Tax Type
BPOL Tax
Description
Machinery and Tools (M&T) Tax & certified pollution control equipment
Topic
Local Power to Tax
Local Taxes Discussion
Rate of Tax
Date Issued
06-10-2002
June 10, 2002
Re: Appeal of Final Local Determination: Machinery and Tools (M&T) Tax
Taxpayer: *****
Locality: *****
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 a final local determination of M&T taxes made by the Commissioner of the Revenue of the ***** (the "Town"). Your appeal is based upon a single question of law: does the Town have the authority to change the percentage of exemption provided for certified pollution control equipment in a tax year after tax day?
Section 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 merchant's 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.
Copies of the Code of Virginia, regulations and public documents cited are included for reference purposes. These and other reference documents are also available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.
FACTS
The Taxpayer owned equipment classified as certified pollution control equipment under Code of Virginia § 58.1-3660 on January 1, 2001. At that time, the Town's ordinance provided for a 100 percent exemption from the M&T tax for such equipment. On March 26, 2001, the Town amended its ordinance to reduce the exemption for certified pollution control equipment from 100 percent to 50 percent. To clarify the Town's intent to make the ordinance retroactive to January 1, 2001, the Town adopted Ordinance 6-01 on September 24, 2001, which amended the enactment language to read "This Ordinance shall be effective for the tax year 2001 and shall take effect January 1, 2001."
The Taxpayer filed its personal property tax return on May 1, 2001. The Treasurer then prepared a tax bill for tax year 2001 for the Taxpayer that reflected the 50% reduction in exemption status for certified pollution control equipment for tax year 2001. The reduction in the exemption resulted in a ***** addition to the Taxpayer's bill for certified pollution control equipment
The Taxpayer applied for a correction of the assessment, stating that "The amended ordinance cannot be applied retroactively" and that the status and value of the Taxpayer's certified pollution control equipment for purposes of the M&T tax were fixed on tax day.
The Town responded, stating that it had authority to increase the rate of taxation on machinery and tools until the date the personal property books are delivered to the Town Treasurer.
ANALYSIS
Machinery and Tools Tax
For tax classification purposes, machinery and tools are segregated from all other classes of personal property and are only subject to local taxation. The rate of the M&T tax cannot exceed that imposed upon the general class of tangible taxable personal property. (See Code of Virginia § 58.1-3507.) However, under Code of Virginia § 58.1-3660, certified pollution control equipment and facilities are defined to be a separate class of real or personal property for purposes of local taxation. As such, localities may, "by ordinance, exempt or partially exempt such property from local taxation." The Taxpayer's certified pollution control equipment and facilities have been granted a 100 percent exemption by the Town since 1978.
Tax and Assessments
For purposes of local taxation, all property located within a jurisdiction on tax day is subject to local taxation. Tax day is January 1. Code of Virginia § 58.1-3515 provides:
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- Except as provided under § 58.1-3010, and except as provided by ordinance or special act in localities authorized to tax certain property on a proportional monthly or quarterly basis, tangible personal property, machinery and tools and merchants' capital shall be returned for taxation as of January 1 of each year, which date shall be known as the effective date of assessment or the tax day. The status of all persons, firms, corporations and other taxpayers liable for taxation on any of such property shall be fixed as of the date aforesaid in each year and the value of all such property shall be taken as of such date... [Emphasis added.]
The Taxpayer contends that its status on tax day of January 1, 2001 was that of a company whose certified pollution control equipment was 100 percent exempt, as it had been since 1978. The Taxpayer maintains that any change in its exemption status after tax day could not be effective until January 1, 2002.
The Attorney General has repeatedly held that the taxable status (taxable or exempt) of property is fixed as of the locality's tax day:
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- The statutes governing local property taxation contemplate that the local commissioner of the revenue should determine the taxable status and value of property based on an evaluation of the relevant facts as they exist on tax day (generally, January 1) of each year. 1991 Op. Att'y Gen. Va. 296, 301 (June 21, 1991).
The Attorney General has also opined that when an ordinance changing the taxable status of property is enacted after the tax day, the change in status takes effect on the next tax day.
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- The status of the owner, as well as the property, is fixed for the entire year on that day [January 1]. It is my opinion, therefore, that any exemption from local taxation for certified property will not be effective until January 1 of the year following the year in which the ordinance was passed. 1989 Op. Att'y Gen. Va. 339, 342 (March 30, 1989). [Emphasis added.]
While this opinion of the Attorney General was addressing a new exemption, it is my opinion that the reference to "any exemption" would include a change in an existing exemption.
Authorization to Raise Tax Rates
The authorization for a town to raise taxes and assessments is found in Code of Virginia § 15.2-1104:
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- A municipal corporation may raise annually by taxes and assessments on property, persons and other subjects of taxation, which are not prohibited by law, such sums of money as in the judgment of the municipal corporation are necessary to pay the debts, defray the expenses, accomplish the purposes and perform the functions of the municipal corporation, in such manner as the municipal corporation deems necessary or expedient. [Emphasis added.]
Under Code of Virginia § 58.1- 3012, localities are authorized to change the rate of tax on real estate, tangible personal property and machinery and tools "during any calendar year, provided such change is made prior to the date on which the personal property and land books are delivered to the treasurer of the applicable county, city or town." However, the effective date of assessment on any given property is fixed on tax day.
The question is whether a change in exemption status is the equivalent to a change in rate, and therefore a reduction in the exemption can be authorized at any time of the year prior to the delivery of the landbooks to the treasurer.
The Town contends that if the tax rate and the valuation are in place on January 1, 2001 and the exemption is 100 percent, then the effective rate of the tax on the property is zero. Reducing the exemption to 50 percent, amounts to a change in the effective rate, which the Town argues is permitted in Code of Virginia § 15.2-1104 and § 58.1-3012.
However, "rate" and "effective rate" are two different concepts. The tax rate is the nominal rate at which all properties within a given classification are taxed. The effective rate is the result of multiplying the nominal rate by the assessment ratio. The assessment ratio may vary with depreciation, which would result in different outcomes in terms of effective rates for different properties within the same classification, although the nominal rate would by law, have to remain constant. While there may be no differentiation accorded to the Town's depreciation schedule, as a point of fact, there is a difference between tax rate and effective tax rate. "Effective rates" are not contemplated in Code of Virginia § 58.1-3012.
Furthermore, the Town's ordinance, adopted on March 26, 2001, amended the Town's code to read:
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- Sec. 58-2 Exemptions from Taxation- Certified Pollution Control equipment and facilities.
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- Certified Pollution Control equipment and facilities as defined in Code of Virginia § 58.1-3660 are hereby declared to be exempt from fifty percent (50%) of all real estate, tangible personal property or machinery and tools taxation by the town.
Nothing in the ordinance states anything about tax rates. Tax rate changes, not changes in tax exempt status, are authorized in Code of Virginia § 15.2-1104 and §58.1-3012.
Status
The Town contends that the "status" referred to in Code of Virginia § 58.1-3515 applies only " to the status of ownership, situs, intended use and valuation." However, the opinions of the Attorney General cited above make clear that the meaning of status includes the idea of "taxable status," which encompasses exemptions, deductions and exclusions. In fact, Chapter 36 of Title 58.1 of Code of Virginia is devoted exclusively to the properties that are accorded tax-exempt status. Status is defined as: "the legal character or condition of a person or thing." 1 The legal tax status of the Taxpayer as defined by the Town ordinance in effect on tax day, January 1, 2001, was that of a taxpayer whose certified pollution control equipment and facilities were 100 percent exempt from local taxation.
DETERMINATION
The Taxpayer asked for a determination on the question of whether or not a locality has the authority to change the percentage of exemption provided for certified pollution control equipment in a tax year after tax day. It is my determination that it does not, for the reasons set forth above. A locality may change its tax rates after tax day to meet budget requirements, but it may not change the tax-exempt status of property after tax day. Any local ordinance affecting an exemption, be it enacting a new exemption, eliminating an exemption, increasing an exemption from partial to total, or, as in this case, reducing an exemption from total to partial, must take effect on January 1 (tax day) of the year following the year in which the ordinance was adopted. None of these changes in local ordinance can be applied retroactively. Therefore, in this case, the Town's amendments to its ordinance made on March 26, 2001, reducing the exemption for certified pollution control equipment from 100 percent to 50 percent are found to be effective January 1, 2002, not January 1, 2001.
If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Janie E. Bowen
Executive Tax Commissioner
Office of Policy and Administration
AR/37878H
1 American Heritage College Dictionary, Second Edition. Houghton Mifflin Company, Boston, 1985.
Rulings of the Tax Commissioner