May 19, 2016
Re: Appeal of Final Local Determination
Locality: *****
Taxpayer: *****
Business, Professional and Occupational License 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 an assessment of Business, Professional and Occupational License (BPOL) taxes issued to the Taxpayer by the ***** (the "City") for tax years 2009 through 2012.
The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of 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 Tax Policy Library section of the Department's web site.
FACTS
The Taxpayer, a subsidiary of ***** (the “Parent”), was engaged in manufacturing at several facilities located outside of the City. The Taxpayer had a storage facility (the “Warehouse”) located in the City. The Taxpayer shipped its product to the Warehouse from its manufacturing facilities for storage. At the Warehouse, the product was palletized and loaded on trucks for delivery to customers under wholesale agreements negotiated by the Parent.
The City determined that the Taxpayer performed wholesale activities beyond mere storage at the Warehouse and issued BPOL tax assessments for the tax years at issue. The Taxpayer appealed the City's adjustments. In its final determination, the City determined that separate and distinct licensable sales activities occurred at the Warehouse and upheld the assessments. The Taxpayer appeals the City's final determination, contending that the activities occurring at the Warehouse were either ancillary to its manufacturing process or de minimus.
ANALYSIS
Classification
The BPOL tax is imposed on businesses and professionals for the privilege of doing business in a locality. The tax is imposed at different rates according to the classification of an enterprise. See Va. Code § 58.1-3706 A. These classifications are regulated under Title 23 the Virginia Administrative Code (VAC) 10-500-10 et seq. Classification of a specific business must be determined based on consideration of all the facts and circumstances. Some of the factors to be considered include:
1. What is the nature of the enterprise's business?
2. How does the enterprise generate gross receipts?
3. Where does the enterprise conduct its business?
4. Who are the enterprise's customers?
5. How does the enterprise hold itself out to the public?
6. What is the enterprise's North American Industry Classification System (NAICS) code?
The Taxpayer contends that it is a manufacturer for BPOL tax purposes and that the activities conducted at the Warehouse were ancillary to its manufacturing activities. The City asserts the Taxpayer should be classified as a wholesaler in its locality because the Taxpayer conducted wholesale sales at the Warehouse.
Exemption
Virginia Code § 58.1-3703 C 4 provides an exemption from the license fee or BPOL tax “for the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture.” Manufacturers may, however, be subject to BPOL tax for wholesale sales made at another definite place of business and as retail merchants. See 1985-1985 Op. Va. Att'y Gen. 287. By reason of their character as legislative grants, statutes relating to exemptions allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See DKM Richmond Associates, L.P. v. City of Richmond, 249 Va. 401, 407, 457 S.E.2d 76, 80 (1995).
Historically, manufacturers have been permitted to establish a warehouse separate from the manufacturing facility merely for transferring products from a truck to another without becoming subject to BPOL tax so long as no sales activities occurred at the warehouse. Additionally, sales made by delivery drivers were not considered to be activities conducted at the warehouse. See Marion Bottling Company, Inc. v. Town of Galax, 195 Va. 1115, 81 S.E.2d 624 (1954).
With the enactment of the uniform ordinance provisions under Va. Code § 58.13703.1, however, gross receipts must be attributed to a definite place of business. See Chapters 715 and 720, Acts of Assembly (1996). Under the new situs rules, sales by delivery drivers could be attributed to the warehouse if the sales activity is directed or controlled from that facility. Thus, if a manufacturer is engaged in substantial activity in terms of sales and marketing of its own goods at a distribution center, away from the place of manufacture, such activities would require the manufacturer to obtain a separate license as a wholesaler. See P.D. 01-98 (8/8/2001).
Under Title 23 VAC 10-500-360, the wholesale activity of a manufacturing business will be considered ancillary so long as the actual sales are made at the place of manufacture and the wholesale activity does not rise to the level of becoming a separate business. See also P.D. 99-300 (11/18/1999), P.D. 03-36 (4/15/2003), and P.D. 04-160 (10/1/2004).
In P. D. 97-257 (6/11/1997), the Department concluded that the term “ancillary” refers to business activities that are subordinate, subservient, auxiliary, or in aid of the business’ principal business activity. Distinguishing between an ancillary activity and an activity that rises to the level of a separate business can often be accomplished by determining if the activity under scrutiny exists independently of the principal business. In general, an activity for which no separate charge is made will be presumed to be ancillary to the activity for which a charge is made, but separately stating charges for different activities will not create a presumption that each such activity is a separate business. See Title 23 VAC 10-500-110 B.
In this case, the Warehouse is separate from the manufacturing facilities. Under Title 23 VAC 10-500-360 A 3, the “[m]ere storage of completed goods is ancillary to manufacturing regardless of where the storage takes place.” One of the definitions of “mere” is “being nothing more than what is specified.” See American Heritage Dictionary 821 (1st Col. Ed. 1981). Virginia's regulation further states that a manufacturer's warehouse located in another jurisdiction will be considered to be an ancillary activity to manufacturing if it is simply a storage facility that conducts no other business functions.
Accordingly, the activities of a storage facility located in a different jurisdiction than the manufacturing facility will be ancillary to a taxpayer's manufacturing process only if no other business functions occur at the facility and these activities are limited to the “mere storage” of goods. Activities that are consistent with the storage of goods include unloading of the product onto pallets, shrink wrapping the product, moving the product to its proper place in the storage facility and checking and certifying the proper amount and location for delivery.
The City contends that stocking shelves, putting out in-store displays and determining whether the stores are sufficiently stocked constitutes sales activity. The Taxpayer argues that its activities that occurred within the customers’ stores were part of the delivery service rather than sales because no sales terms or conditions were negotiated. It further asserts that such activities were ancillary to its manufacturing activities.
The Taxpayer employs over 150 individuals at the Warehouse. The positions include delivery drivers, off-loaders/loaders, certifiers/checkers, merchandisers, pre-sale or customer representatives, administrative staff, fleet workers, and supervisors. While it is clear that certain positions serve the storage function, the City has raised issues concerning the delivery drivers, merchandisers, pre-sale or customer representatives, and supervisors. Further, the City has raised questions concerning several other activities conducted at the Warehouse, including a vending machine sales business and the distribution of products manufactured by unrelated third parties.
Delivery Drivers
Delivery truck drivers transported product to customers on assigned routes. The driver unloaded product to be placed in the customer's designated storage area. If the delivery was accepted, the driver provided a delivery receipt to the store. According to the Taxpayer, the delivery drivers did not solicit or take any orders. According to job announcements placed by the Taxpayer during the tax periods at issue, delivery drivers could also have been responsible for placing future orders and executing sales promotions.
The Taxpayer points out that the delivery drivers do not have office space at the warehouse. Instead they pick up a delivery truck when they report for work and perform assigned tasks at customer locations. Because these services are not performed at a definite place of business, they would be attributed to the definite place of business from which the delivery drivers are directed or controlled.
Merchandisers
Once product has been delivered to a customer, the merchandisers set in-store displays, replenished and rotated shelved products, rotated product in the stockroom, and move product from the stockroom to the sales floor. Because they did not solicit sales and only displayed product in accordance with prearranged plans negotiated by the national and regional sales teams, the Taxpayer believes the merchandisers' activities simply executed the delivery of goods inside the store.
Merchandisers typically traveled an assigned route directly from their home and rarely visit the Warehouse. Again, because the merchandising is not occurring at a definite place of business, the activity would be attributed to the Taxpayer's facility where they are directed or controlled.
Pre-Sale or Customer Representatives
The pre-sale or customer representatives worked with customers to ensure that they had sufficient product mix available to meet consumer demand, filled out displays, and prepared for upcoming sales activity. They were also responsible for tracking each customer's inventory and utilizing this information, along with the customer's historical data and planned Taxpayer or store promotions, they made recommendations to the store's management regarding additional product needs and transmitted requests for such product to the Warehouse.
The Taxpayer asserts the representatives did not solicit sales, yet it acknowledges they were authorized to suggest alternative products based on a store's profit and sales goals. In addition, a description of the customer representative's position obtained by the City indicates they were responsible for taking orders, soliciting new business and executing sales promotions. Further, the information indicates pre-sale or customer representatives were compensated, at least in part, based on commissions for successfully soliciting orders for alternative products from customers.
According to the Taxpayer, customer representatives spent less than 5% of their time at the Warehouse attending meetings and picking up materials and equipment. While the representatives may not perform their primary job function at the Warehouse, situs rules dictate that their services be attributed to the definite place of business from which they are directed or controlled.
Manager and Supervisors
The manager and supervisors hired, trained, directed and coached all of the employees assigned to the Warehouse including merchandisers and customer representatives. According to the Taxpayer, they did not negotiate contracts, take orders or sell any product. However, to the extent the supervisors oversaw activities that exceeded the mere storage of finished goods, their activities would not be considered to be ancillary to the sale of goods from the place of manufacture. In addition, because these supervisors are primarily responsible for directing the delivery drivers, merchandisers and representatives, the activities of these employees would be considered to be directed and controlled at the Warehouse.
The Taxpayer further argues that even if the activities conducted by certain employees exceeded those of a facility conducting a mere storage operation, none of the sales solicitation activities occurred at the Warehouse. Under Va. Code § 58.13703.1 A 3 a (2), the gross receipts of a wholesaler are attributed to: (i) the definite place of business at which the sales solicitation activities are performed, or if not performed at any definite place of business, (ii) the definite place of business from which such activities are directed or controlled.
According to the Taxpayer, national and regional sales teams employed by a related entity negotiate basic wholesale agreements for the distribution and sale of products to retailers. Because they do not operate in the City, the Taxpayer asserts none of the gross receipts attributable to the sales under the wholesale agreements would be sitused to the City. See Title 23 VAC 10-500-170 3. Under Title 23 VAC 10500-10, “Sales solicitation” means “the act or acts directly related to selling particular items or goods to a particular person” [Emphasis Added]. One of the definitions of “particular” is an “individual item, fact or detail.” See American Heritage Dictionary 297 (2nd Col. Ed. 1985).
Vending Machine Sales
The Taxpayer operated a vending machine business from the Warehouse. Virginia Code § 58.1-3703.1 A 1 provides that a separate license shall be required for each definite place of business and for each business a taxpayer is operating. The gross receipts generated under each license are subject to tax in accordance to the rates provided for each business classification. See Va. Code § 58.1-3706 A. The Taxpayer, has in fact, obtained a separate BPOL license for its vending business.
The issue is what effect a separate business operated by a manufacturer at an off sight storage facility has on the exemption under Va. Code § 58.1-3703 C 4. The City contends that the vending machine business was not an ancillary business function conducted at the Warehouse that exceeds mere storage. The Taxpayer argues that, as a separately licensable business, the activity should not be included in the analysis as to whether the Warehouse was ancillary to the manufacturing business.
Under Title 23 VAC 10-500-360 A 3, the mere storage of completed goods assumes the warehouse conducts no other business functions. As indicated above, exemptions must be strictly construed against the taxpayer. In this case, the Taxpayer was conducting a separate business at an off-site facility used to store completed goods.
Goods Manufactured by a Third Party
The Taxpayer also stored and delivered products manufactured by an unrelated third party using the same procedures its uses for its own merchandise. In P.D. 01-98, the Department ruled that when a manufacturer receives substantial gross receipts from the sale of products received from other manufacturers and sells at wholesale, it will be required to apply for a separate license as a wholesaler. See also P.D. 04-160.
The City and the Taxpayer are at odds as to whether the storage and sale of the third party products was substantial enough to constitute a separate business activity. However, substantiality does not need to be proved for purposes of determining whether the Warehouse was ancillary to the Taxpayer's manufacturing activities. As indicated above, the mere storage of completed products allows for no other business function. Although not specifically defined, because of the narrow interpretation of exemptions, the term “completed products” would be considered to be the finished goods inventory manufactured by the business and would not include products purchased or received from other sources. Here, the Taxpayer was storing products that it did not manufacture.
Advisory Opinions
The Taxpayer cites Public Document (P.D.) 10-35 (4/8/2010) to support its position that the Warehouse is ancillary to its manufacturing operations. In fact, the opinion was requested by the Taxpayer and it claims the facts cited in the opinion are exactly the same as the operations conducted at the Warehouse.
Virginia Code § 58.1-3701 authorizes the Department to issue advisory opinions on local license tax issues. These nonbinding opinions are made based on the facts presented. As pointed out in all of the Department's opinions, changes to the facts as presented or the introduction of new facts can lead to a different result.
The facts presented in P.D. 10-35 indicate the Taxpayer has warehouses in six other localities and “cross docking” facilities three different localities. According to the request, the only activity that the employees engaged in was record keeping. The Taxpayer asked whether the cross-docking facilities were subject to the manufacturer's exemption.
Based on the facts presented upon appeal, however, the Taxpayer engaged in numerous activities that go beyond record keeping. The Taxpayer's initial advisory opinion request did not mention or describe the activities listed previously in this letter relating to the delivery drivers, off-loaders/loaders, certifiers/checkers, merchandisers, pre-sale or customer representatives, fleet workers, and supervisors. Further, while the initial advisory opinion request indicated that Taxpayer operated vending machines, it failed to state that these operations were conducted out of the Warehouse. In addition, the Taxpayer's initial advisory opinion request is silent concerning the third-party inventory stored and sold from the Warehouse. Therefore, P.D. 10-35 is not controlling or persuasive for this determination.
DETERMINATION
The Taxpayer has argued that the Warehouse facility in the City is ancillary to its business as a manufacturer because the facility is used merely for the storage of goods. As indicated above, the delivery drivers and merchandisers appear to be engaged in activities regularly associated with making or soliciting sales and taking orders for sales. The pre-sale or customer representatives, however, were clearly making sales. The activities of these employees, which exceeded the mere storage of finished goods, were directed and controlled primarily from the Warehouse. In addition, the fact that the Taxpayer was operating a vending machine business and storing goods received from unrelated third parties indicates the Warehouse was being used for more than the mere storage of finished goods inventory.
Further, while the basic wholesale agreements were negotiated and ratified by the national and regional sales teams, the particular items sold were not identified in these agreements. Under Title 23 VAC 10-500-10, the sales solicitation was not completed until particular items were ordered from the Warehouse.
Based on the evidence provided, I find that the activities conducted in the Warehouse were not ancillary to the Taxpayer's manufacturing activities. The Taxpayer was, therefore, engaged in the separately licensable activity of wholesale sales for the 2009 through 2012 tax years in the City. Accordingly, the City's assessments of BPOL tax issued to the Taxpayer for the 2009 through 2012 tax years are upheld.
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/1-567002802.B