Tax Type
BPOL Tax
BTPP Tax
Machinery Tools Tax
Description
Requesting classification BTPP v MTT
Topic
Classification
Local Taxes Discussion
Tangible Personal Property
Date Issued
04-08-2010
April 8, 2010
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 ***** (the "Taxpayer") with the Department of Taxation. The Taxpayer appeals a final local determination by the ***** (the "City") denying the Taxpayer's request to be classified as a manufacturer for BPOL tax purposes. The Taxpayer also requests that its equipment be classified as machinery not used in manufacturing for the 2005 through 2007 tax years. I apologize for the delay in responding to your letter.
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, i.e., 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.virginia.gov.
FACTS
The Taxpayer, a producer of three-dimensional holograms for the commercial advertising market, was classified as a service provider by the City for BPOL tax purposes. The Taxpayer's production process for the holographic images includes: (1) receiving two-dimensional logos, pictures, or design sketches from customers, (2) creating digital three-dimensional graphic compositions using computer software; (3) producing a master hologram by laser, exposing the three-dimensional graphic composition pieces onto the raw holographic film; (4) processing of the master hologram to permanently alter the material properties of the film; (5) projecting the master hologram film onto a new piece or roll of raw holographic film to make copies; (6) mounting of hologram copies onto glass or plastic; and (7) framing hologram copies of laser cutting hologram copies to fit customer specified shapes and sizes. The holograms are used in commercial advertising and promotional applications.
From March 2004 to February 2007, the Taxpayer lost its supplier of the specialty film needed to produce holograms. As a result, the equipment used to produce the holograms was not in use during that period. In order to continue in business, the Taxpayer began manufacturing rudimentary holographic film that was marketed as a hologram hobby kit.
The Taxpayer contacted the locality and requested that the equipment not in use be classified as idle machinery. In its final determination, the City determined that because the Taxpayer was classified as a service provider and not a manufacturer for BPOL purposes, its equipment was not subject to the machinery and tools tax and that it was not eligible for the idle machinery exemption.
The Taxpayer appeals to the Tax Commissioner, requesting it be classified as a manufacturer and its equipment is 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. See Title 23 of the Virginia Administrative Code (VAC) 10-500-520 B and 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 (9/30/1999). 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 manufacturing can only be determined on a case-by-case basis.
The City found that the Taxpayer was not a printer in the traditional sense that is classified as a manufacturer. Rather, the City determined that the Taxpayer's activities were analogous to digital document conversion (P.D. 04-45 (8/13/2004)), video production (P.D. 97-362 (9/8/1997)) or photograph processing (P.D. 97-304 (7/18/1997)). The Taxpayer contends that the production of a hologram meets the three-part test as enumerated in Brown Boveri.
In the instant case, the Taxpayer takes raw data from two-dimensional images, uses a laser to expose the images onto special holographic film and then heats the exposed film to seal the holographic image. This holographic image is then projected by laser onto a new piece or roll of raw holographic film to create copies that are then heat processed onto glass or plastic. The original materials, the two-dimensional images and raw holographic film are transformed by the laser and heating process to create a new and significantly different object, a holographic image.
With regard to the hologram hobby kit, the original materials (including rudimentary holographic film) are combined to produce an original product.
Based on the information provided and the test established by the Virginia Supreme Court in Brown Boveri, I find that the Taxpayer is engaged in manufacturing activities.
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 City.
Personal Property Tax
The Taxpayer contends that its manufacturing activities make it is exempt from the BTPP tax. The Taxpayer believes that its equipment should be properly taxed as machinery and tools. The Virginia Supreme Court's three-part test for determining whether a manufacturing activity is being undertaken was also applied to BTPP in Brown Boveri. As such, the preceding analysis would be applicable to the Taxpayer's business to determine the property that is subject to local taxation.
Idle Equipment
From March 2004 through February 2007, raw holographic film stack was not available. As such, the Taxpayer's machinery used in producing the holograms was not in use. The Taxpayer requests that this machinery be classified as "idle machinery" for this period.
As a general rule, when machinery has been idle for more than a year and it is not the taxpayer's intent to put it into use within the following year, it may be classified as machinery not used in manufacturing.1 See P.D. 82-120 (8/27/1982). Taxation of idle assets is a factual determination to be made on a case-by-case basis by the local commissioner of the revenue.
The Taxpayer's hologram producing machinery sat idle for a nearly three-year period because it could not get the raw holographic film required to produce its product. Although the machinery had been idle for more than a year, the Taxpayer would have put the machinery back into production as soon as the raw holographic film became available. In fact, the Taxpayer did put the machinery back into production when it began receiving the film in 2007.
As such, the Taxpayer will need to show that it did not intend to use its machinery during the tax years at issue. The fact that the Taxpayer did not have a supplier for one of its raw materials could show such intent. However, the Taxpayer would have to show with reasonable certainty that it would not have a supplier for the entire tax year.
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 was 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.
The Taxpayer will need to provide evidence to the City that it intended to let the machinery sit idle for the 2005 and 2006 tax years. I am remanding this case to the City in order to adjust the assessments and issue appropriate refunds for the 2005 through 2007 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 *****.
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- Sincerely,
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Janie E. Bowen
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- Tax Commissioner
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AR/1-3228935609.B
1.It should be noted that, effective January 1, 2007; idle machinery is taxed as capital under the provisions of Va. Code §§ 58.1-3507 and 58.1-1101 (Chapter 159 of the 2007 Acts of Assembly). Under the new provisions of the law, "idle machinery and tools" means: machinery and tools that (i) (a) have been discontinued in use continuously for at least one year prior to any tax day or (b) on and after January 1, 2007, have been specifically identified in writing by the taxpayer to the commissioner of the revenue or other assessing official, on or before April 1 of such year, as machinery and tools that the taxpayer intends to withdraw from service not later than the next succeeding tax day and (ii) are not in use on tax day and no reasonable prospect exists that such machinery and tools will be returned to use during the tax year. The Taxpayer would not be subject to these provisions for the idle period at issue because it occurred before January 1, 2007.
Rulings of the Tax Commissioner