Is artwork held by a Virginia gallery on consignment inventory subject to the gallery's local merchants' capital tax, and how is purchased art valued?

Subject

Art sold on consignment would not be inventory subject to the merchants' capital tax.

Plain-English summary

A gallery did not include consigned artwork in its merchants' capital inventory because the gallery did not own it. In a consignment, the artist entrusted the work to the gallery to sell as agent. Virginia's advisory opinion distinguished that property from artwork the gallery bought for resale, which would be inventory subject to the local tax.

The artist's federal income-tax rule under IRC § 263A(h) did not decide the local-tax question. That rule addresses which production expenses artists must capitalize for federal inventory-cost purposes, while Virginia's federal conformity generally applies to income tax and the merchants' capital statutes are not tied to federal income-tax treatment.

For inventory the gallery actually owned, the statutes did not prescribe a valuation method, but cited Attorney General opinions used cost basis. County B valued inventory at 100% of the gallery's cost to buy the art. The gallery had to keep records sufficient for the local commissioner of the revenue and prove its reported value.

What this means for you

• Written consignment records should establish that the artist retains ownership until sale.
• Artwork bought outright for resale can be inventory even when consigned artwork is not.
• Federal artist-capitalization treatment does not control this local merchants' capital tax.
• Confirm valuation and filing requirements with the locality administering the tax.

Common questions

Could a locality impose both BPOL and merchants' capital tax on the same merchant?

The opinion says a locality may impose one or the other, but not both.

Was this a binding ruling on County B?

No. The Department expressly characterized it as advisory guidance because local officials impose and administer the tax.

Citations and references

• Va. Code § 58.1-3983.1.
• Va. Code §§ 58.1-3509 and 58.1-3510 A.
• Va. Code § 58.1-3704.
• Va. Code § 58.1-301; IRC § 263A(h).
• Va. Code § 58.1-3109(6) and § 58.1-3983.1 B(4).
• 2006 Op. Va. Att'y Gen. 06-036; 1972-1973 Op. Att'y Gen. 407; 1990 Op. Att'y Gen. 262; 1988 Op. Att'y Gen. 560.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-63

Original ruling text

April 21, 2011

Re: Request for Advisory Opinion

Merchant's Capital Tax

Dear *:

This is in response to your letter in which you request an advisory opinion regarding the application of the merchants' capital tax to an artist's inventory sold on consignment in an art gallery.

The merchants' capital tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue advisory opinions on local business tax matters. The following opinion has been issued subject to the facts presented to the Department summarized below. Any change in facts or the introduction of new facts may lead to a different result.

While addressing the questions raised in your letter, this response is intended to provide advisory guidance only and does not constitute a formal or binding ruling. The Code of Virginia sections and public documents cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov.

FACTS

The Taxpayer is an artist who produces works of art in her studio located in the * (County A). The Taxpayer sells her work on consignment in a gallery located in the *** (County B). County B imposes a merchants' capital tax in lieu of the Business, Professional and Occupational License (BPOL) tax on merchants' gross receipts located in County B. The Taxpayer asks whether art is inventory for purposes of the merchants' capital tax. She also seeks an explanation of art inventory valuation.

OPINION

All tangible personal property, unless declared intangible under the provisions of Va. Code § 58.1-1100 et seq. , is reserved for local taxation by Article X, § 4 of the Constitution of Virginia. The capital of merchants is segregated for local taxation only. See Va. Code § 58.1-3509.

Merchants' capital, as defined in Va. Code § 58.1-3510, includes inventory for sale as merchandise and daily rental vehicles. A locality may impose either a BPOL tax or a merchants' capital tax on merchants, but it is forbidden from assessing both. See Va. Code § 58.1-3704. Accordingly, for those businesses that are selling merchandise, a locality may impose either a license tax on the privilege of doing business, or it may impose a merchants' capital tax on the businesses' inventory.

Inventory

The Taxpayer contends that works of art are exempt under Internal Revenue Code (IRC) § 263A. Rather, this code section addresses what expenses must be included in inventory costs for purposes of federal income tax. Specifically, IRC § 263A(h) exempts writers, photographers, and artists from being required to capitalize any expenses incurred from producing the writing, photographs, or works of art.

Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the IRC unless a different meaning is clearly required. For income tax purposes, Virginia "conforms" to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income. For Virginia tax purposes, conformity is limited to income tax unless specifically specified. Because merchants' capital tax statutes are not tied to federal tax law, IRC § 263A has no bearing as to how inventory is valued for merchants' capital tax purposes.

Virginia Code § 58.1-3510 A defines merchants' capital as, in pertinent part, "[i]nventory of stock on hand." There is no statutory definition of "inventory of stock on hand." However, the Attorney General has opined that the meaning of "inventory of stock on hand" would be goods and materials kept on hand by a commercial establishment for sale. See 2006 Op. Va. Att'y Gen 06-036. As such, works of art that are held for sale by a commercial gallery could be considered inventory for purposes of the merchants' capital tax.

In this case, however, the Taxpayer's works of art are being sold on consignment by the gallery in County B. In a consignment sale, property is entrusted to an agent to sell on behalf of the property's owner. See Black's Law Dictionary 370 (8th ed. 2004). Inventory that is in possession of a dealer is subject to the merchants' capital tax if it is owned by the dealer, not if the dealer is holding the inventory on consignment for an owner. See 1972-1973 Op. Att'y General 407. As such, works of art sold on consignment by a gallery would not be inventory subject to the merchants' capital tax. Works of art that are purchased by a gallery for resale would, however, be inventory subject to the merchants' capital tax.

Valuation

The Taxpayer also requests an opinion regarding the valuation of art inventory. The statutes do not prescribe a methodology for valuing inventory for merchants' capital tax purposes. The Attorney General, however, has opined that inventory subject to the merchants' capital tax must be valued on a cost basis. See 1990 Op. Att'y General 262 and 1988 Op. Att'y General 560. County B values inventory at 100% of the cost. In other words, if a gallery located in County B purchases works of art for resale, the works of art would be valued for purposes of the merchants' capital tax at the gallery's cost to purchase the art.

Under the provisions of Va. Code § 58.1-3109 6, the local commissioner of the revenue is empowered with the authority to require records and other information necessary to make an accurate assessment of a dealer's inventory. It is incumbent upon the dealer to prove to the satisfaction of the local taxing authority that it properly reported the value of its property on its merchants' capital returns. See Va. Code § 58.1-3983.1 B 4.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4599859879.B