05-6 | Virginia Tax

Tax Type

Machinery Tools Tax

Description

Assets used in environmental services

Topic

Local Power to Tax

Date Issued

02-01-2005

February 1, 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 "County") assessment of certain properties for purposes of the Machinery and Tools (M&T) tax.

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 Taxpayer is a manufacturer of snack foods. The Taxpayer contests the County's classification of certain assets as machinery and tools for purposes of local M&T taxation. The Taxpayer contends that, pursuant to Va. Code § 58.1-1101 A 2, assets used in environmental services and quality assurance services should be treated as intangible personal property, subject to state taxation.

The County maintains that the environmental services equipment serves a necessary and integral function in a food processing plant and, therefore, the equipment is properly classified as machinery and tools. Likewise, the County finds the quality assurance equipment to be integral to the manufacturing process. This equipment, the County maintains, is also properly classified as machinery and tools.

ANALYSIS

Taxation of Machinery and Tools

All tangible personal property, unless declared intangible under the provisions of Va. Code § 58.1-1100 et seq., is reserved for local taxation by Article X, § 4 of the Constitution of Virginia. Included in the category of tangible property that is declared intangible and subject to state taxation only is "[c]apital 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)." See Va. Code § 58.1-1101 A 2.

The machinery and tools, motor vehicles and delivery equipment used in a manufacturing business are not defined as intangible personal property. Such property is to be taxed locally as tangible personal property. Virginia has elected to create a separate classification of tangible personal property for machinery and tools used in manufacturing. Virginia Code § 58.1-3507 A provides:

- Machinery and tools . . . used in a manufacturing . . . business shall be listed and are hereby segregated as a class of tangible personal property separate from all other classes of property and shall be subject to local taxation only.

"Used" in Manufacturing

In City of Winchester v. American Woodmark Corp., 250 Va. 451, 464 S.E.2d 148 (1995), the Virginia Supreme Court stated, "Since 1950, the Tax Commissioner has opined that the phrase 'machinery and tools' contained in Va. Code § 58.1-1101 A 2 and its precursors means machinery used in the actual process of manufacturing."

In a more recent opinion of the Supreme Court, The Daily Press, Inc. v. City of Newport News, 265 Va. 304, 576 S.E.2d 430 (2003), the Court amplified the principles set forth in American Woodmark.

- The principle gleaned from American Woodmark can be simply stated: personal property that may be essential to the overall operations of a manufacturing business is not 'machinery and tools' subject to local taxation unless the property is actually and directly used in the manufacturing process where new materials are transformed into a substantially different product or the property is connected with the operation of machinery actually and directly used in the manufacturing process. 265 Va. 304, 311. [Emphasis added.]

This language does not, however, imply that each piece of machinery or tool used directly in the manufacturing process must be directly connected to the complete transformation of a material into something substantially different in character in order for it to be classified as machinery and tools for purposes of local taxation. See Public Document (P.D.) 04-39 (8/2/04); 1985-1986 Att'y Gen. Ann. Rep. 316 at 317; and 1987-1988 Att'y. Gen. Ann. Rep. 590, for additional clarification.

Property at Issue

The Taxpayer contends that the assets in question are not directly used in the manufacture of snack products and therefore are not subject to the tax.

Environmental Services Equipment

This equipment is used to clean both manufacturing and non manufacturing equipment throughout the plant, equipment used to sanitize the production equipment, facility walls and floors in the production area, and fogging equipment used to kill insects in the plant.

I agree with the Taxpayer that general cleaning equipment, including floor scrubbers mops, rags, and trash cans, does not meet the standard of being directly used in the manufacturing process. These items are appropriately classified as capital under the provisions Va. Code § 58.1-1101 A 2 and are not subject to the M&T tax. Likewise, I find that the sanitizing equipment used on the floors and walls and the fogging equipment used to kill insects should be classified as capital under the provisions of § 58.1-1101 A 2. While Va. Code § 3.1-367 requires that walls, floors and ceilings of establishments "shall at all times be kept in a clean, healthful and sanitary condition," the walls and floors are not actually and directly used in the manufacturing process of the snack foods. The same can be said of the fogging equipment used to kill insects. See Va. Code § 3.1-368. I recognize that, without such equipment, the Taxpayer could fail a state-mandated inspection by the Commissioner of Agriculture. While such equipment may be essential to the manufacturing process, it is not directly used in the manufacture of the Taxpayer's product, nor is it "used in connection with the operation of machinery which is actually and directly used in the manufacturing process." Daily Press, id. Therefore, this equipment is properly classified as "intangible" under the provisions of Va. Code § 58.1-1101 A 2 and is subject to state taxation. It is not subject to the M&T tax.

In P.D. 04-39, I found "Machinery and tools used to service the equipment directly used in the manufacturing process would be subject to the M&T tax." [Emphasis in the original.] In this case, the equipment used to sanitize the equipment used in the manufacturing process is integral to the process and "used in connection with the operation of machinery which is actually and directly used in the manufacturing process." Daily Press, id. Therefore, this equipment is subject to the local M&T tax.

Quality Assurance Equipment

The equipment classified by the Taxpayer as "quality assurance" equipment consists of equipment used: (1) to calibrate thermometers used in measuring the temperature of the product; (2) in ingredient inspection; (3) for lab testing and the manufacture of lab samples; (4) to measure moisture content of the ingredients and of the finished product; (5) to weigh the product; (6) to measure viscosity of the intermediate product; (7) to test the "pH" of the finished product; (8) to test the sanitation and cleanliness of the processing equipment; (9) to purify water; and (10) to measure the thickness of the packaging film and material.

The quality assurance equipment listed in items one through eight is clearly used directly in the manufacturing process and is subject to the M&T tax. Whether the equipment used to purify water is directly used in the manufacturing process depends upon the use of the water. If the purified water is used in the manufacture of the snacks, this equipment would also be classified as machinery and tools for purposes of local taxation. (See P.D. 04-39 in which laboratory equipment used in formulating the water and oil mixtures used in the manufacturing process was found to be essential to the manufacturing process.) This is a question for the local commissioner of the revenue to determine.

Likewise, the classification of the equipment used to measure the thickness of the packaging film and material is a question for the local commissioner of the revenue to decide. If this equipment is integral to overall manufacturing process and used in connection with the operation of machinery which is actually and directly used in the manufacturing process, it could be considered machinery and tools for purposes of local taxation.

DETERMINATION

The broad principles enunciated both by the Virginia Supreme Court in American Woodmark and The Daily Press and by the Attorney General's opinions provide sufficient guidance to the local commissioner of the revenue to use in classifying individual objects as tangible or intangible.

Addressing the specific items contested by the Taxpayer, it is my determination that, with the exception of its treatment of the environmental services equipment as discussed above, and the possible exception of the water purifying system and the equipment used in the packaging process, the County has adhered to the applicable principles in its assessment of the Taxpayer's machinery and tools. I am returning this matter to the County with the instruction to remove the following from its list of the Taxpayer's assets subject to the M&T tax: the routine maintenance equipment, the machines used to sanitize the walls and floors, and the fogging equipment. The County must make the determination on the water purification system and the equipment used in conjunction with packaging consistent with the principles in this determination.

If you have any questions regarding 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/51521H

Rulings of the Tax Commissioner