Tax Type
Machinery Tools Tax
Description
Computerized printing equipment used directly in manufacturing activities.
Topic
Local Power to Tax
Manufacturing Exemption
Date Issued
03-31-2010
March 31, 2010
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Machinery and Tools Tax
Dear *****:
This final state determination is issued upon the application for correction filed by ***** (the "Taxpayer") with the Department of Taxation. The Taxpayer appeals an assessment of Machinery and Tools (M&T) tax issued to the Taxpayer by the ***** (the "City") for tax years 2005 through 2008. I apologize for the delay in the Department's response.
The M&T tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 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 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 a printer that uses computerized printing equipment. The Taxpayer relocated its business to the City from another locality (Locality A) in June 2004. Shortly after the Taxpayer relocated to the City, the City audited the Taxpayer and determined that the Taxpayer was a manufacturer subject to the M&T tax. The Taxpayer filed M&T property filings for the 2005 through 2008 tax years. Based on these filings, the City assessed M&T tax that was paid by the Taxpayer.
The Taxpayer filed an application for review with the City, contending that certain property was exempt from the M&T tax. In its final determination, the City agreed to remove some of the assets from the assessment but concluded that the computerized presses were critical to the manufacturing process and therefore subject to the M&T tax. The City also included manufacturing property in the 2008 assessment that had been listed by the Taxpayer on previous returns.
The Taxpayer appeals the City's determination and maintains that because the computerized printing equipment all have computers built into them for operating and administration purposes, that the computerized printing equipment is intangible property exempt form local taxation. The Taxpayer also contends that some of the larger printing presses are real property that is exempt under Enterprise Zone real estate tax abatement rules. Finally, the Taxpayer contends that the City assessed a portion of the M&T tax on equipment that was disposed prior or during the tax years at issue.
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 of 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:
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- 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 presenting its appeal, the Taxpayer relies on City of Winchester v. American Woodmark Corp., 250 Va. 451, 264 S.E.2d 148, (1995) (American Woodmark). In American Woodmark, 250 Va. 451, 458, the Virginia Supreme Court (the "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." The Court also cited previous opinions of the Attorney General in deriving the meaning of "used in manufacturing:"
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- The Attorney General has consistently opined that 'machinery and tools' used in a particular manufacturing business are the machinery and tools which are necessary in the particular manufacturing business and which are used in connection with the operation of machinery which is actually and directly used in the manufacturing process. Id., citing 1985-1986 Att'y. Gen. Ann. Rep. 316 at 317; see also 1987-1988 Att'y. Gen. Ann. Rep. 590. Id.
In The Daily Press, Inc. v. City of Newport News, 265 Va. 304, 576 S.E. 2nd 430 (2003), the Court amplified the principles set forth in American Woodmark:
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- 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 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. Computer hardware that is used directly in the manufacturing process and computer software used to drive that hardware are classified as machinery and tools and are subject to the M&T tax. See Public Document (P.D.) 08-85 (6/6/2008). Upon audit, the City found that the computer hardware that was integrated into the printing equipment was directly used in the manufacturing process and, therefore, were properly classified as machinery and tools.
The evidence furnished by the Taxpayer indicates that the printing equipment, that includes computerized high speed presses, cutters, plate makers, and pocket folders contain computers that are built-in for operating and administrative purposes. These built-in computers are clearly integral to the printing process and are used in the manufacturing process.
Real Property
The Taxpayer contends that some of the larger presses would be considered a fixture for purposes of real property tax and exempt under the Enterprise Zone tax abatement rules. Virginia Code § 58.1-3221 allows for localities to provide a partial exemption from real estate taxes for structures located in an area designated as an Enterprise Zone. The City provides a tax abatement program for renovation of commercial or industrial structures located in such zones. The Taxpayer's facility is located within an Enterprise Zone in the City.
The method of taxation of real property is provided under Va. Code § 58.1-3200 et seq., whereas the taxation of tangible personal property is provided under Va. Code § 58.1-3500 et seq. On those occasions when an item of tangible personal property is determined to be a fixture, it is treated as a real property for purposes of local taxation.
In Danville Holding Corp. v. Clement, 178 Va. 223, 232, 16 S.E.2d 345, 349 (1941), the Court set forth three general rules to be used in determining whether an article of tangible personal property is a fixture, thus considered a part of the real estate for purposes of taxation, or remains personality subject to tangible personal property taxation. The three tests are: (1) annexation of the chattel (property) to the realty, actual or constructive; (2) its adaptation to the use or purpose to which that part of the realty to which it is connected is appropriated; and (3) the intention of the parties, i.e., the intention of the owner of the chattel to make it a permanent addition to the freehold.
In order for the rules to apply, it is presumed that the property is annexed to the realty in some form. In its decision, the Court noted that the "intention of the party making the annexation is the paramount and controlling consideration."
In John Wesley Mullins, et al. v. L.E. Sturgill, et al, 192 Va. 653, 66 S.E. 2d 483 (1951), citing 22 Am. Jur., Fixtures, Sec. 6, p. 719, the Court noted that while the intention of the party making the annexation is made the controlling criterion by most of the authorities, and generally it is considered to be the chief test, it is not always determinative.
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- [I]n cases of doubt it has a controlling influence and must be considered. However, in order that a chattel may be converted into a fixture, the intention to make it a permanent accession to the realty must affirmatively and plainly appear; if the matter is left in doubt and uncertainty, the legal qualities of the article are not changed, and it must be deemed a chattel. [Emphasis added.]
In the present case, the intention to make the presses a permanent part of the realty does not "affirmatively and plainly appear." The presses are equipment used in the Taxpayer's manufacturing process. The Taxpayer moved the presses from another facility into the special purpose facility. Presumably, they could be moved to another facility.
Disposed Property
The Taxpayer contends the City included property in the assessments that had been disposed in previous tax years. It further claims that the City has refused to send representatives to examine its facilities. The City avers that the Taxpayer inexplicably removed assets from its property filings.
Issues regarding the disposal of property are a matter of fact to be determined by the locality. An examination of a facility by a locality can indicate if machinery or tools are no longer on the premises, but a taxpayer must provide sufficient documentation to a locality to show when it disposed of the property in question.
DETERMINATION
Based on the facts and the analysis provided above, I find that the computerized printing equipment is used directly in the Taxpayer's manufacturing activities. In addition, the evidence provided does not support a finding that the presses should be classified as real property exempt under the Enterprise Zone real estate tax abatement rules. Accordingly, the presses are subject to the M&T tax.
Further, I am remanding this case back to the City to determine whether the property removed from the Taxpayer's property filings was in fact disposed of prior or during the taxable years at issue.
If you have any questions regarding this determination, you may call ***** at the Office of Tax Policy, Appeals and Rulings at *****.
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- Sincerely,
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Janie E. Bowen
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- Tax Commissioner
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AR/1-3435070356.B
Rulings of the Tax Commissioner