March 13, 2017
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
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 assessments of the Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by the ***** (the “City”) for the 2013 through 2016 tax years.
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, regulations 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 operated a used car dealership in the City. The Taxpayer's gross receipts mostly consisted of proceeds from vehicle sales, but they also included processing fees and commissions earned from the sale of warranties and insurance. For a portion of the taxable years at issue, the Taxpayer also performed special order transactions in which vehicles were purchased from other sellers and delivered directly to buyers. The City audited the Taxpayer and concluded that it had understated its gross receipts for the 2013 and 2014 tax years.
The Taxpayer appealed the resulting assessments to the City, contending that the taxable amount of gross receipts should not have included all of the proceeds received for special orders, rather just the commissions. The City, however, determined that all such proceeds should have been included and taxed at the repair, personal and business service rate. The City also determined that the gross receipts attributable to the processing fees and commissions from third party warranty and insurance sales should have been taxed at the repair, personal and business service rate instead of the retail rate. The City also concluded that the Taxpayer had not presented sufficient evidence that any special order sales had occurred in ***** (State A) prior to when the Taxpayer established a definite place of business in the City.
The Taxpayer appealed to the Department. The Taxpayer contends that: (1) processing fees and commissions from warranty and insurance sales should have been taxed at the retail rate; (2) proceeds from special order sales should also have been taxed at the retail rate; (3) certain gross receipts should have been excluded from the taxable measure because they were attributable to business activity that occurred before the Taxpayer had established a definite place of business in the City; (4) some gross receipts were not taxable because they were attributable to transactions that did not close and the funds were returned to customers; (5) some gross receipts were not taxable because they were capital contributions from the Taxpayer's owners; and (6) any amounts attributable to customer trade-ins should have been excluded from gross receipts.
ANALYSIS
Multiple Businesses and Classification
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. Local tax officials are responsible for making the determination as to whether a taxpayer is engaged in a single business or in two businesses, each of which could operate independently of the other. In order to make this determination, the local tax official must be provided with documentation demonstrating the substantiality of each business. See 1994 Op. Va. Att’y Gen. 99.
In order to obtain multiple licenses, a business must be engaged in clearly identifiable separate business activities and not merely activities ancillary to the primary business. In Public Document (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 of the Virginia Administrative Code (VAC) 10-500-110 B.
In this case, the Taxpayer's primary business activity was selling used vehicles to consumers. As such, it was a retailer for BPOL tax purposes. See Title 23 VAC 10- 500-10 and Title 23 VAC 10-500-350 B. The City, however, assigned a personal, repair and business service classification to gross receipts from other activities of the Taxpayer, including processing fees, sales of third-party warranties and insurance and special order sales. A different classification could only have applied to such receipts, however, if the Taxpayer was operating another business separate from its retail business. The Taxpayer contends that all of its gross receipts were taxable at the retail rate because its other activities were a part of, or ancillary to, its primary retail business. Each of these activities will be addressed in turn.
Processing Fees, Warranties and Insurance
In connection with its motor vehicle sales, the Taxpayer had gross receipts from processing fees and occasionally from the sale of third-party warranties and insurance for which it received commissions. Title 23 VAC 10-500-110 B sets forth examples in which a retailer will be considered to be providing ancillary services. Charges for extended warranties, delivery service and interest on installment sale contracts are usually considered to be ancillary to a retailer's primary business especially when the charges are made in connection with a retail sale. These examples are not an exhaustive list of all charges that could be considered ancillary, however. In this case, it appears that the processing fees and commissions were received in connection with the vehicle sales.
Special Order Sales
The Taxpayer concedes that all amounts it received for its special order sales were subject to BPOL tax, but the Taxpayer argues that the retail rate should have applied. In its final determination, however, the City concluded that such receipts were subject to BPOL tax at the rate applicable to repair, personal or business services.
The Taxpayer provided documentation from sample special order transactions. The documentation does not refer to any other person or entity other than the Taxpayer as the seller. At least some of the vehicles were also titled in the Taxpayer's name. In addition, based on the Taxpayer's accounting of the special orders, it appears that most of the vehicles were sold to car dealerships or other businesses.
If the Taxpayer and the City agree that the Taxpayer was subject to tax on the full amount of sales proceeds, then a business service classification as held by the City would not be appropriate. It appears there was a good deal of contention over this issue in the audit. According to the City, the Taxpayer first sought the business service classification under the theory that it was acting as a broker. The City is correct in stating that such classification would normally apply to brokerage services, but the taxable amount of gross receipts as a broker would have just been whatever commissions the Taxpayer earned, an amount far less than the total sales amount reported. Now, the Taxpayer concedes that all amounts received for the special order sales should have been subject to BPOL tax. It would be inconsistent to continue to assign a business service classification to gross receipts derived from the sale of motor vehicles.
Another question becomes whether the sales were retail or wholesale. If they were wholesale, the next question would be whether they were ancillary to the Taxpayer's retail business or constituted a separate business. Factors used to discern the difference between a retail and wholesale sale are the characteristics of the purchaser and the purchaser's use of the merchandise and, to a lesser degree, the price and quantity of the product sold. See Dickerson G.M.C., Inc. v. Commonwealth, 206 Va. 339, 342, 143 S.E.2d 863, 865 (1965) and P.D. 98-160 (10/20/1998). Since this determination is based on the facts and circumstances surrounding a sale, price and quantity, by themselves, are not determinative of whether a sale is made at wholesale. See P.D. 98-160.
Under the first two factors, the characteristic of the purchaser and the purchaser's use of the merchandise may be closely related elements. In the basic definition for both BPOL tax and sales and use tax purposes, the ultimate user of a product is usually one who buys at retail, while a purchaser who buys to resell a product is always a wholesaler. Title 23 VAC 10-500-350 B; Title 23 VAC 10-210-6080. The additional factor of character or type of purchaser comes into play for BPOL tax purposes.
In this case, the sample documentation provided by the Taxpayer, together with its accounting of special order sales, suggests that the Taxpayer may have been engaged in a wholesale business with respect to such sales because many of the buyers were car dealers themselves or other businesses.
Situs - Wholesaler
The general rule for establishing situs for the BPOL tax is that whenever the tax is measured by gross receipts, “the gross receipts included in the taxable measure shall be only those gross receipts attributed to the exercise of a privilege subject to licensure at a definite place of business within [the] jurisdiction.” See Va. Code § 58.1-3703.1 A 3 a. For BPOL tax purposes, “gross receipts” are defined as “the whole, entire, total receipts, without deduction.” See Va. Code § 58.1-3700.1. The situs of retail sales is defined as “the definite place of business at which sales solicitation activities occur, or if sales solicitation activities do not occur at any definite place of business, then the definite place of business from which sales solicitation activities are directed or controlled.” See Title 23 VAC 10-500-170. Further, the City taxes wholesalers based upon their purchases. Purchases are attributed to the definite place of business at or from which deliveries of the goods are made to customers. See Va. Code § 58.1-3703.1 A 3 a 2.
The Taxpayer contends that proceeds from certain special order sales should have been excluded from the gross receipts used to compute its 2013 BPOL tax liability (i.e., 2012 gross receipts) because the Taxpayer was doing business in another Virginia locality prior to April 2012. As evidence, the Taxpayer submitted a copy of a lease showing that one of its owners leased a personal residence in that locality at that time. The Taxpayer also submitted its Articles of Organization showing that the Taxpayer's principal business office was in that locality as of December 2011. Although the documentation provided by the Taxpayer is evidence some business may have been conducted prior to April 2012 from a definite place of business outside the City, the documentation is inconclusive as to what extent gross receipts should have been sitused to any such location.
Regardless, if the Taxpayer's special order sales were separately licensable wholesale sales, such sales would not be sitused to the City to the extent that the vehicles were shipped directly from any original seller outside the City to the buyer without ever being sent to the Taxpayer's definite place of business. See Title 23 VAC 10-500-180 A, Example 4.
Exclusions From Gross Receipts
Generally, gross receipts for BPOL tax purposes exclude any amount not derived from the exercise of the licensed privilege to engage in a business or profession in the normal course of business. See Title 23 VAC 10-500-70. The Taxpayer contends that certain portions of its gross receipts should have been excluded from the taxable measure for various reasons, including that some were attributable to a business venture which fell through, some were funds that were ultimately returned to customers and others represented capital contributions from its owners to cover operational expenses. Each of these requested exclusions will be addressed in turn.
Business Venture in Another State
The Taxpayer contends that the City erroneously included an amount in the Taxpayer's gross receipts that represented a capital contribution for a business venture that was to be conducted in State A. The Taxpayer explains that the business venture fell through and the contribution was returned. The City, however, points out that the Taxpayer previously stated it did have gross receipts from the business venture and the receipts were reported as a part of its total gross receipts on Schedule C of its federal income tax return. Even if the business venture failed, gross receipts from the conduct of business could be subject to tax by the jurisdiction where the transactions were sitused.
On appeal, the Taxpayer has submitted copies of a number of State A vehicle registrations as evidence of the venture. The registrations by themselves are not sufficient evidence to support the Taxpayer's assertions.
Returns
The Taxpayer states that the City erroneously included amounts in the Taxpayer's gross receipts in both the 2013 and 2014 taxable year from deposits and wires for transactions that did not close, which resulted in the funds being returned to customers. The City states its figures were supported by the Taxpayer's Schedule C, and it was unable to reconcile its figures with those proposed by the Taxpayer after an examination of the Taxpayer's bank account statements. On appeal, the Taxpayer has not provided any evidence regarding these returned funds other than a self-prepared report. If the transactions fell through, the amounts would not likely have been included in Schedule C gross receipts.
Capital Contributions
The Taxpayer also asserts that a portion of its 2013 and 2014 gross receipts were capital contributions from the business' owners to cover operational expenses. It is unclear based on the information provided, however, what portion of gross receipts should have been excluded as capital contributions. Again, it seems unlikely that capital contributions would have been included in the Schedule C gross receipts figures on which the City relied.
Trade-Ins
Finally, the Taxpayer contends that the City failed to reduce the Taxpayer's gross receipts by the amount it received for trade-ins for each of the 2013 through 2016 tax years. Virginia Code § 58.1-3734.1 provides that “[w]henever a motor vehicle dealer accepts a trade-in as part of a sale of a motor vehicle, the dealer's gross receipts for license tax purposes shall not include the amount of the trade-in.” Typically, gross receipts will be recognized on the subsequent sale of the vehicle. When computing its gross receipts, a motor vehicle dealer may not deduct expenses for labor or materials used to recondition or repair a trade-in vehicle for resale. 1990 Op. Va. Att'y Gen. 224.
In this case, the Taxpayer has submitted detailed schedules with information regarding its trade-ins. The City, however, has not had an opportunity to review any additional information the Taxpayer may be able to provide to substantiate the individual entries in the schedule.
DETERMINATION
The Taxpayer operated as a retailer during each of the tax years at issue. Because they were received in connection with the Taxpayer's retail sales, gross receipts from processing fees and warranty and insurance commissions were ancillary to the Taxpayer's retail business and would not have constituted a separate business subject to a personal, repair and business service classification. In addition, based on the documentation provided, it is possible that the Taxpayer's special order sales were wholesale sales. Further, the Taxpayer has submitted evidence that it received some vehicles as trade-ins.
With regard to the Taxpayer assertions that some of the amounts included in gross receipts were attributable to business conducted before the Taxpayer had established a definite place of business in the City and that the City was improperly taxing funds that were returned to customers and capital contributions, the Department finds that the information provided is insufficient to prove whether such gross receipts should have been excluded from the taxable measure.
I am, therefore, remanding the case back to the City to review any additional evidence the Taxpayer is able to provide regarding its special order sales in order for the City to evaluate the extent such sales were retail or wholesale. If the City finds that the Taxpayer had wholesale sales, it will also need to evaluate whether they constituted a separate business. If they were a separate business, then the City would then need to evaluate the extent they were properly sitused to the City. In addition, the City is instructed to examine any additional evidence the Taxpayer may be able to provide to substantiate its trade-ins. The Taxpayer may also supply additional information, suitable to the City, with regard to the gross receipts it believes should have been excluded. The Taxpayer should provide all evidence for the City to review within 30 days of the date of this determination. Once the City has evaluated the new evidence, it must issue a new final determination and revise the assessments as warranted.
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/839.M