May 22, 2020
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Business, Professional and Occupational License (BPOL) Tax
Dear *****:
This final state determination and notice of jurisdiction is issued upon the application for correction filed by you on behalf of ***** (the “Taxpayer”), with the Department of Taxation. You appeal assessments of Business, Professional and Occupational License (BPOL) tax and local food and beverage tax issued to the Taxpayer by ***** (the “City”) for the 2016 through 2019 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 is a distillery located in the City. The City audited the Taxpayer and issued assessments of BPOL tax for the 2016 through 2019 tax years. The Taxpayer appealed to the City, contending that it was exempt from BPOL tax as an agent of the Virginia Alcoholic Beverage Control Authority (the “Authority”) and as a manufacturer.
In its final determination, the City agreed with the Taxpayer that it was not generally subject to BPOL tax on gross receipts attributable to wholesale sales of distilled spirits that it manufactured or for bottle sales that the Taxpayer made at its distillery store as an agent of the board of directors of the Authority (the “Board”). The City, however, concluded that the Taxpayer was subject to both BPOL tax as well as the local meals tax on alcoholic beverages the Taxpayer sold at tastings. The Taxpayer filed an appeal with the Department, contending that it is exempt from BPOL and local meals taxes as a “government store” under the Virginia Alcoholic Beverage Control Act (Title 4.1 of the Code of Virginia) (the “Act”). In addition, the Taxpayer argues that it is exempt from the local meals tax because it did not operate a food establishment as defined by local ordinance.
ANALYSIS
Alcoholic Beverage Control Act
The Taxpayer argues that it is exempt from BPOL taxation because it sold tastings at a government distillery store it operated as an agent of the board of directors of the Authority (the “Board”). It appears that the Taxpayer is essentially arguing that the Authority is a tax-exempt entity, and it should have enjoyed the same tax exemption to the extent it operated as an agent for the Board.
The Authority is an independent political subdivision of the Commonwealth. See Virginia Code § 4.1-101. The Authority’s tax exemption is described in Virginia Code § 4.1-101.09, which provides in relevant part:
[T]he Authority shall not be required to pay any taxes or assessments upon any property acquired or used by the Authority under the provisions of this title or upon the income therefrom, including sales and use taxes on the tangible personal property used in the operations of the Authority.
Government stores are stores established by the Authority for the sale of alcoholic beverages. See Virginia Code § 4.1-100. Generally, alcoholic beverages at government stores must be sold by Authority employees. See Virginia Code § 4.1-119. The Board, however, can appoint the holder of a distiller’s license or its officers and employees as agents for the Board to sell spirits at government stores established by the Board on the distiller’s premises or at the site of events licensed by the Board. See id. Such agents of the Board may also give samples of spirits for on-premises consumption, provided certain conditions are satisfied. See Virginia Code § 4.1-119 G. According to Authority records, the Taxpayer operates a government distillery store.
Even if the Taxpayer was operating as an agent of the Board with respect to its tasting sales, it does not necessarily follow that gross receipts attributable to such sales were exempt from BPOL tax. Because only Authority employees can normally make such sales by law, the agency relationship for holders of distillery licenses, their officers and employees, none of whom were considered employees of the Authority, was necessary to permit those individuals to make such sales.
Virginia Code § 4.1-101.09 grants the exemption to the Authority itself. The Taxpayer, however, remained a business separate and distinct from the Authority and was thus subject to taxes as such, unless and to the extent otherwise exempt under the Act or the law generally. Therefore, the question becomes to what extent, if at all, was the Taxpayer itself exempt from the BPOL tax.
Because businesses that produce or sell alcohol are heavily regulated by the Act, the Department examined whether and to what extent any other part of the Act may have granted a BPOL exemption to the Taxpayer. Although localities are generally prohibited from imposing sales and excise taxes on alcoholic beverages, they are not prevented from imposing a license or privilege tax on businesses engaged in the sale in whole or in part of alcoholic beverages when certain conditions are met. The tax must be imposed by general law, must include alcoholic beverages in its taxable measure, and must treat them the same as nonalcoholic beverages. See Virginia Code § 4.1-128. A locality may also require, and charge license taxes for, local licenses in addition to the state licenses to manufacture, bottle or sell alcoholic beverages within its jurisdiction. See Virginia Code § 4.1-205. Virginia Code § 4.1-233 imposes limitations on the amount of the local license tax based on category of licensee but that statute also allows localities to impose local wholesale, retail or restaurant license taxes measured by sales, and include alcoholic beverages in the taxable base the same as if the beverages were nonalcoholic. In the opinion of the Department, the Act does not otherwise prohibit the City from imposing the BPOL tax on any retail sales the Taxpayer may have had, provided that the Taxpayer was operating a licensable retail business.
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 Virginia Code § 58.1-3703 C 4. In its final determination, the City concluded that the Taxpayer was a manufacturer making wholesale sales at the place of manufacture and adjusted the assessments accordingly. The City, however, determined that gross receipts attributable to tastings constituted retail sales that were subject to licensure.
Because tastings were sold directly to consumers, the Department agrees with the City that such sales would be considered retail sales. See Title 23 of the Virginia Administrative Code (VAC) 10-500-10. In Public Document (P.D.) 98-154 (10/16/1998), the Department ruled that a manufacturer was exempt from BPOL tax on receipts attributable to products sold at wholesale from the place of manufacturer, but not on any retail receipts or other licensed activities. Under Title 23 VAC 10-500-520 C 1, however, any receipts that are ancillary to a manufacturer’s sales at wholesale at the place of manufacture are also exempt. Thus, the question becomes whether the Taxpayer’s tasting activities were ancillary to its wholesale sales or whether they rose to the level of being a separate business subject to BPOL taxation.
Multiple Businesses
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 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.
A case that is often cited in determining whether a taxpayer is operating separate businesses is Caffee v. Portsmouth, 203 Va. 928, 128 S.E.2d 421 (1962). Caffee involved a bakery that had a manufacturing business because it made the baked goods at the location and also a retail storefront where customers could purchase the baked goods. The court reasoned that the taxpayer was in fact conducting two separate trades or occupations for license tax purposes because the manufacturing component could be performed completely independent of, and without relation to the retail merchandising, even though the source of the retail sales was the taxpayer’s own manufacturing activities. See id. at 203 Va. 928, 930, 128 S.E.2d 421, 423.
The facts of this case are analogous to Caffee, and the reasoning is perhaps even stronger in this case because the Taxpayer was actually required to purchase any products it used for the tastings back from the Authority first. Thus, the exempt manufacturing and wholesale transaction had already been completed before the retail sales even occurred.
Meals Tax
Virginia Code §§ 58.1-3703.1 and 58.1-3983.1 authorize the Department to consider appeals of final local determinations of certain taxes. The ability to file an administrative appeal to the Department for a local tax is limited to the following: BPOL tax, business tangible personal property tax, machinery and tools tax, merchant’s capital tax, local mobile property tax and consumer utility tax. See P.D. 13-82 (5/29/2013) and P.D. 17-218 (12/22/2017).
DETERMINATION
The Department is not authorized to consider appeals of the local food and beverage tax, commonly known as the meals tax. Therefore, I cannot issue a determination regarding the validity of the meals tax assessments issued to the Taxpayer by the City.
The Taxpayer may appeal assessments of the meals tax to the circuit court under the provisions of Virginia Code § 58.1-3984 A. In the Taxpayer’s case, such an appeal must be filed with the circuit court: (1) within three years from the last day of the tax year for which the assessment is made, (2) within one year from the date of the assessment, or (3) within one year from the date of the local official’s final determination under Virginia Code § 58.1-3981, whichever is later.
As to the assessment of BPOL tax, in the Department’s opinion, no provision of the Act exempts the Taxpayer from BPOL tax merely for being an agent of the Board. The Act does, however, preserve a locality’s authority to impose a license tax measured by a taxpayer’s gross receipts even when some part or all of the gross receipts are attributable to alcohol sales. See Virginia Code § 4.1-128.
Although any wholesale sales the Taxpayer made from its place of manufacture were exempt from the BPOL tax, the facts indicate the Taxpayer was operating a separately licensable retail tasting business. According to the City’s final determination, it was only such retail sales that the City used to compute the taxable measure for the BPOL tax. Accordingly, the City’s assessment of BPOL tax is 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/3344.M