Was a farm winery's separately charged wedding and event rental activity a separate business for county BPOL tax?

Plain-English summary

Virginia said the farm winery appeared to have a potentially separate event-rental business, but the record was not enough for a final classification. The case went back to the county for more documentation and reconsideration.

The winery manufactured and sold wine from grapes grown on its farm. It also separately charged customers to rent the property for weddings and other events, while requiring a minimum purchase of the winery's wine.

Under Va. Code § 58.1-3703.1(A)(1) and 23 VAC 10-500-110(B), a separate BPOL license can apply when a taxpayer conducts clearly identifiable businesses that can operate independently. An activity that is subordinate or auxiliary to the principal business may instead be ancillary. Separately stated charges do not automatically settle that question.

Facility rental was a type of activity that could operate independently, as it does for hotels, restaurants, clubs, schools, museums, theaters, and convention centers. Events also promoted the winery, however, so the Department could not decide without examining the books and records.

The ruling rejected two broader arguments. Sales-tax treatment of wine and facility charges did not control BPOL classification because BPOL taxes the privilege of conducting business rather than individual transactions. And Va. Code § 15.2-2288.3(A), limiting certain local regulation of usual farm-winery activities, did not bar a revenue-raising BPOL tax.

The winery was directed to provide records within 30 days showing whether it operated multiple businesses and breaking down wine-sale and facility-rental receipts.

What this means for you

• A complementary activity can still be a separately licensable business if it has independent substance.
• Separate pricing is relevant but does not by itself prove that two businesses exist.
• Keep books that segregate receipts and expenses for production, retail sales, and event rentals.
• Sales-tax classification does not automatically determine local BPOL classification.

Common questions

Q: Did Virginia finally rule that the rental business was separate?
A: No. It said the facts suggested multiple businesses and remanded for documentation.

Q: Did requiring customers to buy wine make rentals ancillary?
A: Not necessarily. The rental activity could still exist independently.

Q: Was BPOL tax prohibited regulation of a farm winery?
A: No. The ruling treated BPOL as a revenue measure, not the kind of regulation addressed by the cited farm-winery statute.

Citations and references

• Va. Code §§ 4.1-233(A)(3)(c), 15.2-2288.3(A), 58.1-3703, and 58.1-3703.1(A)(1).
• 23 VAC 10-500-110(B).
• 1994 Op. Va. Att'y Gen. 99.
• P.D. 97-257, P.D. 98-85, and P.D. 09-139.
• City of Virginia Beach v. Virginia Restaurant Association, Inc., 231 Va. 130, 341 S.E.2d 198 (1986).
• Welles v. Revercomb, 189 Va. 777, 54 S.E.2d 878 (1949).

Subject

Winery; Operation of separately licensable business of renting a facility for events

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-220

Original ruling text

December 21, 2012

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 appeal an assessment of Business, Professional and Occupational License (BPOL) taxes issued to the Taxpayer by the *** (the "County") for the 2010 tax year.

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, regulation 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 operated a farm winery in the County during the tax year at issue. It held a farm winery license. As a farm winery, the Taxpayer sold wine manufactured on its premises from grapes grown on its farm. It also rented its facilities for weddings and other events.

Under audit, the County determined that the Taxpayer was properly licensed for its farm winery. However, it concluded that the rental of its facilities for events constituted a separate business subject to the BPOL tax. As such, the County requested that the Taxpayer segregate its gross receipts derived from the rental of its facilities when not promoting its wines.

The Taxpayer appealed the audit conclusion to the County. In its final determination, the County determined that the rental of the Taxpayer's facilities was a separate business subject to the BPOL tax. The Taxpayer filed an appeal with the Tax Commissioner, contending the rental of its facilities is a usual and customary activity of a farm winery and not a separate licensable business.

ANALYSIS

Multiple Businesses

Virginia Code § 58.1-3703.1 A 1 provides that a separate license will 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.

In order to be required to obtain multiple licenses, a business must be engaged in clearly identifiable separate business activities and not merely activities ancillary to the primary business. In Public Document (P. D.) 97-257 (6/11/1997), the Department concluded that the term "ancillary" refers to business activities that are subordinate, subservient, auxiliary, or in aid of the business' 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. In general, an activity for which no separate charge is made will be presumed to be ancillary to the activity for which a charge is made, but separately stating charges for different activities will not create a presumption that each such activity is a separate business. See Title 23 of the Virginia Administrative Code (VAC) 10-500-110 B.

Farm Wine

Virginia Code § 4.1-233 A 3 c imposes a local license tax on a farm winery that shall not exceed $50. The Taxpayer contends that the rental of its facilities for events is ancillary to the manufacture and sale of wine because such events promote the sale of its wine, and renters are required to purchase the Taxpayer's wine for any event held in Taxpayer's facility.

The Taxpayer's rental agreement requires that a minimum amount of the Taxpayer's wine must be purchased for the event. Renters are charged a separate fee to rent facilities for an event. While conceding that the events at the facility enhance the Taxpayer's winery operations, I must recognize that the rental agreement provided is similar to that of other businesses that rent facilities for special events, including hotels, restaurants, churches, home owners associations, clubs, schools, museums, theaters, and convention centers. In some cases, facility rental is the primary purpose of business. Thus, the Taxpayer's rental business is the type of activity that could be considered to exist independently. Without a full examination of the Taxpayer's books and records, however, it would be difficult to determine whether the facility rental activities are limited to an activity that is subordinate, subservient, auxiliary, or in aid of the principal business activity.

The Taxpayer claims the Department has already connected the sale of wine to the rental of services for farm wineries in P.D. 98-85 (5/7/1998). P.D. 98-85 reiterates Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 concerning charges for services in connection with the sale of tangible personal property. In that case, the Department advised that Virginia's sales and use tax would be collected upon the total charge for the facility when wine was served during the event.

The BPOL tax, however, is a local tax that is separate and distinct from Virginia's retail sales and use tax. The BPOL tax is not a transaction based tax; rather, it is a tax based on the privilege of engaging in business. The standard for determining whether services are connected to a sale of tangible personal property for sales tax purposes cannot be rationally applied in determining whether a business activity is ancillary to a principal business activity. Consequently, the Department has not found the application of retail sales and use tax rulings authoritative in BPOL tax cases. See P.D. 09-139 (9/21/2009).

Power to Regulate

Virginia Code § 15.2-2288.3 A provides in pertinent part that the "usual and customary activities and events at farm wineries shall be permitted without regulation [by a locality] unless there is a substantial impact on the health, safety, or welfare of the public." The Taxpayer asserts that local taxation equates to regulation. Because a BPOL tax is unrelated to health, safety, or public welfare, localities cannot impose the BPOL tax on farm wineries.

In City of Virginia Beach v. Virginia Restaurant Association, Inc. , 231 Va. 130, 341 S.E.2d 198 (1986), the Virginia Supreme Court held that a regulation imposes changes that are directly tied to the administration of the particular regulatory scheme that is sought to be imposed, whereas a tax raises revenue. The object of Virginia's licensing tax statutes, including Va. Code § 58.1-3703, is to obtain public revenues and not to regulate business. See Welles v. Revercomb , 189 Va. 777, 54 S.E. 2d 878 (1949). As such, the imposition of the BPOL tax statute on a business operated by a farm winery is not a prohibited regulation.

DETERMINATION

The facts presented in this case indicate that the Taxpayer appears to be operating multiple businesses. Based on the limited information provided, the sales of wine appear to constitute a majority of the business conducted by the Taxpayer. The Taxpayer may also be engaged in a separately licensable business of renting a facility for events. It is incumbent upon the Taxpayer to furnish sufficient documentation to the County in order for a dual classification to be determined.

This case, therefore, is being remanded back to the County with the instruction to reconsider the Taxpayer's appeal with regard to the 2010 tax year. The Taxpayer should provide the County with sufficient documentation to show if it engaged in multiple businesses, and the breakdown between its sales of wine and fees for the facility rentals. The Taxpayer should provide the County with such documentation within 30 days of the date of this letter or the County may issue an assessment based on available information.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5152892131.B