Tax Type
Machinery Tools Tax
Description
Methods of valuation of tangible property
Topic
Basis of Tax
Local Power to Tax
Date Issued
08-03-2005
August 3, 2005
Re: Appeal of Assessment: Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Machinery and Tools 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 the ***** (the "County") valuation of certain machinery and tools for purposes of the Machinery and Tools ("M&T") tax in tax year 2003. I apologize for the delay in responding to your letter.
The M&T tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 D authorizes the Department to issue determinations on taxpayer appeals of M&T tax assessments. On appeal, an M&T 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 Code of Virginia sections and public documents cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov.
FACTS
The Taxpayer is a manufacturing business. The Taxpayer's facility is more than 50 years old and much of its original technology is still in place. For purposes of the M&T tax, the County computed the assessed value of the Taxpayer's machinery and tools using a valuation method of 25% of original cost for property acquired in the last ten years, 20% of original cost for property acquired in the previous 11 to 20 years, and 15% of original cost for property acquired more than 20 years ago. The County assigned a factor of 1% of original cost to idle or unused equipment. Using this methodology, the County determined the assessed value of the Taxpayer's machinery and tools to be $65.6 million dollars.
The Taxpayer appeals the assessment, asserting that the County's method of valuation ignores the constitutional principle of fair market value. Pursuant to earlier discussions with the County, the Taxpayer commissioned an unrelated appraisal firm, (the "Firm"), to conduct an appraisal of the machinery and tools in question. The Firm used a combination of the cost approach and the income approach in its analysis, taking into consideration replacement new cost of machinery and tools, physical deterioration and normal economic obsolescence and "extraordinary functional and economic obsolescence" in its appraisal.
The appraisal concluded that the fair market value of the machinery and tools was $50 million, or 23.8% less than the County's determination of assessed value. Citing Va. Code § 58.1-3507 B and Public Document ("P.D.") 04-16 (5/24/2004) as support for its position, the County refused to consider the outside appraisal.
The Taxpayer appeals the County's final local determination, contending that the County is not prohibited by statute or rulings from considering appraisals when such appraisals reveal that property is assessed at above fair market value.
ANALYSIS
Taxation of Property
All tangible personal property, unless declared intangible under the provisions of Va. Code § 58.1-1100 et seq., is reserved for local taxation by Article X, § 4 of the Constitution of Virginia. Article X, §§ 1 and 2 of the Constitution of Virginia provide that all property, unless specifically exempted within the provisions of the Constitution, shall be taxed at a uniform rate among classes, and that "all assessments of real estate and tangible personal property shall be at their fair market value to be ascertained as prescribed by general law." That is, this provision of the Constitution contains the presumption that the General Assembly can prescribe a valuation method that will result in something approximating fair market value. Virginia Code § 58.1-3103 specifically charges local commissioners with the responsibility of assessing property at fair market value.
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- As part of his duties each commissioner of the revenue shall ascertain and assess, at fair market value, all subjects of taxation in his county or city on the first day of January in each year, except as otherwise provided by law. [Emphasis added.]
Fair market value is generally defined as the price a property will bring when offered by one who desires, but is under no obligation, to sell it, and the buyer has no immediate necessity to purchase it. See Tuckahoe Women's Club v. County of Richmond, 119 Va. 734, 101 S.E.2d 571 (1958).
In attempting to achieve property valuations that reasonably approximate fair market value, the General Assembly has statutorily prescribed different methodologies for use in the valuation of different classifications of property. For purposes of business tangible personal property taxation, the machinery and tools of manufacturers are separate from the general classification of tangible personal property. The method of valuation to ascertain the fair market value of machinery and tools used in a manufacturing business is set forth in Va. Code § 58.1-3507 B.
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- Machinery and tools segregated for local taxation . . . shall be valued by means of depreciated cost or a percentage or percentages of original total capitalized cost excluding capitalized interest. [Emphasis added.]
The County uniformly applies the percentages of original cost methodology in its valuation of machinery and tools used in manufacturing.
Fair Market Value
At issue in this case is the relationship between the constitutional requirement that all property be assessed at fair market value and the County's interpretation of the statutory requirements set forth in Va. Code § 58.1-3507 B and its interpretation of P.D. 04-16.
In P.D 04-16, the taxpayer sought to use a percentage of depreciated cost methodology in the valuation of its property. Such a methodology is not provided for in Va. Code § 58.1-3507 B and, as such, could not be permitted. Moreover, in that case, the locality's assessment methodology resulted in the property being assessed at less than fair market value. In addition, P.D. 04-16 noted that, historically, the Virginia Supreme Court (the "Court") has not objected to property being assessed at less than fair market value so long as such assessments are applied uniformly. See Norfolk and Western Railway Company v. Commonwealth of Virginia, et al., 211 Va. 692, 179. Public Document 04-16 does not address those instances in which property is assessed well above fair market value.
The constitutional requirements of uniformity and fair market value can be conflicting. In Tuckahoe Women's Club supra, the Court held that while the uniformity provision is preferred, when the uniformity and fair market value clauses are in conflict
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- that does not mean that property in any taxing jurisdiction may be assessed in excess of and without relation to its fair market value as required by the Constitution. [Emphasis added.]
That is, if an assessment is based on a valuation that is significantly greater than fair market value, the method of valuation resulting in the significant deviation must be revised so as to more reasonably approximate fair market value.
In the present case, the Taxpayer submits that the County has valued its property well above fair market value for purposes of M&T taxation, and therefore the assessment needs to be adjusted to address the constitutional requirement of fair market value.
Role of Appraisals and Fair Market Value
The County asserts that because the Firm's appraisal methodology violates the methodologies prescribed by law, the County could not consider the appraisal in its decision. I disagree. In Board of Supervisors of Fairfax County et al. v. Telecommunications Inc., 246 Va. 472, 436 S.E.2d 442 (1993), the Court found error in the county's assertion that it could not correct an assessment even if taxpayers within a class could prove that the methodology for assessing property violated the principle of fair market value. The Court agreed with the trial court's finding of manifest error. The Court also found that the "Telecommunications Industries carried its burden of rebutting the presumption of correctness of assessment," and upheld the new assessments made by the trial court. In the present case, the Taxpayer has secured an outside appraisal by a reputable firm in its efforts to rebut the presumption of correctness.
In 1984-1985 Op. Att'y Gen. Va. 371, the Attorney General considered the use of private appraisals in the valuation of tangible property. The Attorney General found that "A private appraisal may be considered to the extent that it casts doubt upon the accuracy of the percentage of cost method in reaching the actual fair market value of a specific piece of property." That is, localities may consider the appraisal in deciding what method to use in valuing a particular property.
Multiple Methods Provided for by Statute
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- In R. Cross v. Newport News, 217 Va. 202, 228, S.E.2d 442 (1993), the Court
DETERMINATION
Virginia Code § 58.1-3507 B gives the County the option to choose among three specific methods of valuation of tangible property to best meet the constitutional requirement of fair market value. These methods do not preclude the County from considering an independent appraisal or other evidence of fair market value in an appeal of a machinery and tool tax assessment to demonstrate that the property was assessed above its fair market value. To the extent that P.D. 04-16 may be read to limit a local official's authority to consider outside appraisals or other evidence in an appeal addressing fair market value for purposes of assessing the machinery and tools tax, it is expressly superseded by this determination.
Accordingly, the County may consider the outside appraisal and other evidence offered by the Taxpayer to determine if the County's assessments for the property in dispute reflect fair market value.
If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Sincerely,
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- Kenneth W. Thorson
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- Tax Commissioner
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- Kenneth W. Thorson
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AR/52274H
COMMONWEALTH of VIRGINIA
Department of Taxation
Department of Taxation
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- TO WHOM IT MAY CONCERN:
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Under the authority of §§ 58.1-1 and 58.1-110 of the Code of Virginia, I hereby delegate to Gerald Gwaltney, Deputy Tax Commissioner, the authority to sign for me, in my absence, any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and Treasury Board.
This authority shall become effective January 10, 2003, and shall remain in effect until revoked.
Done at Richmond, Virginia, this 13th day of January 2003.
Kenneth W. Thorson
Tax Commissioner
Acknowledgement: Gerald H. Gwaltney Date:
Done this 13th of January 2003 in the City of Richmond, State of Virginia. My
Commission expires 9-30-2003.
Sylvia J. Wesson
Notary Public Notary Seal
Rulings of the Tax Commissioner