06-9 | Virginia Tax

Tax Type

Machinery Tools Tax

Description

Contesting valuations of tangible personal property and methodology of validation

Topic

Classification

Local Taxes Discussion

Date Issued

01-27-2006

January 27, 2006

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") final local determination upholding its original assessment of the machinery and tools ("M&T") tax on the Taxpayer's property in tax year 2005.

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, an 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 summarized below. The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.

FACTS

The Taxpayer is engaged in the manufacture of a specialized product at its facility in the City. The Taxpayer is currently planning to phase out production at two of its older plants, including the facility in the City, and consolidate all of its production activities at a new facility in ***** ("State A"). The Taxpayer states that its facility in the City will be shut down permanently in 2007, and its entire production process will be moved to the new facility in State A.

The Taxpayer's records reflect that it has been acquiring new equipment for use in its operations in the City on an annual basis since 2000. The Taxpayer asserts, however, that because of rapidly changing technologies used in the manufacture of its specialized product, there is no market for the machinery and tools currently in use at its facility in the City. On its 2005 personal property tax return, the Taxpayer claimed a cost basis adjustment equivalent to 50% of original cost of equipment, ascribing the adjustment to the technological obsolescence of the machinery and tools at its facility. The Taxpayer then applied the City's 50% of original cost valuation ratio to this new "original cost."

The City denied the Taxpayer's use of the cost basis adjustments in calculating its M&T taxes in 2005. The Taxpayer appeals the City's final local determination.

ANALYSIS

Taxation of Property

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. 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 to be ascertained as prescribed by general law." That is, this provision of the Constitution contains the presumption that the General Assembly's prescribed valuation method will both standardize valuation practices across all the local governments in the Commonwealth and result in something approximating fair market value.

Virginia Code § 58.1-3507 B provides that the machinery and tools of a manufacturer shall be valued by means of depreciated cost or a percentage or percentages of original total capitalized cost, excluding capitalized interest. All tangible personal property of manufacturers that is not used directly in the manufacturing process or indirectly in the making of equipment used in the process is classified as intangible and subject only to taxation by the state. See Va. Code § 58.1-1101 B.

Methods of valuing all other tangible personal property are addressed in Va. Code § 58.1-3503. This section authorizes localities to factor in technological obsolescence in their valuation of tangible personal property of businesses that are not manufacturers. There is nothing in the statute that permits a taxpayer who is a manufacturer to use cost basis adjustments equivalent to a percentage of original cost, due to "technological obsolescence," the methodology proposed by the Taxpayer.

Public Document ("P.D.") 04-16 (05/14/2004) addresses a similar situation. In that case, the taxpayer contended that technological obsolescence of the machinery and tools had to be considered in the valuation of its property in order to achieve fair market value, and that the provisions of Va. Code § 58.1-3503 be used in the valuation of its machinery and tools. This position was firmly rejected in P.D. 04-16, which affirmed that the principles of Va. Code § 58.1-3503 B do not apply to machinery and tools used in manufacturing. Virginia Code § 58.1-3507 provides for a separate classification for machinery and tools used in manufacturing, and the methods of valuation for such property are specifically prescribed in that section.

In all cases, tangible personal property may not be valued at above fair market value. See Tuckahoe Women's Club v. County of Richmond, 119 Va. 734, 101 S.E.2d 571 (1958). If the valuation methodology employed by a locality results in an assessment well above fair market value, the locality may use another methodology prescribed in Va. Code § 58.1-3507 B. See P.D. 05-129 (08/03/2005).

In contesting valuations of tangible personal property, the taxpayer bears the burden of proof to demonstrate that property has been assessed at greater than fair market value.¹

Unlike the situation presented in P.D. 05-129, where the taxpayer offered an outside appraisal made by an independent firm to support its position, the Taxpayer in this case has justified its self-assessment merely with evidence supporting the fact that it intends to move its operations to State A in tax year 2007. The fact remains that Taxpayer's facility in the City is still operating, and it has acquired new equipment annually, the most recent acquisition of record occurring in 2004.

DETERMINATION

Absent clear evidence that the constitutional principle of fair market value was violated by the City's valuation methodology, it is my determination that the final local determination made by the Commissioner of the Revenue is correct. The Taxpayer's request for a partial refund of 2005 M&T taxes paid is denied.

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/55814H

¹This is a well-established principle of taxation. See Va. Code § 58.1-3984; Board of Supervisors of Fairfax County, et al. v. Telecommunications Industries, Inc., 246 Va. 472; 436 S.E.2d 442; (1993), and Board of Supervisors v. Donatelli & Klein, 228 Va. 620, 627, 325 S.E.2d 342, 345 (1985).

Rulings of the Tax Commissioner