August 24, 2022
Re: Request for Advisory Opinion
Business Tangible Personal Property Tax
Dear *****:
This is in response to your letter in which ***** (the “County”) requests an advisory opinion regarding the application of the business tangible personal property (BTPP) tax to assets for which a taxpayer received rebates.
The BTPP tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue advisory opinions on local business tax matters. The following opinion has been issued subject to the facts presented by the County to the Department as summarized below. Any changes in facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s website.
FACTS
Under the scenario described by the County, a business receives a rebate for making purchases of certain fixed assets in bulk. The rebate is not a coupon amount or discounted sales price given at the time the sale is made. Rather, the assets are purchased and the rebate is given after the fact as a refund. The rebate is provided to the business in a lump sum and cannot be tied to specific assets. The County has requested an advisory opinion regarding whether the business may use the rebate provided by the seller to reduce the taxable cost basis of assets for purposes of BTPP taxes in the Commonwealth. If the rebate may reduce the taxable cost basis, the County asks how the rebate should be allocated among the assets to which it relates.
OPINION
All tangible personal property, unless declared intangible under the provisions of Virginia 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.” This provision of the Constitution contains the presumption that the General Assembly’s prescribed valuation method will both standardize valuation practices across all the local governments in the Commonwealth and 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.
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). If the valuation methodology employed by a locality results in an assessment well above fair market value, the locality may use another methodology prescribed in Virginia Code § 58.1-3507 B. See Public Document (P.D.) 05-129 (8/3/2005).
Virginia Code § 58.1-3503 A 18 specifies that, for most items of tangible personal property that are used in a trade or business, fair market value is to be ascertained either by a percentage or percentages of original cost. The General Assembly has not provided a definition for the term “original cost” within the context of Virginia Code § 58.1-3507 B. Absent a statutory definition, the plain and ordinary meaning of the term is controlling. See Samson v. Board of Supervisors, 257 Va. 589, 514 S.E.2d 345 (1999). “Original cost” typically refers to the net invoice price for an asset, which necessarily assumes that is the amount paid and capitalized. In addition, legal dictionaries define “original cost” as “[a]n asset’s net price; the original cost of an asset. Also termed historical cost, original cost.” Black’s Law Dictionary 371 (8th Edition 2004).
The term “original cost” has consistently been interpreted to mean the cost paid by the original purchaser from a manufacturer or dealer. See 2009 Op. Va. Att’y Gen. 18 and 2014 Op. Va. Att’y Gen. 20. The Department has held that original cost includes all costs incurred for putting the property in use, i.e., the total sum of money the buyer parts with to get the article. See P.D. 08-85 (6/6/1985) and P.D. 14-68 (5/21/2014). See also S. & L. Straus Beverage Corporation v. Commonwealth of Virginia, 185 Va. 1055, 41 S.E.2d 76 (1947).
A rebate is defined as “[a] return of a part of a payment, serving as a discount or reduction.” Black’s Law Dictionary 1295 (8th Edition 2004). The rebate payment does not share the same characteristics as a receipt for goods or services because it is essentially just a reimbursement of a part of the purchase price.
Under Generally Accepted Accounting Principles (GAAP), the Financial Accounting Standards Board (FASB) has established the Accounting Standards Codification (ASC). Under FASB ASC 705-20-25-10, rebates paid by a vendor to a reseller that purchases certain levels of inventory are generally recognized as a reduction in cost of sales. Further, the International Accounting Standards Board requires that trade discounts, rebates and other similar items are deducted when valuing inventories. See IAS 2 Inventories (2001). Matching a rebate received against the purchase price in order to determine the historical cost of a fixed asset would be consistent with these principles. Such matching is also supported by the Internal Revenue Service (IRS), which treats rebates as adjustments to the sales price when determining the basis of an asset. See IRS Publication 551 (12/2018), Basis of Assets.
The Oregon Tax Court has a similar view for property tax purposes. In Freightliner Corporation v. Department of Revenue, 3 Or. Tax 528 (1969), the Oregon court determined that rebates reduce the taxable cost basis of assets for business property tax purposes. Although the Oregon case is not binding in Virginia, it is consistent with the way rebates are treated under general accounting and income tax principles.
The facts and circumstances of the particular transaction and the parties’ true intent, however, must be examined to determine whether a payment labelled by the parties as a rebate is actually something else entirely. For example, if the “rebate” is paid by a third party and not the seller or where the payment is made in advance of the purchase, the “rebate” may not reflect an adjustment to the purchase price. See, e.g., Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707 (1956), John R. Wentz, et ux. v. Commissioner, 105 TC 1 (1995) and IRS Technical Advice Memorandum (TAM) 9719005 (1997).
Based on the foregoing, a business may reduce the taxable cost basis of assets subject to BTPP tax by rebates received from a manufacturer where the facts and circumstances and the parties’ intent indicate the rebate was intended as a reduction to the purchase price of the asset, or class of assets, at issue. The burden is on the business to show that it paid some other amount for the asset, or in this case, that it received a rebate for purchasing the asset, or class of assets, that is not shown on the invoice or the capitalized costs on the business’s books. If the business meets this burden, the rebate generally should be allocated among the assets in proportion to their pre-rebate cost.
In certain circumstances, however, the rebate should be allocated to only a portion of the assets. For example, if the rebate is earned after 100 units are purchased and does not increase with purchases in excess of 100 units, the rebate would be allocated proportionally among only the first 100 units purchased. See, e.g., Emerging Issues Task Force (EITF) Abstract 02-16 issued by the FASB.
Where, however, the facts and circumstances and the parties’ intent show that the allowance was not intended as a reduction in the selling price of the assets at issue, the cost basis of such assets would not be reduced. In such a case the allowance would not reduce the cost basis of the assets, but would be accounted for based on the intent of the parties.
If you have any questions regarding this opinion, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/4030.X