Document Number
08-80
Tax Type
BTPP Tax
Machinery Tools Tax
Description
Machinery and tools used in the manufacturing process at in the City are subject to the local M&T tax
Topic
Tangible Personal Property
Date Issued
06-06-2008

June 6, 2008




Re: Appeal of Final Local Determination
Locality: *****
Taxpayer: *****
Business Tangible Personal Property Tax

Dear *****:

This final state determination is issued upon the application f or correction filed by you on behalf of ***** (the "Taxpayer") with the Department of Taxation. You appeal an assessment of business tangible personal property (BTPP) taxes issued to the Taxpayer by the ***** (the "City") for tax years 2002 through 2006.

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. 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, a vertically integrated manufacturer, contests the assessment of its tangible personal property made by the County for tax years 2002 through 2006.

The Taxpayer's lines of business are described as chicken and poultry processing, further processing of poultry, manufacturing of soybean meal and oil, and the manufacturing of animal feed. Its third division, the manufacture of soybean meal and oil, has situs in the City.

Upon examination of the Taxpayer's activity in the City, the City classified the Taxpayer as a wholesaler engaged in some manufacturing and assessed the Taxpayer's tangible personal property accordingly. The Taxpayer contests the assessment, arguing that its activity in the City was substantial enough to warrant its classification as a manufacturer for local tax purposes.

ANALYSIS


In the assessment and the ensuing protest, neither the Taxpayer nor the City viewed the Taxpayer's entire business. The appropriate classification of similar businesses was previously addressed in Public Documents (P.D.) 02-1 (01/04/02) and 02-2 (01/04/02). Because the Department has already addressed this classification issue, the following is simply a brief restatement of the findings issued in P.D.s 02-1, 02-2, other previously issued public documents and Virginia Supreme Court Rulings.

Vertically Integrated Manufacturers

The issue of whether the particular activities of a taxpayer in a jurisdiction can be separated from the company as a whole for purposes of taxation was addressed by the Virginia Supreme Court in City of Winchester v. American Woodmark, 250 Va. 451, 464 S.E.2d 148 (1995). In that decision, the Court found that the applicable law did not require capital be used in a manufacturing facility in the locality to be used in a manufacturing business. This ruling was based in part on an earlier ruling, County of Chesterfield v. BBC Brown Boveri 238 Va. 64, 389 S.E.2d 890 (1989), in which the Court found:
    • When a party is engaged in both manufacturing and non-manufacturing activities, it will nonetheless be classified as a manufacturer for tax purposes if the manufacturing portion of its business is substantial.

In P.D. 02-1 (01/04/02), the Department found that the taxpayer had factually demonstrated the substantiality of the manufacturing portion of its business. The percentage of receipts attributed to manufacturing meat products from live poultry ranged from 30.41% to 39.63%. These figures did not include the receipts generated from the taxpayer's manufacture of oils and feed. The Department noted that the inclusion of those receipts would have further increased the percentage of the taxpayer's overall manufacturing activity. Important to the instant case, in P.D. 02-1, the Department found that the activities of the taxpayer constituted a single business and must be treated as such for purposes of local business license taxation. There is little difference between the situations presented in P.D.s 02-1 and 02-2 and in the Taxpayer's case. Therefore, I see no reason to change the results of those documents in consideration of the instant case.

What actually occurs at the Taxpayer's facility in the City is not the sole consideration for the purposes of personal property taxation, because it is a vertically integrated company. As such, it is my determination that the Taxpayer's machinery and tools used directly in the manufacturing process in the City are subject to the City's machinery and tools (M&T) tax. All other capital located in the City, with the exception of motor vehicles and delivery equipment, tangible in fact, is considered to be intangible, and segregated for state taxation only. See Va. Code § 58.1-1101.

It is important to note that during the tax years in question, the Taxpayer operated as a single entity much like the taxpayer in American Woodmark. In April of 2007, the Taxpayer formed a separate LLC and its facility in the City has been operating under the new entity. As such, effective April 2007, the Taxpayer's operation in the City would most likely be subject to the BTPP tax much like the Taxpayer in P.D. 07-191 (07/21/07). That determination should be made by the local commissioner of the revenue.

Manufacturing

The City contends that because the soybean oil, as well as other products manufactured at the facility in the City, are sent to another facility elsewhere for further processing, no manufacturing occurs in the City.

The definition of a "manufacturer" is not in the Code of Virginia. However, the Virginia Supreme Court has developed a test involving three essential elements in determining whether a manufacturing activity is being undertaken. These elements are: (1) original material, referred to as raw material; (2) a process whereby the original material is changed; and (3) a resulting product, which by reason of being subject to such processing is different from the original material. See Solite Corp. v. County of King George, 220 Va. 661, and BBC Brown Boveri.

For local tax purposes, a manufacturer is one engaged in a processing activity whereby the original materials are transformed into a product that is substantially different in character from the original materials. It does not matter whether the transformation is a step in getting the product ready for market or it is a complete process. What matters for purposes of local taxation, is whether the transformation of the material takes place in the locality. See Commonwealth v. Meyer, 180 Va. 466, 23 S.E.2d 353 (1942) for further explanation.

In the instant case, the transformation of soybeans into oils and feed does take place at the Taxpayer's facilities in the City. These activities constitute manufacturing and the machinery and tools used in these activities are subject to the City's M&T tax.

DETERMINATION


During the tax years in question, the Taxpayer was a vertically integrated manufacturer. As such, its machinery and tools used in the manufacturing process at its facility in the City are subject to the local M&T tax. All other capital, other than motor vehicles and delivery equipment, is intangible and subject to the provisions of Va. Code § 58.1-1101.

If you have any questions regarding this determination, you may call the Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,

                • Janie E. Bowen
                  Tax Commissioner



AR/1-1422776960H


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46