic

Manufacturing

Property Subject to Tax

Tangible Personal Property

Date Issued

06-11-2009

June 11, 2009

Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business Professional and Occupational License (BPOL) Tax
Business Tangible Personal Property (BTPP) Tax

Dear *****:

This final state determination is issued upon the application for correction filed by you on behalf of your client, ***** (the "Taxpayer") with the Department of Taxation. You appeal a final local determination upholding a BPOL tax assessment and a BTPP tax assessment for tax years 2005 and 2006, issued by the ***** (the "County"). I apologize for the delay in the Department's response.

The local license tax and fee and business tangible personal property tax are imposed and administered by local officials. Virginia Code §§ 58.1-3703.1 A 5 and 58.1-3983.1 D 1 authorize the Department to issue determinations on taxpayer appeals of certain BPOL and BTPP tax assessments respectively. On appeal, a BPOL tax assessment is deemed prima facie correct, that is, the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections 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 produces both framed and unframed colored prints and paintings that are sold at wholesale. The Taxpayer does not engage in retail sales. A portion of the Taxpayer's products are unframed and packed in circular cardboard tubes. The remainder of the products is placed in metal or wood frames that are produced by the Taxpayer. Frames are produced by cutting supplies of wood, metal and glass to required lengths and specifications, and then combining the wood, metal, and glass with glue and fasteners to produce the finished frame in which the print or painting is placed.

The Taxpayer produces its decorative art prints and framed wall decor through two different processes: (1) the hand-painted reproduction process, and (2) the color print process.

Hand-painted Reproduction Process

A hand-painted reproduction is produced by designing a master print and using the Taxpayer's industrial printing equipment to produce multiple black and white paper base guides or blueprints. The Taxpayer's employees then apply paints and ink by hand to produce the product. Employees produce the hand-painted reproductions using a process to apply one color to multiple base guides, then switching to apply an alternate color that is applied to multiple paper base guides, and repeating until the reproduction is fully produced. The product is dried and then either packaged and shipped as an unframed product, or framed and shipped. In approximately 50% of the hand-painted reproductions, the Taxpayer applies secondary finishes such as gold leafing, texturing and aging chemicals prior to the shipping process.

Color Print Process

A color print is produced by inserting specialized print stock paper into the Taxpayer's digital and industrial printing equipment, which apply toners, color inks and chemicals to specialized stock paper to produce the color print product prior to framing and shipping.

Location in the County

During 2005, the Taxpayer opened a definite place of business in the County. Upon its move, the Taxpayer submitted an application for a business license and described its business as a manufacturer. The County investigated the Taxpayer and classified it as a wholesale merchant. The Taxpayer paid the BPOL and BTPP taxes for the years at issue and appealed its classification as a wholesale merchant to the County. In its final determination, the County determined that the Taxpayer's processes were not manufacturing and the Taxpayer was properly classified as a wholesale merchant. The Taxpayer appeals to the Tax Commissioner, requesting that it be classified as a manufacturer exempt from the BPOL tax and subject to the machinery and tools tax rather than the BTPP tax.

ANALYSIS

BPOL - 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 Va. 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 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 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.

Under Virginia's BPOL statutes, "printers" have generally been considered manufacturers. However, the classification of printers as manufacturers has been limited to printing in the traditional sense, in which presses of various types are used. See Public Document (P.D.) 99-264 (9/30/99). In limited circumstances, the Department has determined that activities that would not be considered printing in the traditional sense might still be considered manufacturing. In P.D. 99-239 (8/23/99), the Department opined that when a business engages in more than one or a combination of processes, such as typesetting, editing, or graphic design, and by so doing transforms original material, it becomes a question of fact as to whether such business is engaged in manufacturing. Accordingly, whether or not a business is engaged in printing can only be determined on a case-by-case basis.

In the instant case, the County found that the Taxpayer was not a printer in the traditional sense that is classified as a manufacturer. Rather, the County determined that the Taxpayer's activities were analogous to photocopying or photograph processing. The Taxpayer argues that its production process is similar to producing camera-ready book pages from a manuscript, which the Commissioner found to be manufacturing in P.D. 99-200 (7/23/1999).

With regard to the hand-painted reproduction process, a master blueprint is printed out and filled in by hand with ink and paint. The original materials (paper, paint and ink) are combined to produce an original product. As such, it meets the three-pronged test in BBC Brown Bovari. In addition, approximately 50% of the hand painted prints require the additional steps of adding gold leafing, texturing and aging.

In the color print process, the color print is produced by inserting specialized print stock paper into the Taxpayer's digital and industrial printing equipment, which apply toners, color inks and chemicals to specialized stock paper to produce the color print product. The County, citing P.D. 99-239, found the color print processing to be more akin to photocopying and, therefore not manufacturing.

The Taxpayer argues that there is a distinction between the color print process and photocopying because in the color print process, inks and paints are sprayed onto the paper whereas photocopying involves a dry process in which a negative image is formed by a resinous powder being electrically transferred onto paper. In addition, photocopying entails the reproduction or replication of original materials, without any transformation element. See P.D. 99-239.

I believe that the Taxpayer's color print process differs from photocopying. Under § 5.5.2 of the 2000 BPOL Guidelines, "copying over the counter (including copies made by the customer on the business' equipment)" is listed as a business service primarily because such businesses do not produce the documents or items being copied and do not sell products at wholesale. The Taxpayer creates and replicates artwork that is then mass produced for wholesale to its customers.

Moreover, in P.D. 02-56 (4/17/02), the Commissioner found that printing complex color graphics onto rolls of plastic met the three-pronged test set forth in Brown Bovari. I find that the insertion of toners, color inks, and chemicals to specialized paper using digital and industrial printing equipment is analogous to printing complex graphics onto rolls of plastic. As such, I find that color print process constitutes manufacturing.

In addition, I would disagree with the County's determination that the framing process was mere assembly rather than manufacturing. The County cites § 5.2.2 of the 2000 BPOL Guidelines, which lists picture framing or gilding as a personal or business service. Such service, however, entails placing a picture or print into a pre-made or preassembled frame. The Taxpayer's process goes well beyond the simple assembling of pre-made frame parts. It involves the cutting of wood, metal and glass to required lengths and specifications, and then combining the wood, metal, and glass with glue and fasteners to produce a finished frame. Such a process satisfies the three-part test as enumerated by BBC Brown Bovari in that it changes raw materials through a process that results in a substantially new product.

To be exempt under the BPOL tax, a manufacturer must also sell its goods, wares and merchandise at wholesale at the place of manufacture. See Va. Code § 58.1-3703 C 4. In this case, the Taxpayer sells and ships its goods from the place of manufacture in the County. For the reasons stated above, the Taxpayer meets the criteria for exemption as a manufacturer under the BPOL tax.

Personal Property Tax

The Taxpayer contends that as a manufacturer, it is exempt from the BTPP tax, and the County is limited to taxing the Taxpayer's property that is considered to be machinery and tools. The Taxpayer claims that the remaining property is exempt from property tax pursuant to Va. Code § 58.1-1101.

In general, business tangible personal property, with some exceptions, is subject to local taxation. Virginia Code § 58.1-1101 2, provides a general exemption from the BTPP tax for tangible personal property used in manufacturing businesses. This same statute excludes machinery and tools, motor vehicles and delivery equipment of manufacturing businesses from the exemption, thus permitting them to be taxed by localities under application statutes and ordinances.

The Virginia Supreme Court's three-part test for determining whether a manufacturing activity is being undertaken was also applied to BTPP in BBC Brown Boveri. As such, the forgoing analysis would be applicable to the Taxpayer's business to determine the property that is subject to local taxation.

DETERMINATION

Based on the foregoing, I find that the Taxpayer is a manufacturer for the tax years at issue and is exempt from the BPOL tax on sales at wholesale from the place of manufacture. I also find that the Taxpayer, as a manufacturer, is subject to the machinery and tools tax on equipment used in its manufacturing processes, and property not used in the manufacturing process is exempt from local property taxation. I am remanding this case to the County in order to adjust the assessments and issue appropriate refunds for the 2005 through 2006 tax years in accordance with this determination.

If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-2181128576.B

Rulings of the Tax Commissioner