Were sales of prewritten measurement software retail or wholesale sales for Virginia BPOL classification purposes?

Subject

Prewritten measurement software was a BPOL business service

Plain-English summary

Virginia classified the company's prewritten measurement software as a business service rather than a retail or wholesale sale for BPOL tax. The county's assessments for 2011 through 2013 were upheld.

The taxpayer argued that earlier income-tax rulings treated canned software as tangible personal property, so its sales should be retail or wholesale for BPOL purposes. The Commissioner rejected that comparison because BPOL, income tax, and retail sales tax are distinct tax systems; rules from another tax do not control BPOL unless a statute says they do.

The BPOL regulation defined retail and wholesale sales as sales of goods, wares, and merchandise. Applying the physical-transfer meaning used in the prior determination, the Commissioner concluded that software was intangible and did not fall in those categories. The remaining applicable classification was business services under 23 VAC 10-500-500.

This was the Department's final determination. The ruling directed any further challenge to the appropriate circuit court.

What this means for you

• A product's sales-tax or income-tax characterization does not automatically determine its BPOL classification.
• For the software and transfer described here, prewritten software was not goods, wares, or merchandise for BPOL purposes.
• Classification followed the BPOL regulations, producing business-service treatment.

Common questions

Q: Did calling the product "prewritten" or "canned" make it a retail sale?

A: No. The ruling focused on the absence of physical transfer of goods, wares, or merchandise.

Q: Did the Commissioner change the earlier P.D. 14-117 result?

A: No. He found no basis to overturn it and upheld the assessments.

Q: What was the taxpayer's next remedy?

A: The ruling identified judicial review in the appropriate circuit court.

Citations and references

• Va. Code § 58.1-3703.1.
• 23 VAC 10-500-10 and 10-500-500.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-19

Original ruling text

February 11, 2015

Re: Appeal of Final Local Determination
Taxpayer: *
Locality: ***
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 seek a reconsideration of Public Document (P.D.) 14-117 (7/23/2014) concerning the Business, Professional and Occupational License (BPOL) assessments issued to the Taxpayer by the *** (the "County") for the 2011 through 2013 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 Department determined in P.D. 14-117 that the Taxpayer was a business service provider because its principal business consisted of developing measurement software. The Taxpayer seeks a reconsideration, contending that the sale of the measurement software was either a retail or wholesale sale of tangible personal property.

ANALYSIS

Income and BPOL Taxes

The Taxpayer contends that because P.D. 94-88 (3/25/1994), P.D. 94-181 (6/13/1994) and P.D. 95-236 (9/7/1995) determined that sales of prewritten "canned software" are considered to sales of tangible personal property for purposes of the income tax, that sales of prewritten software should be treated as wholesale or retail sales for BPOL tax purposes.

The Department has repeatedly held that the BPOL tax is a local tax that is separate and distinct from Virginia's retail sales and use tax. 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), P.D. 12-220 (12/21/2012), and P.D. 13-25 (3/5/2013). Likewise, the BPOL tax is also separate and distinct from income tax because an income tax is a tax based on a taxpayer's income while a BPOL tax is based on the privilege of engaging in business. As such, just as sales tax regulations and policies are not reliable sources for evaluating local tax issues, income tax regulations are not applicable to BPOL tax issues unless specified by statute.

Prewritten Software

Under Title 23 of the Virginia Administrative Code (VAC) 10-500-10, a "retail sale" and a "wholesale sale" are defined in pertinent part as "a sale of goods, wares and merchandise." The Taxpayer contends that the sale of this prewritten measurement software product was either at retail or wholesale because it was a "ware". It asserts that the definition in Title 23 VAC 10-500-10 does not require the goods, wares and merchandise to be tangible.

In P.D. 14-117, the Department cited the definition of "merchandise" in Black's Law Dictionary 1008 (8th Edition 2004) in order to determine whether prewritten software was tangible property that could sold at wholesale or retail. Black's definition limited goods, wares and merchandise to items which are traded by physical transfer. It also excluded "intangibles such as software." Based on that definition, the sale of prewritten software at issue is neither a retail nor wholesale sale. The only classification that would apply would be business services. In fact, the sale of prewritten software most reflects business services. See Title 23 VAC 10-500-500.

DETERMINATION

I have reviewed the additional arguments presented by the Taxpayer with regard as to whether sales of prewritten measurement software are classified as retail or wholesale sales for purposes of the BPOL tax. Based on the foregoing analysis, I find no basis to overturn my determination in P.D. 14-117 that the sale of the prewritten measurement software constitutes a business service. As such, the BPOL tax assessments for the 2011 through 2013 tax years are upheld.

This letter constitutes the Department's final determination in this matter. If the Taxpayer wishes to pursue an appeal of this matter, it should apply to the appropriate circuit court for judicial review of the determination as provided under Va. Code § 58.1­3703.1 A 7.

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/1-5824915903.B