Document Number
02-162
Tax Type
Retail Sales and Use Tax
Description
Distribution center, tax assessed on charges for a conveyor system
Topic
Accounting Periods and Methods
Documents Subject to Tax
Date Issued
12-18-2002

December 18, 2002


Re: § 58.1-1821 Application: Retail Sales and Use Tax


Dear *****:

This is in response to a letter submitted by your former representative indicating that ***** (the "Taxpayer") seeks correction of the retail sales and use tax assessment issued as a result of an audit. I apologize for the delay in the department's response.
FACTS

The Taxpayer operates a distribution center in Virginia. An audit for the period January 1997 through December 1999 resulted in the assessment of tax on untaxed purchases of tangible personal property.

The Taxpayer takes exception to the tax assessed on charges for a conveyor system. According to the Sales Agreement, the vendor provided and installed the conveyor system, including the provision of air piping, trash removal, permits, licenses, inspection fees and other services. The Taxpayer was responsible for ensuring that the roof structure and floor could support loads imposed by the support structures and conveyor equipment, including live loads. As noted in the Sales Agreement, the term "Equipment" is defined to mean "all the Equipment, machinery, parts and other items intended to be installed permanently at the Worksite ...."

The Taxpayer indicates that the building and foundation, the flooring, and supporting structures are designed specifically to house the conveyor system equipment. The Taxpayer also indicates that the thickness of the concrete flooring, the placement of ceiling support beams and the location of the doors are all designed around the design of the conveyor system. Although the conveyor system is bolted in place and is easily moveable without damage to the structure, the Taxpayer indicates that the conveyor system cannot be rearranged within the existing structure because the concrete flooring would need additional reinforcement and the ceiling support structures would need to be changed.

Accordingly, the Taxpayer maintains that the conveyor system is permanently affixed to realty and that the vendor, operating as the contractor, is liable for the tax.
DETERMINATION

In determining whether an article used in connection with realty is to be considered real or personal property, the Virginia Supreme Court has ruled:
    • Three general tests are applied to determine whether an item of personal property placed upon realty becomes itself realty. They are: (1) annexation of the property to realty, (2) adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated, and (3) the intention of the parties. Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970).

Under the first test, there must be actual or constructive annexation. The method or extent of the annexation carries little weight. The second test, adaptation of the personal property to the use of the property to which it is annexed, is entitled to great weight, especially in connection with the element of intention. The intention of the party making the annexation is the paramount and controlling consideration. Danville Holding Corp. v. Clement, 178 Va. 223, 16 S.E.2d 345 (1941).

In light of this background, I will now address the issues raised in the appeal.

Three prong test

First test. Based on a tour of the facility, it was apparent that the bolt and nut attachment of the conveyor system permits its removal, repair, replacement or rearrangement without damage to the warehouse structure. However, this method of attachment is a form of annexation. In this context, the first test cited above is satisfied. This attachment, by itself, however, does not constitute a permanent annexation to the realty unless the second and third tests discussed below are satisfied.

Second test. The Taxpayer maintains that the conveyor system is essential to the purpose for which the building is presently being used (i.e., as a distribution center).

The conveyor system in this case is highly mechanized and efficient in order to handle the high volume of distribution. However, the movement of stored items could be accomplished with forklift trucks as they are in many other warehouses. In addition, because of the ease of removal of the conveyor system, the Taxpayer or subsequent owners could use the warehouse for purposes other than as a distribution center (e.g., retail outlet, offices, etc.) and not need a conveyor system. The conveyor system could also be relocated from one warehouse to another if necessary.

Although this conveyor system plays an important role in the current distribution of products, it is not essential to the operation of the building as a warehouse or for the long-term existence and use of the building. Because the conveyor system is not permanently adapted to the warehouse structure, the second test is not satisfied.

Third test. When determining intent in the law of fixtures, Virginia courts have relied on the presumption that concerns the relationship of the annexor and the subject realty. Where the owner of realty annexes chattels, any doubt as to his intention to permanently affix them will be resolved in favor of such intent, upon the theory that the owner seeks to permanently enhance the usefulness and market value of this property. Danville Holding Corp., 178 Va. at 233 [citing 1 Minor on Real Property, section 36 (2nd edition)].

The Taxpayer has not shown that the conveyor system permanently enhances the market value of the Taxpayer's real property. On the contrary, I understand that the conveyor system is not subject to real property taxation in the locality in which the warehouse is located but is taxable as business personal property. Further, the Taxpayer has not shown that the conveyor system is included in a mortgage on the warehouse property.

I am also concerned that no documents have been submitted indicating how the Taxpayer classified the conveyor system for federal tax depreciation purposes. This information would help give a more complete picture of the Taxpayer's intent with respect to the contested property.

The intention to make a chattel a permanent accession to the realty must affirmatively and plainly appear. If the matter is left in doubt and uncertainty, the legal qualities of the article are not changed, and it must be deemed a chattel. Mullins v. Sturgill, 192 Va. 653 (1951). Moreover, intent "is to be generally found from the facts existing at the time the machinery is installed in the building, its manner of installation, its purpose, and the intention of the annexor ...." (Emphasis added.) Danville Holding Corp., at 235. Intent must not be secretive but must be clearly demonstrated.

Although the building maybe specially designed to accommodate this conveyor system, such design does not provide, by itself, conclusive evidence that the conveyor system was intended to become a fixture of the building.

Furthermore, the Sales Agreement does not affirmatively and plainly establish an intention to make the conveyor system a permanent part of the realty. Rather, the Sales Agreement defines "Equipment" as "all Equipment, machinery, parts and other items intended to be installed permanently at the Worksite." However, the term "worksite" is not defined as a specific building or structure. Rather, it is defined as a "location" where equipment is to be installed or used in the installation of the equipment. As such, these definitions do not express or imply an intent (at the time that the agreement was made) for the conveyor system to become a permanent fixture of the realty.

In addition, the Sales Agreement provides no clear indication that the vendor had held itself out to being a real property contractor in regard to the conveyor system installation. The vendor was not responsible for the construction of the building and supporting framework for the conveyor system. Rather, the Taxpayer was responsible for erecting the building structure and for making "all building modifications as required to support the equipment." In addition, the agreement is not structured like a real property installation contract in that it is labeled as a "Sales Agreement" and refers to the parties to the agreement as "purchaser" or "seller." The vendor also refers to itself as the "supplier." Moreover, the agreement does not expressly state or imply that the vendor would be the final taxable user or consumer of the materials comprising the conveyor system. Thus, the agreement does not demonstrate that the vendor intended to act as a real property construction contractor.

For all of the above reasons, the third test is not satisfied.

Vendor's web site

A review of the vendor's Internet web site reveals that it is "a designer and supplier of material handling systems for all phases of product distribution." In regard to the various conveyors sold by the vendor, this web site states that "all are designed not only to integrate with customers' current distribution systems, but also to be easily reconfigured, as needs change within those systems."

The above does not suggest or stress permanence of installation. Rather, the emphasis is placed upon mobility, i.e., the ease in which various parts can be rearranged. As such, the vendor does not appear to operate or represent itself as a real property contractor. Rather, the vendor is an equipment supplier and installer.

Park ride structures

During the tour of the facility, the Taxpayer's former representative had claimed that the conveyor system at issue is analogous to park rides affixed to realty. However, park rides such as roller coasters affixed to the realty are extensive structures that are akin to a tower. Such structures are built with one purpose in mind and are generally installed as permanent improvements to realty. Accordingly, there can be no valid comparison between a roller coaster and the conveyor system at issue.

Conclusion

Code of Virginia § 58.1-205 deems any tax assessment issued by the Department of Taxation as prima facie correct. The burden of proof is upon the Taxpayer to establish through convincing evidence that a tax assessment is erroneous. The Taxpayer has not met this burden of proof requirement and, therefore, has not established that the conveyor system became permanently affixed to realty.

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 45 days from the date of this letter. If you have any questions about paying this assessment, please contact ***** with the department's Collections section at *****.

Copies of the Code of Virginia sections, regulations and public documents cited are available online in the Tax Policy Library section of the Department of Taxation's web site located at www.tax.state.va.us. If you have any questions regarding this determination, you may contact******** in the Office of Policy and Administration, Appeals and Rulings, at *****.
                • Sincerely,
                    • Kenneth W. Thorson
                  Tax Commissioner


AR/34709R

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46