Should a furniture store with separately billed design work and significant custom framing be classified only as a BPOL retailer?

Subject

Furniture sales were retail, while custom framing could require a separate service classification

Plain-English summary

Virginia treated the company's furniture-and-furnishing activity as retail but left open a separate BPOL classification for custom framing. The company earned 60%-65% of annual receipts from furniture and furnishing sales, 35%-40% from custom framing, and less than 1% from separately billed design services.

Furniture sold to individual consumers at retail prices qualified as retail sales. Design supplied at no charge with those purchases was ancillary, as were third-party fabrication, upholstery, and installation services offered only with the company's merchandise.

Standalone interior design was a service activity, but its tiny receipt share made a separate business license highly doubtful. The local taxing official, not the Department, had to make that final determination.

Custom framing was also classified as a service rather than retail. Because it produced a significant share of receipts, the company might operate multiple businesses. The company had to provide the locality enough facts to decide whether framing was subordinate to retail sales or independently substantial enough for dual classification.

What this means for you

• BPOL classification looks at the nature of the business and how it earns receipts, not sales-tax labels alone.
• Free services tied to merchandise sales are presumed ancillary to the charged retail activity.
• Separately billing an activity does not automatically make it a separate business.
• A substantial custom service line can require dual classification even when the company's largest activity is retail.

Common questions

Was the furniture business a retailer?

Yes, assuming the stated sales were to individual consumers for personal use at retail prices.

Did separately billed design work require another license?

Virginia said that was highly doubtful at less than 1% of receipts, but the local official had to decide.

Was custom framing retail?

No. The cited BPOL rules classified picture framing as a service, and its 35%-40% receipt share could support dual classification.

Citations and references

• Va. Code §§ 58.1-3701, 58.1-3706, and 58.1-3703.1(A)(1).
• 23 VAC 10-500-10, 10-500-100(B), 10-500-110(B), 10-500-350, 10-500-480, and 10-500-500.
• 1994 Op. Va. Att'y Gen. 99.
• Virginia Public Document 08-40.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-139

Original ruling text

September 21, 2009

Re: Request for Advisory Opinion

Business, Professional and Occupational License Tax',

Dear *:

This is in response to your letter in which you request an advisory opinion regarding the classification of a business for purposes of the Business, Professional and Occupational License (BPOL) tax.

The local license fee and tax are imposed and administered by local officials. Virginia Code § 58.1-3701 authorizes the Department to promulgate guidelines and issue advisory opinions on local license tax issues. The following opinion has been made subject to the facts presented to the Department summarized below. Any change in these facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulations and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.

FACTS

The Company has a definite place of business in a locality that imposes a BPOL tax. The Company has two aspects to its business: (1) an interior decoration department, and (2) a framing department. The Company provides design, consultation and similar services to its customers. When the Company provides solely design, consulting or other services it charges an hourly rate for such services. Provision of services generates less than 1% of the Taxpayer's annual gross receipts.

The Company's store displays furniture and furnishings for sale and delivery to customers. Customers can also order items through catalogs and procure installation and upholstery services from a third-party source. All fabrication and upholstery services are connected with merchandise purchased from the Company. The Company coordinates all of these purchases, buying the merchandise and the fabrication services for resale to the customer. Design services with respect to any of the furniture and furnishings purchased from or through the Company are provided at no charge. The goods and services are purchased at wholesale prices and are marked up and resold to its customers at a retail price. These activities produce 60 to 65% of

the Company's gross receipts annually.

The Company also provides custom framing for various pictures and works of art. Typically, the art is brought in by customers. The Company will help a customer select the molding, mat board, glass, and other components and custom builds a frame for the picture. The charge for tree framing is inclusive of all design services and labor required to make the frame. The framing activities produce 35 to 40% of the Company's gross receipts annually.

The Company requests a ruling that it should properly be classified as a retail merchant for BPOL tax purpose. The Company further requests that the Department rule that the de minimis amount of revenues attributable to separately billed interior design services does not require it to obtain a separate business license.

OPINION

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. The classifications are explained under Title 23 of 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 the enterprise generates gross receipts.

3. Where the enterprise conducts its business.

4. Who are the enterprise's customers?

5. How the enterprise holds itself out to the public.

6. The enterprise's NAICS code.

The Company believes it should properly be classified as a retail merchant for BPOL tax purposes. It cites several authoritative definitions and Virginia court cases defining a merchant. However, the term merchant is never used in either Chapter 37 of Title 58.1 with reference to the tax imposed on retailers. The BPOL tax is imposed on those businesses that make "retail sales." See Va. Code § 58.1-3706 A. 2. Further, Va. Code § 58.1-3703.1 3 a 2 governs the situs of gross receipts of retailers.

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." No single factor, such as price, purpose, or place, can always distinguish between wholesale and other types of sales. However, Title 23 VAC 10- 500-350 states that consideration should be given as to whether a sale is "to an individual consumer for the consumer's own personal use" or "to another merchant for resale."

In this case, the Company is not making sales for resale. Thus, the issue becomes whether the Company is making sales to individual consumers for their own personal use.

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.

The Company is conducting three separate activities that must be considered: (1) interior design services; (2) sales of furniture and furnishings; and (3) custom framing.

Interior Design Services

When the Company provides interior design, consultation and similar services to its customers not associated with the purchase of furniture and furnishings, it is clearly

not engaged in making retail sales. In fact, "interior decorating" is classified as a "service business" under the Title 23 VAC 10-500-500.

The Company has asked the Department to rule that the interior design portion is not subject to a separate business license. As stated above, such a determination is the responsibility of local taxing officials. Based on the low amount of gross receipts generated by the design services as stated in your letter, the Department finds it highly doubtful that the gross receipts from this activity rise to the Ievel of a separate business. If not subject to separate licensure, the gross receipts generated from design services would be taxed at the same rate as the primary business.

Furniture and Furnishing Sales

The Company believes that its primary business is making retail sales of furniture and furnishings. The Company points to the "true object" test under Title 23 VAC 10-210-4040 and the treatment of fabrication labor Title 23 VAC 10-210-560, which regulate Virginia's retail sales and use tax.

The BPOL tax, however, is a local tax that is separate and distinct from the Commonwealth's retail sales and use tax. It is not a transaction based tax; rather, it is a tax based on the privilege of engaging in business. For example, retail sales for BPOL purposes do not include sales to institutional, commercial, and industrial consumers, while such sales could be subject to the retail sales and use tax. Consequently, the Department has not found the application of retail sales and use tax regulations authoritative in BPOL tax cases.

In distinguishing between retail and wholesale sales, Title 23 VAC 10-500-350 D 1 sets forth the two factors in determining a retail sale. The first is whether the sale of merchandise is made for the personal use by individual consumers. The second is whether retail price is offered to consumers on such merchandise. The Company states that it sells furniture and furnishings at retail prices. Presuming that the Company sells to individual customers for their personal use, the sales of furniture and furnishings would be retail sales.

According to the Company, however, some question has been raised by local auditors who have focused on interior decorating as providing primarily design services. The Company argues that because no separate charge is made for design or consulting services when sales of furniture and furnishings are made, such activity is ancillary to the retail sales. Under Title 23 VAC 10--500-110 B, "An activity for which no separate charge is made is presumed to be ancillary to the activity for which a separate charge is made, but separately stating charges for different activities does not create a presumption that each such activity is a separate business." Further, in Public Document (P.D.) 08-40 (4/17/2008), the Department stated that an interior designer or decorator could provide services that may be considered ancillary to the sale of home furnishings. Based on the facts presented, the Company's design services provided in conjunction with the sale of furniture and furnishings at no charge are ancillary to the retail sales.

As for the labor charges associated with projects such as making drapes upholstering furniture, or installing furnishings performed by third party vendors and passed through to the customer by the Company, Title 23 VAC 10-500-100 B states, "Gross receipts that are not ancillary to a licensable business must rise to the level of a separate business to be taxable." The regulation goes on to state that the provision of delivery services by a third party vendor offered for a fee only with respect to merchandise sold by a retailer is ancillary to the retailer's business.

This same reasoning is applied to the labor charges passed through by the Company to its customers. The third party provides the services only for merchandise purchased by customers. Thus, the labor charges are ancillary to the Company's furniture and furnishing sales.

Because more than half of the Company's gross receipts are from the retail sales of furniture and furnishings, it should be classified as a retailer for BPOL tax purposes.

Custom Framing

The Company also maintains that it sells custom frames at retail. The frames are made from inventory on hand purchased at wholesale and sold at a standard retail markup.

Many retailers carry picture frames in standard sizes for sale at retail prices. The fact that custom framing includes design services and the labor to make the frame and install the picture or art work into such frame along with framing materials demands further evaluation. A customer may choose custom framing when the art work will not fit into a standard frame, when special protection is required, or a custom display is desired. In such cases, the customer is seeking the expertise of the framer in addition to a frame.

Title 23 VAC 10-500-480 provides for services that are not clearly identified as financial, real estate or professional to be classified as "repair, personal, business and other services. Under Title 23 VAC 10-500-500, "picture framing and gilding" is listed among those businesses considered to be rendering a repair, personal or business service, or other service. Accordingly, the Company's custom framing business does not appear to be sales at retail.

Unlike the interior design services, the custom framing makes up a significant part of the Company's business. The facts presented indicate that the Company might be operating multiple businesses. Specifically, a determination would have to be made as to whether or not, based on the facts and circumstances, the custom framing services are subordinate, subservient, auxiliary or in aid of the furniture and furnishings sales. It would be incumbent upon the Company to furnish sufficient information to the local official to make a determination as to whether a dual classification is appropriate.

If you have any questions regarding this advisory opinion, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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