Did a 2012 retailer classification automatically entitle an equipment broker to earlier BPOL refunds?

Plain-English summary

Virginia did not treat the business's 2012 retailer classification as proof that all earlier BPOL returns were wrong. Refund claims for years before 2009 were barred by the local-tax limitations period.

For 2009 through 2011, the business had described itself as an equipment broker and paid the service-provider rate. A broker earning commissions without taking title is generally providing a service. Retailers typically buy inventory for resale to final consumers, while wholesalers may sell at wholesale or to industrial, commercial, or governmental users.

The taxpayer offered no evidence of its actual transactions beyond changing its 2012 return. The county also relied too heavily on the taxpayer's earlier self-labels and cited sales-tax rules that Virginia said were unreliable for BPOL classification.

Virginia remanded the timely years for factual reconsideration. The taxpayer had 30 days to document retail operations; without sufficient proof, the county's determination would be treated as correct.

What this means for you

• File local refund claims within three years after the tax year or one year after assessment, whichever is later.
• Classification turns on actual receipts, title, inventory, customers, and transactions—not a return label alone.
• A later classification does not automatically apply retroactively.
• NAICS codes can help but do not control BPOL treatment.
• Sales-tax classifications are not reliable substitutes for local BPOL rules.

Common questions

Q: Were 2003-2008 refunds considered?
A: No. Those claims were barred by the statute of limitations.

Q: Did Virginia decide the business was a retailer?
A: No. It sent 2009-2011 back to the county for a fact-based determination.

Q: What happened if the taxpayer supplied no records?
A: The county's existing classification would be considered correct.

Citations and references

• Va. Code §§ 58.1-3109 2, 58.1-3703.1, 58.1-3706 A, and 58.1-3980.
• 23 VAC 10-500-10 et seq. and 10-500-350 A-B.
• Virginia Public Documents 99-100, 04-45, 08-136, 09-93, 09-139, 11-44, 11-83, and 12-220.

Subject

On its 2012 BPOL return, the Taxpayer reclassified itself as a supplier

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-25

Original ruling text

March 5, 2013

Re: Appeal of Final Local Determination

Locality: *

Taxpayer: *

Business, Professional and Occupational License Tax

Dear *:

This final state determination is issued upon the application for correction filed on behalf of * (the "Taxpayer") with the Department of Taxation. You request a refund of Business, Professional and Occupational License (BPOL) taxes paid by the Taxpayer to the *** (the "County") for the 2003 through 2011 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 has operated at a definite place of business in the County since 2003. The Taxpayer classified itself as an equipment broker, both on its original business license application, and on all of its County BPOL tax returns through the 2011 tax year. As such, it paid BPOL tax at the rate for service providers. On its 2012 BPOL return, the Taxpayer reclassified itself as a supplier. In accordance with this reclassification, the County determined that the Taxpayer was subject to tax at the retail rate and issued a refund for the 2012 tax year.

The Taxpayer filed an appeal requesting a refund of BPOL taxes paid, maintaining that it should have been classified as a retailer for all prior years because the County accepted the retailer classification for the 2012 tax year. In its final local determination, the County held that the Taxpayer was a service provider for the 2009 through 2011 tax years based on how it classified itself on its BPOL returns. Accordingly, the County denied the Taxpayer's request for a refund. The Taxpayer appeals the County's final determination to the Tax Commissioner, contending it should have been liable for the BPOL tax as a retailer.

ANALYSIS

Limitations on Appeals of Local Tax Assessments

The Taxpayer filed a request for reclassification and refunds in October 2012 for all the tax years it was in operation. Virginia Code § 58.1-3980 provides that any person aggrieved by an assessment of local taxes:

may, within three years from the last day of the tax year for which such assessment is made, or within one year from the date of the assessment, whichever is later , apply to the commissioner of the revenue or such other official who made the assessment for a correction thereof. [Emphasis added.]

The term "tax year" generally applies to the calendar year for which local taxes are assessed under Virginia law. See Public Document (P.D.) 08-136 (7/30/2008). Based on the date the claims were filed, the earliest tax year for which the Taxpayer could have timely filed a refund claim under the statute of limitations would be the 2009 tax year. Any refund claim for tax years prior to 2009 would be barred by the statute of limitations. Accordingly, the Department's determination will be limited to the 2009 through 2011 tax years.

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 A. These classifications are regulated 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:

What is the nature of the enterprise's business?

How does the enterprise generate gross receipts?

Where does the enterprise conduct its business?

Who are the enterprise's customers?

How does the enterprise hold itself out to the public?

What is the enterprise's North American Industry Classification System (NAICS) code?

On the 2012 BPOL tax return, the Taxpayer classified itself as a retail merchant. 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.

Other than reporting itself as a retailer on its 2012 BPOL tax returns, the Taxpayer has provided no documentation that its operations include such activities. Further, the County has relied heavily upon the Taxpayer's self classification on its BPOL tax returns.

In its final determination, the County indicated that the Taxpayer had identified itself as wholesaler of machinery and equipment under the NAICS. For purposes of BPOL taxation, Title 23 VAC 10-500-350 A recognizes the wholesale trade as the selling at wholesale prices and in large quantities to others who will then resell such goods either to ultimate consumers or further down the normal distribution chain. Under this regulation, a wholesale trade or business could also include sales to industrial, commercial, or governmental users. The Department has found the NAICS definitions of industries may be useful in evaluating business classification, but they are not controlling. See P.D. 11-83 (6/2/2011).

The County cited Virginia's sales and use tax regulation regarding mining and mineral processing, Title 23 VAC 10-210-960, as authority for considering the classification of the Taxpayer for BPOL tax purposes. The Department has repeatedly held that Virginia retail sales and use tax regulations and policies are not reliable resources for evaluating local tax issues. See P.D. 04-45 (8/13/2004), P.D. 09-93 (6/11/2009), P.D. 09-139 (9/21/2009), P.D. 11-44 (3/23/2011), and P.D. 12-220 (12/21/2012).

On the 2009 through 2011 BPOL tax returns, the Taxpayer described its business activity as an equipment broker for the mining industry. Services are defined in Title 23 VAC 10-500-10 as "things purchased by a customer that do not have physical characteristics, or that are not goods, wares, or merchandise." Service providers are subject to the BPOL tax on the gross receipts derived from compensation paid for the services they provide. In P.D. 99-100 (5/6/1999), the Department ruled that an equipment broker's activity is considered a service rather than a retail or wholesale sale. In that case, the brokers received a commission for facilitating the sale of property without taking title to that property.

Under the provisions of Va. Code § 58.1-3109 2, the local commissioner of the revenue is required, upon investigation, to assess the proper license taxes. Distinguishing whether a taxpayer should be properly classified as retailer, wholesaler or service provider requires a thorough review of the Taxpayer's licensable activities.

DETERMINATION

Other than its declaration on its BPOL returns, the Taxpayer has provided no explanation or documentation concerning its licensable business operations. Further, in its final determination, the County relied almost solely on the Taxpayer's descriptions on the BPOL returns in determining the appropriate business classification.

Because the determination of a taxpayer's classification is a factual determination, this case is being remanded back to the County with the instruction to reconsider the Taxpayer's appeal with regard to the 2009 through 2011 tax years. The Taxpayer should provide the County with sufficient documentation to show it operated as a retail merchant. Such documentation should be submitted within 30 days of the date of this letter.

Once the County determines the Taxpayer's proper classification, it should make any appropriate adjustments to the Taxpayer's liability for the tax years at issue. If the Taxpayer fails to provide sufficient documentation, the County's determination will be considered to be correct.

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/1-5229775604.B