Was a water-deionization company's BPOL business wholesale sales, contracting, or a business service?

Plain-English summary

Virginia upheld BPOL classification of the water-deionization operation as a business service. Customers sought purified water meeting their business requirements, not merely individual chemicals or pieces of equipment.

The company designed, installed, serviced, and maintained systems. Customers bought chemicals and replacement parts and leased tanks, but those items worked only as part of the water-purification process.

The sales and tank-related charges therefore did not change the transaction's service character. Installation under the contractor's license also existed to support the primary purification service and was ancillary rather than a separate contracting business.

What this means for you

• BPOL classification follows what the customer principally buys.
• Tangible components do not necessarily make an integrated activity wholesale.
• Installation can be ancillary when it exists only to support the main service.
• Separate, independently useful product sales could require a different analysis.

Citations and references

• 2000 BPOL Guidelines § 1.
• P.D. 97-257.

Subject

Ancillary and Primary business

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 06-133

Original ruling text

October 30, 2006

Re: Appeal of Final Local Determination

Taxpayer: *

Locality Assessing Tax:*

Business, Professional and Occupational License (BPOL) Tax

Dear *:

This final state determination is issued upon the application for correction filed by you on behalf of * (the "Taxpayer") with the Department of Taxation. You appeal a final local determination upholding assessments of BPOL tax made by the Commissioner of the Revenue of *** (the "County") for the tax years 2002 through 2005.

The following determination is based on the facts presented to the Department summarized below. 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 Taxpayer sells, installs and services water purification equipment. The Taxpayer purchases components from manufacturers and sells them as a water system. The water purification systems are custom designed and installed by the Taxpayer. The Taxpayer also services and maintains the systems.

The issue in this appeal concerns deionization systems. A deionization system involves chemical replacement in tap water. Deionization tanks are recharged with the chemicals at the Taxpayer's place of business. When a customer's deionization tank is exhausted, a recharged tank is attached to the customer's water system. The customer purchases the chemicals and leases the tank from the Taxpayer. The Taxpayer provides maintenance and minor repairs on site. The Taxpayer maintains a Virginia contractor's license for the purpose of installing the systems into existing buildings and new constructions.

The Taxpayer had been classified as a wholesale merchant for BPOL tax purposes. As the result of an audit, the County reclassified the portion of the Taxpayer's water deionization business as a business service and assessed additional BPOL tax for the tax years 2002 through 2005.

The Taxpayer appeals the additional assessments, contending that it is a wholesale merchant for BPOL tax purposes.

ANALYSIS

Classification

For BPOL tax purposes, the term "wholesale sale" is defined in § 1 of the 2000 BPOL Guidelines as:

a sale of goods, wares and merchandise for resale by the purchaser, including sales when the goods, wares and merchandise will be incorporated into goods for sale, and also includes sales to institutional, commercial, industrial, and governmental users which because of the facts and circumstances surrounding the sales, such as the quantity, price, or other terms, indicate that they are consistent with sales at wholesale.

For BPOL tax purposes, "services" are defined as "things purchased by a customer which do not have physical characteristics, or which are not foods, wares, or merchandise." 2000 BPOL Guidelines § 1.

The issue is whether the Taxpayer's deionization systems constitute the sale of services or wholesale sales. Customers need deionization systems to purify water to satisfy their business requirements. The Taxpayer designs, installs, services and maintains the systems to the customer's specifications. As such, customers are purchasing the water deionization process, not just the chemicals. In essence, the customers are purchasing a service to clean their water. Although customers are charged for tangible property, such as the chemicals, tank rentals, and replacement parts, such purchases do not change the underlying character of the transactions, i.e. , a business service.

Ancillary activity

In Public Document 97-257 (6/11/97), the Tax Commissioner defined the term "ancillary" for BPOL tax purposes:

The term 'ancillary' . . . refers to business activities, which are subordinate, subservient, auxiliary, or in aid of the businesses [sic] 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. To the extent that additional services are offered to make the sale of a good or service more attractive to the consumer, the offering of such supplemental services are usually ancillary to the principal business. [Emphasis added.]

The facts presented in this case indicate that the Taxpayer's sale of the chemicals and replacement parts individually is not useful without the tank leasing or maintenance of the system and other the services provided by the Taxpayer. Likewise, the Taxpayer's contracting activity is not a separate business but instead exists to supplement the principal business of providing a service. Hence, such activities must be considered to be ancillary to the primary business of the Taxpayer.

DETERMINATION

Based on the facts presented, I find that the portion of the Taxpayer's business relating to the deionization systems constitutes a business service. I also find that the Taxpayer's business of installing water purifications systems does not constitute a contracting business for BPOL tax purposes. In this case, the contracting business is ancillary to the Taxpayer's business service. Accordingly, the County's assessments are correct.

If you have any questions regarding this determination, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/57006B