March 15, 2022
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business, Professional and Occupational License (BPOL) Tax
Business Tangible Personal Property (BTPP) Tax
Machinery & Tools (M&T) Tax
Dear *****:
This final state determination is issued upon the application for correction filed by ***** (the “Taxpayer”), with the Department of Taxation. The Taxpayer appeals the assessments of BPOL tax issued to the Taxpayer for the 2017 through 2019 tax years and the assessments of BTPP tax for the 2016 through 2019 tax years by ***** (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 tax assessment by a local assessing officer 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 was a fabricator of countertops. It transformed slabs of raw granite and marble into finished countertops. The installation of the countertops was performed by unrelated third party contractors. The Taxpayer classified itself as a contractor for purposes of the BPOL tax. In addition, it did not remit BTPP tax on its fabricating equipment.
As the result of an audit, the County issued assessments of BTPP tax for the 2016 though 2019 tax years to the Taxpayer. The Taxpayer appealed the assessments to the County, contending that its equipment constituted machinery and tools used in manufacturing and should be taxed at the applicable Machinery and Tools (M&T) tax rate. The County requested additional information in order for it to determine whether the Taxpayer was a manufacturer for purposes of both the BTPP and BPOL taxes. Based on the documentation it received and a site visit, the County determined that the Taxpayer should be classified as a retailer in part and a wholesaler in part for purposes of the BPOL tax, and that it was not performing manufacturing. Accordingly, BPOL tax was assessed for the 2017 through 2019 tax years and the BTPP tax assessments were upheld. The Taxpayer appealed the assessments of BTPP and BPOL taxes to the Department, asserting that it should be classified as a manufacturer for purposes of the BPOL and BTPP taxes.
In Public Document (P.D.) 21-62 (5/18/2021), the Department remanded the case to the County to issue a proper final local determination. The Department also instructed the Taxpayer to amend its local appeal to include an appeal of its BPOL classification.
The County re-issued a final local determination letter in response to the Taxpayer’s amended appeal. It determined that the Taxpayer was not a manufacturer for purposes of the BPOL and BTPP taxes because it merely cut a slab to order and the finished product was still a slab of granite or marble. The Taxpayer appeals the assessments to the Department, asserting again that it should be classified as a manufacturer.
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 Virginia Code § 58.1-3703 C 4. The local business tax 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, 380 S.E.2d 890 (1989). As such, for local business 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.
The process of fabricating a countertop began with multiple slabs of granite or marble that were trimmed down to approximate job specifications. Excess stone was cut off by a saw specifically designed for stone cutting. If a customer requested a mitered edge, two slabs were cut at 45 degree angles by the saw and glued to form a new edge. A power hand saw was then used to cut excess slab material left by the bridge saw. The hand saw also cut the part of the slab where a sink would be installed. A hole saw bit was used to cut holes in the sink countertop area where the faucet would be installed. A grinder or stone cutter was used to cut a decorative edge if a mitered edge was not selected. The countertop was then buffed and polished. Next, sealant was applied to protect the countertop from stains and spills. Finally, the finished countertops were quality checked to ensure they met the job specifications and the surfaces were free of color imperfections and scratches.
For purposes of the BPOL tax, Title 23 VAC 10-500-520 C provides that in order for manufacturing to occur, the:
Mere manipulation or rearrangement of the original materials is not sufficient; there must be a substantial, well-signified transformation in form, usability, quality and adaptability rendering the original material more valuable for use than it was before. Merely processing, blending, grading, etc. material is not manufacturing.
Further, this regulation provides factors used to help determine whether a process is manufacturing or assembly. Factors that suggest the production is manufacturing include, but are not limited to, whether: 1) the assembly process is complex and uses numerous parts; 2) after assembly, the components cannot be recognized without previous knowledge; and 3) the components are not readily usable for any purpose other than incorporating into the finished product.
In this case, the only components were the granite or marble slabs and the mounting studs. The process for transforming a slab into a finished countertop, however, was complex. It required cutting to precise measurements, creating edges, multi-step polishing and sealing. Once, the countertop was finished, it could not be used as anything other than a countertop.
The County asserts that no substantial transformation took place because the finished product was fundamentally a slab of granite or marble. The County essentially argues that the slab was still recognizable as a marble or granite slab after being fabricated into a countertop. In P.D. 09-94 (6/11/2009), the Department determined that cutting wood, metal and glass to specified lengths and combining these pieces to form picture frames satisfied the three part manufacturing test set out in BBC Brown Boveri. Clearly the wood, metal and glass in the finished picture frame could be recognized as the individual pieces of wood, metal and glass. In this case, the finished countertop would be recognized as originating from a slab of granite or marble. This recognition, however, does not change the fact that a substantial alteration occurred.
Wholesale Sales
In order to be classified as a manufacturer for BPOL tax purposes, it is not enough that the business be conducting substantial manufacturing activities. An entity must be selling goods, wares or merchandise at wholesale. As it is the public policy of Virginia to encourage manufacturing, the words “selling goods, wares and merchandise at wholesale” must be liberally interpreted.
Wholesale trade is generally recognized as the selling at such prices and in such quantities to others who will then resell such goods either to ultimate consumers or further down the normal distribution chain. See Title 23 VAC 10-500-350 A. Not all manufacturers sell at wholesale, however. For example, in P.D. 97-146 (3/27/1997), it was determined that manufacturers selling at retail are subject to license taxation on gross receipts from retail sales. See also P.D. 18-164 (9/26/2018). The underlying reasoning for these determinations resulted because Virginia Code § 58.1-3703 C 4 only exempts a specific privilege undertaken by a manufacturer and does not provide a blanket exemption for manufacturers. See P.D. 98-154 (10/16/1998).
Under Title 23 VAC 10-500-10, a “retail sale” is defined as “a sale of goods, wares and merchandise for use or consumption by the purchaser or for any purpose other than resale by the purchaser, but does not include sales at wholesale to institutional, commercial, industrial, and governmental users that are classified as wholesale sales.” While no single factor, such as price, purpose, or place, can always distinguish between wholesale and other types of sales, retail merchants typically purchase inventory for resale and sell such inventory to an individual consumer for the consumer’s own personal use. See Title 23 VAC 10-500-350 B.
In this case, the Taxpayer indicates that it sold its countertops to commercial customers which included architects, interior designers, general and subcontractors, home builders, kitchen designers and remodelers. These customers then resold the countertops to the homeowners when building or remodeling kitchens. Such sales would qualify as wholesale sales.
In addition, the Taxpayer also sold countertops directly to homeowners. Such sales would be considered retail sales and would not be exempt from BPOL tax.
Personal Property Tax
All tangible personal properly, unless declared intangible under the provisions of Virginia 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 Virginia 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. Although manufacturers are not subject to the BTPP tax, they are subject to the M&T tax on machinery and tools used directly in the manufacturing process.
DETERMINATION
Accordingly, for the tax years at issue, I find that the Taxpayer was a manufacturer for purposes of the BPOL tax and the BTPP tax. As a manufacturer, the Taxpayer was exempt from the BPOL tax on sales at wholesale at the place of manufacture. Any retail sales made, however, would not be exempt.
Further, the Taxpayer was subject to the M&T tax on equipment used in its manufacturing process. Property not used in the manufacturing process would be exempt from local property taxation.
The case will be remanded to the County in order to adjust the assessments of BPOL and BTPP tax for the tax years at issue in accordance with this determination and issue updated bills or refunds, 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/3893.B