Did an automotive alternator remanufacturer qualify as a manufacturer whose wholesale sales from the place of manufacture were exempt from local BPOL tax?

Subject

Taxpayer's business is an integrated part of its parent's business; Automotive parts

Plain-English summary

A wholly owned subsidiary rebuilt worn or defective alternators by disassembling them, replacing broken and worn parts, cleaning and reusing casings, and performing quality-control testing. Some work occurred entirely in the county, while other alternators began processing elsewhere and were completed there. The finished alternators were sold at wholesale.

The county treated the subsidiary as a manufacturer for machinery-and-tools property tax but denied manufacturer treatment for BPOL tax. Virginia had previously advised that the taxpayer qualified if new materials were manufactured at its plant or its operations were so integrated that they could not be segregated for local tax purposes.

The Tax Commissioner found both meaningful county manufacturing activity and integration with the parent's automotive-parts manufacturing business. He found no basis to overturn the prior manufacturer classification and remanded the case with instructions to refund excess BPOL tax, including penalties and interest.

What this means for you

• Remanufacturing can qualify as manufacturing when the process rebuilds used components into a finished product for wholesale sale.
• Operational integration with a parent manufacturer can matter when local activities cannot realistically be segregated for BPOL classification.
• A local BPOL assessment is presumed correct on appeal, so the taxpayer must prove the classification or measure is wrong.
• This ruling followed an earlier opinion involving the same taxpayer and facts; it is not a general exemption for every repair or rebuilding business.

Citations and references

• Va. Code § 58.1-3703.1, Department review of local BPOL determinations.
• County of Chesterfield v. BBC Brown Boveri, 238 Va. 64, 380 S.E.2d 890 (1989).
• P.D. 02-76 (May 2, 2002), the earlier classification opinion discussed in this determination.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-52

Original ruling text

April 26, 2007

Re: Application for Correction of Final Local Determination

Taxpayer: *­

Locality Assessing Tax: *

Business, Professional and Occupational License 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 made by the Commissioner of the Revenue of the *** (the "County") denying a refund request for Business, Professional and Occupational License (BPOL) taxes paid for tax years 2001 through 2004.

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. That is, 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 public document cited and other reference documents are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website.

FACTS

The Taxpayer is a wholly owned subsidiary of a manufacturer of automotive parts. The Parent manufactures alternators and other automotive parts in locations throughout the United States and in other countries. The Taxpayer handles alternators returned due to manufacturing flaws and trade-ins of worn out alternators. The Taxpayer disassembles the alternator, replaces broken and worn parts, and performs quality control testing on the "new" alternator. Essentially a new alternator is built, with the exception of the casing, which is usually cleaned and put on the "new" alternator.

In some cases, the entire rebuilding of the alternators occurs in the County. However, in many cases the work begins at the Taxpayer's facility in another locality and is completed in the County. Between 10 and 20 percent of the parts used in the rebuilding of the alternators are new; the remainder are refurbished parts. The Taxpayer then wholesales the remanufactured parts to retailers.

Although the majority of the Taxpayer's business is devoted to rebuilding alternators manufactured by the Parent, about 15% of the Taxpayer's business is rebuilding alternators for other manufacturers. These "new" alternators are also sold at wholesale under the Taxpayer's name or some other name to retail markets.

The County treats the Taxpayer as a manufacturer for purposes of personal property taxation, applying the machinery and tools rate to the Taxpayer's tangible personal property used in the remanufacture of the alternators. The County has determined that the Taxpayer is not a manufacturer for BPOL tax purposes, however. The Taxpayer appeals the County's determination.

ANALYSIS

The Department addressed this issue in an advisory opinion concerning the correct classification of the Taxpayer. See Public Document (P.D.) 02-76 (05/02/2002). In that opinion, citing County of Chesterfield v. BBC Brown Boveri 238 Va. 64, 380 S.E.2d. 890, (1989), the Department found that the Taxpayer should be classified as a manufacturer, and its sales at wholesale from the place of manufacture would be exempt from BPOL taxation if either of the two following conditions were present:

1. the "new" materials are manufactured at the Taxpayer's plant; or

2. the company is integrated to such an extent that its activities cannot be segregated for purposes of local taxation.

In the present case, the alternators are indeed rebuilt or manufactured at the Taxpayer's location in the County. Furthermore, the Taxpayer's business is an integrated part of its parent's business, which in part, is the manufacture of alternators for sale at wholesale to retailers.

DETERMINATION

Based on the facts presented, I find no basis to overturn the Tax Commissioner's previous opinion that classified the Taxpayer as a manufacturer for purposes of the BPOL tax. I am remanding this to the County with the instruction to refund any excess taxes paid, including penalties and interest, to the Taxpayer.

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

Sincerely,

Janie E. Bowen

Tax Commissioner

1-691206301H