Tax Type
BPOL Tax
Description
Complete Auto Transit; Taxpayer is not exempt from BPOL tax as a result of federal preemption.
Topic
Exemptions
Local Power to Tax
Local Taxes Discussion
Taxable Transactions
Date Issued
10-22-2013
October 22, 2013
Re: Appeal of 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 on behalf of ***** (the "Taxpayer") with the Department of Taxation. You appeal a final local determination issued by the ***** (the "County") denying a refund of BPOL taxes paid by the Taxpayer for the 2008 through 2012 tax years.
The local license tax and fee are imposed and administered by local officials. Virginia Code § 58.1-3703.1 A 5 authorizes the Department to issue determinations on taxpayer appeals of certain BPOL tax assessments. 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 documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department's web site.
FACTS
The Taxpayer operates duty free stores at an airport located in the County. The Taxpayer sells merchandise to customers who are leaving the United States for foreign destinations. It also sells goods to customers for domestic use.
The Taxpayer paid BPOL tax to the County based on all its gross receipts generated during the tax years at issue. The Taxpayer subsequently filed an appeal with the County requesting a refund of the BPOL taxes paid, maintaining it was exempt from paying BPOL tax on gross receipts derived from sales to its customers traveling internationally. In its final local determination, the County held that the Taxpayer is subject to tax on gross receipts derived from its sale of merchandise and denied the Taxpayer's request for a refund. The Taxpayer appeals the County's final determination to the Tax Commissioner, contending that duty-free shops are exempt under federal law from all taxation on goods sold to customers leaving the United States. The Taxpayer also asserts that the assessment of the BPOL tax is unconstitutional under the Commerce Clause of the United States Constitution.
ANALYSIS
Federal Preemption of State Law
Virginia Code § 58.1-3700 et seq. authorizes localities to impose, by ordinance, a license tax on all businesses, trades, professions, occupations and callings and upon the persons, firms and corporations engaged therein. This authority, however, is limited in those instances when a federal statute preempts a local ordinance or tax. See Public Document (P.D.) 05-50 (4/8/2005).
The Taxpayer's duty free stores are "bonded warehouses" under 19 U.S.C. § 1555 and 19 C.F.R. § 19.35 that are regulated and supervised by the United States Customs and Border Protection. Goods that are stored in "bonded warehouses" may be withdrawn and re-exported without payment of duty if done within a prescribed period. See 19 U.S.C. § 1557 (a). Only if goods are withdrawn for domestic sale or stored beyond the prescribed period does any duty become due.
The Taxpayer contends that because federal law preempts a state's right to impose state sales tax and local property tax for merchandise sold to customers leaving the United States, it would also preempt the BPOL tax. The County concedes that federal law preempts a state's right to impose excise, sales and property taxes. However, it asserts that the BPOL tax is not preempted by federal law because the BPOL tax is a tax for the privilege to engage in business in a given jurisdiction.
The Taxpayer has provided several letters from taxing authorities to support its contention that the sale of certain merchandise held in bonded warehouses would be exempt from certain license tax requirements. Although the Taxpayer has cited numerous cases addressing federal preemption, none of these cases address taxes for the privilege of doing business.
Two state cases address whether federal law preempts the ability of a state or locality to assess tax other than sales or property tax on the sale of merchandise from duty free stores to customers traveling outside the United States. In City of Los Angeles v. Marine Wholesale/Warehouse Co., Inc., 15 Cal.App.4th 1834, 19 Cal.Rptr.2d 611 (1993), the California Court of Appeal (the "California Court") held that Los Angeles could impose a gross receipts and payroll tax on the sale of merchandise from bonded warehouses. It held that such tax does not interfere with congressional objectives behind customs-bonded warehouses. The California Court's rationale explains that the gross receipts tax is levied on the entity rather than the stored goods, the merchandise is not an export because it is consumed during the voyage, and the customs-bonded warehouse system assists certain classes of importers by allowing for flexibility and thus encourages the use of American ports.
In Ammex, Inc. v. Department of Treasury, 273 Mich.App., 732 N.W.2d. 116 (2007), the Michigan Court of Appeals (the "Michigan Court") addresses whether duty free shop sales to customers traveling outside the United States are subject to the Michigan Single Business Tax (MSBT). The MSBT is levied on the privilege of doing business in Michigan. The Michigan Court distinguished the MSBT from sales or property taxes because it is a tax on the Taxpayer's business activity as a whole. It held that the MSBT applies to duty-free stores for merchandise sold for use outside of the United States because it does not stand "as an obstacle to the accomplishment and execution of the full objectives of Congress."
Commerce Clause
The Taxpayer contends that regardless of whether the BPOL tax is considered a duty, the taxation of gross receipts measured by sales of merchandise for use outside of the United States violates the Commerce Clause. It argues that the United States Supreme Court (the "Supreme Court") in Crew Levick Co. v. Pennsylvania, 245 U.S. 292 (1917), held that a tax on the sale of merchandise shipped to foreign countries that is measured by a gross receipts tax is unconstitutional because it violates the Commerce Clause. The County asserts that Western Live Stock v. Bureau of Revenue, 303 U.S. 250 (1938), is applicable to the Taxpayer's case. In Western Live Stock, the Supreme Court held that a privilege tax measured by gross receipts that was imposed by New Mexico on publishers for advertising transactions across state lines was valid because, unlike the merchandise sales in Crew Levick, the advertising sales could be separated from interstate commerce.
Although the Supreme Court did not expressly overrule either Crew Levick or Western Live Stock, it subsequently issued case decisions that addressed the validity of state taxes with regards to the Commerce Clause. In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), the Supreme Court established a four-pronged test in evaluating the validity of a local tax under the Commerce Clause. The tax must be: (1) applied to an activity with a substantial nexus with the taxing authority; (2) fairly apportioned; (3) nondiscriminatory to interstate commerce; and (4) fairly related to the services provided by the state or locality. Complete Auto Transit was applied to the taxation of transactions in interstate commerce. In Japan Line, LTD. V. County of Los Angeles, 441 U.S. 434 (1979), the Supreme Court held that when a state seeks to tax instrumentalities of foreign commerce, two additional factors must be considered in addition to the four-prong test articulated in Complete Auto Transit. The first factor considers whether a state tax creates an enhanced risk of multiple taxation. The second factor considers whether a state tax will impair federal uniformity in an area where federal uniformity is essential. Federal uniformity may be impaired if the tax could cause international disputes over "reconciling apportionment formulae." See Japan Line.
The first prong of the Complete Auto Transit test is whether a taxpayer has substantial nexus with the jurisdiction in which it is located. In this case, the Taxpayer has substantial nexus with the County because its stores are physically located in the County.
The second prong of Complete Auto Transit requires that the local tax must be fairly apportioned. This prong requires that an assessment be both internally and externally consistent. Goldberg v. Sweet, 488 U.S. 252 (1989). An assessment is internally consistent if applying the text of the taxing statute, and assuming that every other jurisdiction applied the same statute, the taxpayer would not be subjected to a risk of double taxation. Id. An assessment is externally consistent if the assessment applies only to the "portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed." Id. In this case, the BPOL tax is both internally and externally consistent because the Taxpayer's stores located in the County would only be subject to the BPOL tax within in the County.
The third prong of Complete Auto Transit requires the local tax not discriminate against interstate commerce. Discrimination against interstate commerce exists if the local tax imposes a greater burden on those businesses engaged in interstate business than those only engaged in intrastate business, See Maryland v. Louisiana, 451 U.S. 725 (1981). In this case, there is no discrimination against interstate commerce because the gross receipts from the sale of merchandise for domestic, interstate or international use are treated exactly the same for BPOL tax purposes.
The fourth prong of Complete Auto Transit requires that the local tax be fairly related to the services provided by the locality. Virginia Code § 58.1-3703 grants localities the authority to impose local license taxes and fees. The BPOL tax is related to the services provided by localities because such receipts are used to fund services provided by the County.
The County's BPOL tax is based only on the gross receipts generated from sales that occur within the Taxpayer's stores located within the County measured by all the gross receipts of a taxpayer. Thus, the tax is not imposed on only those receipts generated from foreign transactions. As such, the two additional considerations set forth in Japan Line, LTD. are not violated.
DETERMINATION
Although some other taxing jurisdictions have chosen not to impose licensing taxes on the Taxpayer, the court record does not support the Taxpayer's contention that the BPOL tax is preempted by federal statute. As such, I find the Taxpayer is not exempt from BPOL tax as a result of federal preemption. I also find that the BPOL tax, as imposed on the Taxpayer's gross receipts, meets each of the four prongs in Complete Auto Transit and the two additional considerations added by Japan Line for foreign transactions. As such, the application of the BPOL tax to the Taxpayer's gross receipts derived from goods sold for use outside of the United States does not violate the Commerce Clause. Accordingly, I find no basis to overturn the County's denial of the Taxpayer's request for the refund of BPOL taxes paid for the 2008 through 2012 tax years.
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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Craig M. Burns
Tax Commissioner
AR/1-523632076.B
Rulings of the Tax Commissioner