Tax Type
BPOL Tax
Machinery Tools Tax
Description
Business tangible personal property tax & merchants capital tax
Topic
Local Taxes Discussion
Manufacturing
Taxability of Persons and Transactions
Date Issued
01-04-2002
January 4, 2002
Re: Appeal: Local Business Tax
Dear *****
This is in response to your appeal of a local final determination of local business taxes and request for clarification of two aspects of the local business tax appeals process.
§ 58.1-3983.1 of the Code of Virginia authorizes the department to receive taxpayer appeals of certain local business tax assessments and to issue determinations on such appeals. The local business taxes covered by this section are the machinery and tools tax, business tangible personal property tax and merchants capital tax. However, in no case is the department required to interpret any local ordinance, nor does the department have the authority to issue advisory opinions on local business tax issues.
You present three issues in your letter:
1. Should the Taxpayer be classified as a manufacturer for tax years 1996 through 2000?
2. Does the Tax Commissioner have the authority to hear an appeal of a timely filed Application for Review when the local assessing official fails to respond to the Taxpayer within the timeframes set forth in the department's Guidelines for Appealing Local Business Taxes?
3. Does the denial of a timely-filed amended personal property tax return constitute an assessment, and does the Tax Commissioner have the authority to hear the appeal of such a denial?
FACTS
You represent ***** (the "Taxpayer") as a "fully integrated" manufacturing business engaged in turkey and chicken production, processing and sales. The Taxpayer has operations in several different locations in Virginia and in other states. The Taxpayer describes its manufacturing process as the "transmutation of the raw material - live birds - into the finished manufactured goods - feed mash, burgers, sausages, ready-to-cook products, salads and various other meat products and foodstuffs." In fiscal year 1999, approximately 85 percent of the Taxpayer's net sales of ***** million were attributable to these "value added" products. The Taxpayer maintains that over the period in question, its revenues attributed to manufacturing consistently have exceeded 33 percent of the total revenues generated by the Taxpayer's activities.
The Taxpayer has filed an amended return that seeks a refund for tangible personal property taxes paid for tax years 1996-1999.
OPINION
Manufacturers
§ 58.1-1101(A)(2) of the Code of Virginia states that the following property is to be classified as intangible subject only to state taxation:
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- Capital which is personal property, tangible in fact, used in manufacturing (including, but not limited to, furniture, fixtures, office equipment and computer equipment used in corporate headquarters), mining, water well drilling, radio or television broadcasting, dairy, dry cleaning or laundry businesses.
The first issue to be addressed is whether the Taxpayer is a manufacturer, subject only to state taxation. The definition of a "manufacturer" is not in the Code of Virginia. However, the Supreme Court of Virginia has developed a test involving three essential elements in determining whether a manufacturing activity is being undertaken. These elements are: (1) original material, referred to as raw material; (2) a process whereby the original material is changed; and (3) a resulting product, which by reason of being subject to such processing, is different from the original material. County of Chesterfield v. BBC Brown Boveri 238 Va. 64 (1989) 1 . While BBC Brown Boveri addressed the local business license tax, it provides a good definition of manufacturing for general purposes of local taxation. A manufacturer means one engaged in a processing activity whereby the original materials are transformed into a product that is substantially different in character from the original materials.
Other Case Law
In Commonwealth v. Meyer 180 Va. 466 (1942), the Supreme Court of Appeals opined, "a hog on the hoof put through plaintiff's packing plant is no longer a hog. It comes out as hams, shoulders, middlings, sausage, souse, chitterlings, and other articles of commerce fit for consumption. Its value is increased." The Court affirmed the trial court's decision that the plaintiffs were manufacturers.
This opinion applied to a manufacturing process that is very similar to that of the Taxpayer. In another case, Prentice v. City of Richmond 197 Va. 724, (1956), the business operation consisted of the "buying, killing, chilling, and the sale of and delivery of poultry to various wholesalers and jobbers." In Prentice, the Court held that:
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- In [the Taxpayer's] processing operation the necessary qualitative element of manufacturing is lacking. There is no change or transformation of the poultry into an article or product of substantially different character; slaughtering poultry, picking and cleaning it does not constitute such change as is essential to manufacturing.
In the opinion, however, the Court also noted a ruling of the former Tax Commissioner and agreed that under "certain conditions, a poultry processor will be treated for tax purposes as though he were a manufacturer."
In the present instance, operation of the Taxpayer's plants bears a far stronger resemblance to the example in Meyer than to that of Prentice. The preponderance of the Taxpayer's investment is in sophisticated machinery. Through its processes, the Taxpayer transforms "raw material" (live poultry) into its "value added" products, such as hams, sausages, meat products, feed mash, burgers, and additive enhanced thigh and breast parts. A substantial portion of the Taxpayer's products resulting from its processes is different from the original material. Therefore, I must conclude that the Taxpayer is a manufacturer.
One Business versus Separate Businesses
The Taxpayer has argued that its business must be examined as a whole, rather than have each location examined in isolation of the business as a whole. In City of Winchester v. American Woodmark (1995), the Virginia Supreme Court addressed whether the particular activities of a taxpayer in a jurisdiction can be separated from the company as a whole for purposes of taxation.
American Woodmark is headquartered in Winchester, Virginia. It manufactures kitchen cabinets and bathroom vanities at certain manufacturing facilities located in several states. However, no manufacturing occurs at its headquarters facility. American Woodmark also has distribution facilities, warehouses, service centers and sales offices throughout the United States. In the case before the Supreme Court, American Woodmark maintained that its personal property, including property at its headquarters, is used in its manufacturing business and, therefore, is not subject to local taxation. The City of Winchester argued that American Woodmark's persona! property located at its headquarters is subject to local taxation because the headquarters is not a manufacturing business and the property at issue is not used in the manufacturing business.
The Court ruled that American Woodmark's personal property constitutes capital used in manufacturing businesses that is not subject to local taxation. The Court found that the applicable law did not require capital be used in a manufacturing facility in the locality to be used in a manufacturing business.
Similarly, in BBC Brown Boveri, the Court noted:
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- When a party is engaged in both manufacturing and non-manufacturing activities, it will nonetheless be classified as a manufacturer for tax purposes if the manufacturing portion of its business is substantial. 2
Since the Taxpayer has demonstrated the substantiality of the manufacturing portion of its business, I must concur that the activities of the Taxpayer constitute a single business and must be treated as such for purposes of local business taxation.
Administrative Appeal Timeframes
The ability to appeal local business tax assessments to the Tax Commissioner was enacted by the General Assembly in 1999. Any person assessed with any local business tax may apply within ninety days from the date of such assessment to the commissioner of the revenue or other official responsible for the assessment for a correction thereof. Upon the filing of such an application, collection activity shall be suspended by the treasurer until such time as the local assessing official has issued a final local determination. Code of Virginia § 58.1-3983.1 requires the following of the local commissioner of the revenue or other assessing official:
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- [He] shall undertake a full review of the taxpayer's claims and issue a determination to the taxpayer setting forth his position within ninety days after such application is filed. Such determination shall be accompanied by a written explanation of the taxpayer's right to seek correction and the specific procedure to be followed in the jurisdiction (e.g., the name and address to which an application should be directed). [Emphasis added.]
If a taxpayer disputes the final local determination, it has 90 days in which to file an appeal with the Tax Commissioner. This process only applies to assessments made on or after January 1, 2000, even if the assessment was for an earlier taxable year.
In this case, the Taxpayer did timely file an application for review to the local commissioners in the jurisdictions where it had situs. However, the Taxpayer has not received a final local determination from all of the jurisdictions in which it filed applications for review. For the two localities that issued a final local determination, the Taxpayer's appeal was timely filed with the department. The remaining localities must issue a final local determination in accordance with Code of Virginia § 58.1-3983.1.
Amended Return
Code of Virginia § 58.1-3983.1, "Appeals and rulings of certain local business taxes" references §§ 58.1-1821 and 58.1-1822, which describe the correction of erroneous assessments of taxes administered by the Department of Taxation. It does not reference § 58.1-1823, which separately addresses corrections of assessments due to amended returns. Therefore, since this section was not referenced in the local business tax appeals process outlined in Code of Virginia § 58.1-3983.1, I must conclude that the General Assembly did not equate the denial of an amended return for refund with assessments in creating appeal rights under the local business tax appeals process.
The Department's Authority
The department is limited by statute to consider only those appeals of local business tax assessments that are made on or after January 1, 2000. In those cases, the taxpayer must follow the procedure of first appealing to the local commissioner of the revenue as outlined in the Guidelines for Appealing Local Business Taxes. See P.D. 00-02, (11/09/99). Taxpayers who want to contest local business tax assessments through application to the circuit court made prior to January 1, 2000 may do so:
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- unless otherwise specially provided by law, (i) within three years from the last day of the tax year for which any such assessment is made, (ii) within one year from the date of the assessment, ... or (iv) within one year from the date of the final determination under § 58.1-3981, whichever is later, apply for relief to the circuit court of the county or city wherein such assessment was made. Code of Virginia § 58.1-3984 (A).
Conclusion
Based on the three-part test developed by the Virginia Supreme Court, the Taxpayer is engaged in manufacturing, and a substantial portion of its activity is manufacturing based. It is my determination, therefore, that the Taxpayer's property should be classified as intangible and segregated for state taxation. This does not however, imply that the Taxpayer is exempt from other local taxes, such as the local machinery and tools tax.
Furthermore, while the local assessor's determination is deemed prima facie correct, this does not relieve the local assessor of the responsibility of issuing a final local determination when the Taxpayer has timely filed an application for correction of the assessment. The localities that have not issued a final determination on the issues presented are required to do so in accordance with Code of Virginia § 58.1-3983.1.
If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/33991H
1 BBC Brown Boveri cited Solite Corp. v King Georges County 220 Va. 661 as the precedent for this finding.
2The court cited a 1984-85 Op. Va. Att'y. Gen. 364,366, in which the attorney General opined that the term "substantial is not defined by mathematical precision, rather it is not synonymous with preponderance and is properly "defined as not ‘incidental' or 'inconsequential."'
Rulings of the Tax Commissioner