Document Number
04-9
Tax Type
BPOL Tax
Description
Modified accelerated cost recovery system
Topic
Accounting Periods and Methods
Appropriateness of Audit Methodology
Local Taxes Discussion
Date Issued
03-26-2004

March 26, 2004


Re: Appeal of Assessment: Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Business Tangible Personal Property (BTPP) Tax

Dear *****:

This final state determination is issued upon the application for correction filed by your firm on behalf of ***** (the "Taxpayer") with the Department of Taxation. You appeal the ***** (the "County") treatment of certain items as tangible personal property subject to the BTPP tax. I apologize for the delay in the Department's response.

The BTPP 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 BTPP tax assessments. On appeal, a BTPP tax assessment is deemed prima facie correct. In other words, 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 as summarized below. This determination addresses the question of whether or not the cost basis utilized by the County for the valuation of the property in question for tax years 1999, 2000, 2001 and 2002 was appropriate.

The Code of Virginia sections and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.

                        • FACTS

The Taxpayer specializes in providing various forms of residential care to senior citizens including assisted living, Alzheimer's care, nursing care and rehabilitative care. It owns retirement homes and communities throughout the country, including two in the County.

In 1998, the Taxpayer replaced six air handling units with six new units for one of its facilities in the County. This facility contains 210 residential units. The air handling units are commercial building units "designed for heating, cooling, dehumidifying, filtering and ventilating the entire living area" of a building. The County initially taxed these units as part of the realty. In 2002, however, discovering that the Taxpayer used the modified accelerated cost recovery system (MACRS) in depreciating these assets for purposes of the federal income tax, the County assessed these units as business tangible personal property. In its revised assessment, the County assessed the Taxpayer for taxes owing and due in tax years 1999, 2000, 2001 and 2002, with penalties and interest.

In denying the Taxpayer's appeal of this assessment, the County stated that because the Taxpayer had elected to treat the units as personal property using the 7-year MACRS convention for federal income tax purposes, the units "must be treated as persona! property for business tangible personal property purposes." The County also told the Taxpayer that it might want to consider amending its federal income tax return and the accompanying depreciation schedule to change the status of the units from personal property to real property, which would extend the class life of the units for depreciation purposes to 27.5 or 39 years. The County stated that if the Taxpayer declined to amend its federal income tax returns, the "property here will remain taxable as personal property."

The Taxpayer appeals the County's determination and presents the following questions:
  • 1. Does the treatment of an asset on the federal income tax return determine its taxation as business personal property in Virginia?
    2. Do MACRS depreciation rules apply to the administration of the BTPP tax?
    3. If MACRS depreciation rules are applied in the administration of the BTPP tax, should not the exemptions in MACRS apply as well?
ANALYSIS

Local Taxation of Property

Article X, § 4 of the Constitution of Virginia, segregates all real property for local taxation. All tangible personal property, unless declared intangible under the provisions of Va. Code § 58.1-1100 et seq., is also reserved for local taxation by Article X, § 4 of the Constitution of Virginia.

In Danville Holding Company v. Clement, 178 Va. 223 (1941), the Virginia Supreme Court noted, "[it] is difficult, if not impossible, to frame any precise rule to determine whether an article used in connection with realty is to be considered a fixture or not," and that each case must be decided on particular facts and circumstances. The Court did, however, offer general rules for guidance in determining whether an item of personal property placed upon realty becomes realty. They are: (1) the method of annexation of the property to the realty, (2) the adaptation of the property 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 to make the property a permanent addition to the freehold. The Court emphasized, "The intention of the party making the annexation is the chief test to be considered in determining whether the chattel has been converted into a fixture. Transcontinental Gas and Pipe Company v. Prince William County, 210 Va. 550, 555 (1970), citing Danville Holding Company.

In Danville Holding, the Court further elaborated on the three tests outlined, noting that while "under the first test, there must be actual or constructive annexation, the method or the extent of the annexation carries little weight except insofar as they relate to the nature of the article, the use to which it is applied and other attending circumstances as indicating . the intention of the party making the annexation."
    • In the Taxpayer's case, all three criteria are met:
    • (1) Annexation to the Realty: The air handling units, weighing several tons, are affixed to the roof of the building. The units replaced six other permanently installed units that were no longer functioning as intended.
    • (2) Adaptation to use or purpose of the property or realty: These air handling units are affixed to the roof of the building and furnish all aspects of air monitoring, from heating and cooling, to dehumidifying, filtering and ventilating the buildings. These functions are essential to the building's use as a residential facility.
    • (3) The intention of the parties: The Taxpayer states that its mission is finding "a better way to improve the quality of life for seniors." The air handling units are essential to the fulfillment of this goal in that they are central to the provision of a comfortable residential living environment in an assisted living complex for senior citizens.

It is my determination that, consistent with the findings in Danville Holding Corp. and Transcontinental Gas and Pipe Company, the air handling units in this case should be taxed as realty, not as tangible personal property.

Although it is my determination that the air handling units should be treated as realty for purposes of local taxation, I will address the Taxpayer's questions about the relationship between the treatment of property for federal income tax purposes and for purposes of local business tangible personal property taxation.

Does the treatment of an asset on the federal income tax return determine its taxation as business personal property in Virginia?

The simple answer is "no." There is nothing in either the Constitution of Virginia or in the Code of Virginia that would link the federal treatment of assets for purposes of the federal income tax to local tax treatment of tangible personal property.

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." The taxation of tangible personal property is reserved to localities and the method of valuation for property like that in question here is set forth in Va. Code § 58.1-3503(17).
    • All tangible personal property employed in a trade or business other than that described in subdivisions 1 through 16 of this subsection, which shall be valued by means of a percentage or percentages of original cost.

Virginia Code § 58.1-3503(B) does leave some room for further flexibility. This Code section states, "Methods of valuing property may differ among the separate categories; so long as each method used is uniform within each category, is consistent with requirements of this section and may reasonably be expected to determine actual fair market value as determined by the commissioner of revenue or other assessing official . . . ." The Virginia Supreme Court has consistently held that the constitutional requirements of uniformity and fair market value should be construed together, with the preference given to uniformity. This does not diminish the importance of fair market value, however. See Skyline Swannanoa v. Nelson County 186 Va. 878 (1947); quoted with approval, R. Cross Inc. v. City of Newport News 217 Va. 202 (1976).

Do MACRS depreciation rules apply to the administration of the BTPP tax?

Again, the answer is "no." The Constitution of Virginia charges the General Assembly with the responsibility of determining how tangible personal is to be assessed. Tangible personal property is made subject to "local taxation only, and shall be assessed for local taxation in such manner and at such times as the General Assembly may prescribe by general law. Constitution of Virginia, Article X, § 4. Virginia Code §§ 58.1-3503 through 58.1-3508 provide for specific classifications of tangible personal property.

If MACRS depreciation rules are applied in the administration of the BTPP tax should not the exemptions in MACRS apply as well?

The business tangible personal property tax and the machinery and tools tax are locally imposed and subject only to the conditions set by the Constitution of Virginia, the Code of Virginia and by local ordinance. Localities may not incorporate any exemptions that are not specifically authorized by the General Assembly pursuant to Article X of the Constitution of Virginia. For this reason, the federal exemptions under the MACRS valuation method would not be applicable to the administration of the BTPP tax. If a locality were to employ MACRS as a general method of valuation for all subjects in a given classification, it would do so independently of the requirements of the federal income tax.
DETERMINATION

As stated above, it is my determination that the air handling units are a part of the realty and should be taxed as such. I am returning this matter to the County with the instruction to assess the air handling units as a part of the realty, and to make the proper adjustments to the Taxpayer's bills for tax years 1999, 2000, 2001 and 2002.

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/48548


COMMONWEALTH of VIRGINIA
Department of Taxation
                • TO WHOM IT MAY CONCERN:

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 day 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

Last Updated 08/25/2014 16:46