12-66 | Virginia Tax

Tax Type

BPOL Tax

BTPP Tax

Description

Property not used in the manufacturing process would be exempt from local property taxation.

Topic

Classification

Manufacturing Exemption

Property Subject to Tax

Date Issued

04-30-2012

April 30, 2012

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 2010 and 2011, issued by the ***** (the "County").

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, regulation, and public document 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 is a commercial printer with facilities located throughout the country. During the 2010 and 2011 tax years, it owned a facility in the County. The Taxpayer's facility printed books, catalogs, direct mail, directories, magazines, newspaper inserts and other items. It also provided other business services to customers.

The County classified the Taxpayer as a business service provider and assessed BPOL license tax and BTPP tax. The Taxpayer filed an appeal with the County, contending it was a manufacturer exempt from both the BPOL and BTPP tax. In its final determination, the County concluded that the Taxpayer was engaged in business services at the facility in the County on the basis that it was, part of the Taxpayer's direct mail division and that no manufacturing occurred.

The Taxpayer paid the assessments and filed an appeal to the Tax Commissioner, contending it should properly be classified as a manufacturer for purposes of the BPOL and BTPP taxes.

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 (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 (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.

While printers have generally been considered to be manufacturers for BPOL purposes, the classification of any business as a manufacturer is dependent upon whether such business meets the three established elements. Further, in Winchester v. American Woodmark, 250 Va. 451, 464 S.E.2d 148 (1995), the Court found that the applicable law did not require capital be used in a manufacturing facility in the locality in order to be used in a manufacturing business. Thus, the particular activities of a taxpayer in a jurisdiction cannot be separated from the company as a whole for purposes of BPOL taxation.

In this case, the County found that the Taxpayer's business at the facility within the County was limited to direct mail activities rather than manufacturing at the facility. The Taxpayer asserts that a substantial portion of its activity at the facility was printing and, when considered as a whole with its manufacturing activities at other locations, it should be classified as a manufacturer for BPOL purposes.

In Public Document (P.D.) 02-1 (1/04/2002), the Department found that when a taxpayer, whose activities constitute a single business, factually demonstrates the substantiality of the manufacturing portion of its business, such taxpayer must be treated as a manufacturer for purposes of BPOL taxation. In this case, the Taxpayer operated a number of facilities that constituted a single business. The printing conducted at most of these facilities would meet the three elements of manufacturing. As such, the Taxpayer was conducting manufacturing activities during the tax years at issue.

Substantiality

In BBC Brown Boveri, the Court held that after it is determined that a taxpayer is engaged in a manufacturing activity, the taxpayer's manufacturing activities must meet the test of substantiality. "When a party is engaged in both manufacturing and nonmanufacturing activities, it will nonetheless be classified as a manufacturer for tax purposes if the manufacturing portion of its business is substantial."

The Court offered several constructive measures to be used in determining whether a business should be classified as a manufacturer for local business tax purposes. These are: (1) the manufacturing component's financial receipts or proportion of total corporate income; (2) the percentage that manufacturing equipment, inventory, etc., comprises of the total capital investment; (3) the number of employees working in the manufacturing component as compared with the total number of employees; or (4) the ratio of manufacturing activities to the entire business. Pursuant to Title 23 VAC 10-500-520 C, to be considered substantial, the manufacturing component of a business must not be de minimis, merely trivial, or only incidental to its principal business. The Taxpayer has provided documents indicating that its printing operations met the test of substantiality in 2010 and 2011.

Personal Property Tax

All tangible personal properly, unless declared intangible under the provisions of Va. Code § 58.1-1100 et seq., is reserved for local taxation by Article X, § 4 of the Constitution of Virginia. Included in the category of tangible property that is declared intangible and subject to state taxation only is "[c]apital which is personal property, tangible in fact, used in manufacturing (including, but not limited to, furniture, fixtures, office equipment and computer equipment used in corporate headquarters)." See Va. Code § 58.1-1101 A 2.

The machinery and tools, motor vehicles and delivery equipment of a manufacturing business are not defined as intangible personal property. Such property is to be taxed locally as tangible personal property. Virginia has elected to create a separate classification of tangible personal property for machinery and tools used in manufacturing. Virginia Code § 58.1-3507 A provides:

- Machinery and tools . . . used in a manufacturing . . . business shall be listed and are hereby segregated as a class of tangible personal property separate from all other classes of property and shall be subject to local taxation only.

The 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.

DETERMINATION

The County limited its analysis to the Taxpayer's activities conducted at the local facility. In accordance with American Woodmark, however, all of the Taxpayer's facilities must be considered as a whole in order to determine if it was a manufacturing business. Based on the evidence provided, the Taxpayer's multiple locations constituted a single business, it conducted manufacturing activities and it met the test of substantiality. Accordingly, the Taxpayer was a manufacturer for the 2010 and 2011 tax years.

As a manufacturer, the Taxpayer was exempt from the BPOL tax on sales at wholesale at the place of manufacture. Further, the Taxpayer was subject to the machinery and tools tax on equipment used in its manufacturing process. Property not used in the manufacturing process would be exempt from local property taxation. The County must, therefore, adjust the BPOL and BTPP tax assessments in accordance with this determination and issue refunds for the overpayment of tax plus applicable interest.

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

- - - - Sincerely,

- - - - Craig M. Burns
        Tax Commissioner

AR/1-4950118001.B

Rulings of the Tax Commissioner