Document Number
05-3
Tax Type
Machinery Tools Tax
Description
City valuation of the Taxpayer's property /fair market value
Topic
Accounting Periods and Methods
Allocation and Apportionment
Date Issued
01-21-2005


January 21, 2005



Re: Appeal of Assessment: Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Machinery and Tools Tax

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 the ***** (the "City") valuation of certain equipment for purposes of the machinery and tools (M&T) tax in tax years 1999, 2000, 2001 and 2002.

The M&T 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 M&T tax assessments. On appeal, a M&T tax assessment is deemed prima facie correct. That is, 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. 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.policylibrary.tax.virginia.gov.

FACTS

***** (the "Owner") sold his manufacturing business in the mid 1970's for cash and a note of approximately two million dollars. In 1981, the Owner's former company was on the brink of bankruptcy. In order to avert a substantial loss, the Owner purchased the assets of the business for a sum of ***** plus the remainder of the note. The Owner considered this action as a forced buy back of the operation, stating that "the amount of the debt greatly exceeded the value of the equipment returned" to the Owner.

The Owner's company, the Taxpayer, functioned as a real estate holding company until 1992. In 1992, the Taxpayer resumed its primary business of manufacturing. At that time, for federal income tax purposes, the Taxpayer estimated the replacement value of its assets, including installation of the machinery and tools, requisite engineering, site plans and surveys, piping systems and equipment would be *****. This amount was recorded on the company's books and reported on its federal corporate income tax return.

The City initiated an audit of the Taxpayer in 1995. The City states the audit was never completed because the Taxpayer failed to provide the City with updated M&T tax returns. As a result, the Taxpayer's account "was held at the same assessed value assigned to the assets in 1990: *****" This basis was used in tax years 1997, 1998, 1999, 2000 and 2001. In 2002, the City revised the basis of the property in question to reflect the replacement value of ***** as reported on the Taxpayer's corporate income tax return. As a result, the revised basis of the Taxpayer's property liable for the M&T tax was *****, ***** and ***** in tax years 1999, 2000 and 2001, respectively.

The Taxpayer appealed the revised assessment. The City directed the Taxpayer to obtain a formal appraisal of the property at issue. The Taxpayer did so, and the property in question was appraised with a current market value of ***** on March 26, 2003. Despite the appraisal of the independent auditor, the City maintained its original position and denied the Taxpayer's appeal. The Taxpayer appeals the City's determination to the Department of Taxation.

In addition to appealing the valuation of its equipment, the Taxpayer also appeals four other errors in the City's assessment. These relate to factual questions that are to be resolved by the Taxpayer and the local Commissioner of the Revenue; therefore, they will not be addressed in this determination. It is incumbent upon the Taxpayer to identify "each alleged error in the assessment, the grounds upon which the taxpayer relies, and any other facts relevant to the taxpayer's contention." Va. Code § 58.1­3983.1 B.

ANALYSIS

Valuation for Purposes of Property Taxation

Virginia has elected to create a separate classification of tangible personal property for machinery and tools used in manufacturing. In so doing, it has also prescribed the valuation method localities may elect to use in assessing such property for taxation. The method of valuation used to ascertain the fair market value of machinery and tools is established in Va. Code § 58.1-3507 B:
    • Machinery and tools segregated for local taxation pursuant to subsection A, other than energy conservation equipment of manufacturers, shall be valued by means of depreciated cost or a percentage or percentages of original total capitalized cost excluding capitalized interest. [Emphasis added.]

The City uses an assessment ratio of a straight 50 percent of original cost to determine the value of property for purposes of the M&T tax. In other words, machinery purchased in 1980 is assessed at 50 percent of its original cost in 1980 and in subsequent years.

Uniformity and Fair Market Value

Article X, § 1 of the Constitution of Virginia provides that "All taxes shall be levied and collected under general laws and shall be uniform upon the same classes of subject within the territorial limits of the authority levying the tax." 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. See Skyline Swannanoa v. Nelson County, 186 Va. 878, 44 S.E.2d 437 (1947), quoted with approval, R. Cross Inc. v. City of Newport News, 217 Va. 202, 228 S.E.2d 113 (1976).

This does not diminish the importance of fair market value, however. Fair market value is defined as the price a property will bring when one 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. City of Richmond, 199 Va. 734, 101 S.E.2d 571 (1958). In Tuckahoe, the Virginia Supreme Court, citing Lehigh, etc., Co. v. Commonwealth, 146 Va. 146, 135 S.E. 699 (1926), held that while the uniformity provision is preferred when the uniformity and fair market value clauses are in conflict, "that does not mean that property in any taxing jurisdiction may be assessed in excess of and without relation to its fair market value as required by the Constitution." [Emphasis added.]

The City has adopted a uniform method of assessing machinery and tools, using a percentage of original cost. In the Taxpayer's case, the City's long-standing basis used for the valuation of the Taxpayer's property increased from ***** to *****. The change in basis was based upon the City's review of the Taxpayer's corporate income tax returns. While often a useful preliminary tool in determining the value of assets, corporate income tax returns are not always the most appropriate tools to be utilized for purposes of property valuation. The provisions of corporate income tax law frequently are not in concert with the local property tax law, particularly when the adaptation of these provisions violates the constitutional requisite of fair market value.

M&T Tax and the Constitution of Virginia

Historically, the Virginia Supreme Court has recognized that property is often assessed at less than fair market value and has not objected to such assessments so long as they are applied uniformly. See Norfolk and Western Railway Company v. Commonwealth of Virginia, et al, 211 Va. 692, 179 S.E.2d 623 (1971). It has insisted, however, that the principle of fair market value be observed when the valuation methodology results in a valuation that far exceeds fair market value. Tuckahoe, at 738.

In accordance with the provisions of Article X, § 2 of the Constitution of Virginia, and Va. Code § 58.1-3507 B, for purposes of the M&T tax, the City has the option of using as its method of valuation: (1) depreciated cost or; (2) a percentage of original total capitalized cost excluding capitalized interest cost or; (3) percentages of original total capitalized cost excluding capitalized interest. There are no other options available to the City provided for in the statute. See Public Document (P.D.) 04-16 for a further discussion of this issue.

In this case, the City used the Taxpayer's stated "replacement cost" reflected on the Taxpayer's corporate income tax returns as a basis for valuation. After applying the 50% depreciation method, the basis used in assessing the Taxpayer's property was *****. If the City had elected to use a depreciated cost basis for valuation, the Taxpayer would be assessed at 100 percent of its fair market value, or depreciated cost in tax year 2003. Under this method, the basis for the Taxpayer's M&T assessment would be ***** not *****.

In its appeal, the Taxpayer cites Board of Supervisors of Fairfax County et al. v. Telecommunications Inc., 246 Va. 472, 436 S.E.2d 442 (1993), in which the Court reiterates that "the preference for uniformity must stop short of assessment at greater than fair market value." In fact, as has been demonstrated, the City's assessment is far greater than fair market value. It is clear that the City's revised basis of the property in question, based on replacements costs reported on federal income tax returns and not the depreciated cost or a percentage of the original total capitalized cost of the machinery as required by Va. Code § 58.1-3507 B, far exceeds fair market value and is in conflict with Article X, § 2 of the Constitution of Virginia and with the principles set forth in Tuckahoe and Board of Supervisors.

DETERMINATION

The City's valuation method for the property at issue is not based on the provisions of Va. Code § 58.1-3507 B and violates the fair market value requirements of the Constitution of Virginia. In accordance with this determination, the City should revise its valuation of the Taxpayer's property to more accurately reflect fair market value. The original equipment should be based on 50 percent of value as agreed to at the time of the 1996 audit. Any new equipment purchased after 1996 should be assessed at 50 percent of its original cost.

If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
                    • Sincerely,


                  • Kenneth W. Thorson
                    Tax Commissioner



AR/49845H

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46