Tax Type
Machinery Tools Tax
Description
County must consider the Taxpayer's appraisals in determining the fair market value
Topic
Appropriateness of Audit Methodology
Classification
Local Taxes Discussion
Date Issued
05-12-2010
May 12, 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 you on behalf of ***** (the "Taxpayer") with the Department of Taxation. You appeal assessments of machinery and tools tax issued to the Taxpayer by ***** (the "County") for the 2004 through 2007 tax years.
The machinery and tools tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue determinations on taxpayer appeals of machinery and tools tax assessments. On appeal, a machinery and tools tax assessment is deemed prima facie correct, i.e., the local assessment will stand unless the taxpayer proves 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 in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov.
FACTS
The Taxpayer manufactures tangible personal property at a facility located in the County. In December 2005, the Taxpayer's parent company was sold. The purchaser, in turn, sold the Taxpayer's assets to a venture capital firm in February 2007. In November 2006, the purchaser of the Taxpayer's parent company obtained an appraisal of the machinery and tools located in the plant. In February 2007, the venture capital firm also obtained an appraisal of the machinery and tools based on their liquidation value.
The County values machinery and tools at 100% of cost in the first year of purchase and productive capacity and then reduces the value by 10% each year over a five-year period to 50%, which remains applicable until the equipment is taken out of production.
The Taxpayer filed claims for refunds for the 2004 through 2007 tax years. The refunds were based on the reduced valuation of assets reported in the appraisals and a claim that certain assets previously taxed were not subject to the machinery and tools tax because they were not used in manufacturing. As a result of a meeting with the Taxpayer's representatives, the County removed non-manufacturing assets and reduced the assessment for the 2007 tax year. The County denied the Taxpayer's request to reduce the machinery and tools assessments for the 2004 through 2006 tax years. In addition, the County did not reduce the valuation of the assets in accordance with the Taxpayer's appraisals. The Taxpayer appeals the County's final local determination.
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. 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." 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 § 58.1-3103 specifically charges local commissioners with the responsibility of assessing property at fair market value.
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- As part of his duties each commissioner of the revenue shall ascertain and assess, at fair market value, all subjects of taxation in his county or city on the first day of January in each year, except as otherwise provided by law. [Emphasis added.]
Fair market value is generally defined as the price a property will bring when offered by one who 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. County of Richmond, 119 Va. 734, 101 S.E.2d 571 (1958).
In attempting to achieve property valuations that reasonably approximate fair market value, the General Assembly has statutorily prescribed different methodologies for use in the valuation of different classifications of property. For purposes of business tangible personal property taxation, the machinery and tools of manufacturers are separate from the general classification of tangible personal property. The method of valuation to ascertain the fair market value of machinery and tools used in a manufacturing business is set forth in Va. Code § 58.1-3507 B.
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- Machinery and tools segregated for local taxation . . . shall be valued by means of depreciated cost or a percentage or percentages of original total capitalized cost excluding capitalized interest. [Emphasis added.]
The County uniformly applies the percentages of the original cost methodology in its valuation of machinery and tools used in manufacturing.
Appraisals
Virginia Code § 58.1-3507 B requires a commissioner of revenue to consider any bona fide, independent appraisal presented by the taxpayer when valuing machinery and tools when requested in writing by the taxpayer. The Taxpayer originally submitted two appraisals valuing its assets for purposes of liquidation. The County rejected these appraisals because they were performed for the purpose of liquidating the Taxpayer's assets. The Taxpayer has now submitted a third appraisal that purportedly values the machinery and tools of the Taxpayer at its exchange valuation rather than its liquidation value.
Classification
In general, business tangible personal property, with some exceptions, is subject to local taxation. Virginia Code § 58.1-1101 2, provides a general exemption from the BTPP tax for tangible personal property used in manufacturing businesses. This same statute excludes machinery and tools, motor vehicles and delivery equipment of manufacturing businesses from the exemption, thus permitting them to be taxed by localities under application statutes and ordinances.
In 2007, the Taxpayer presented evidence to the County regarding certain tangible assets and their classification as machinery and tools. As a result of this evidence, the County reduced the Taxpayer's 2007 assessment of machinery and tools tax. The same reductions were not applied to the Taxpayer's 2004 through 2006 tax years.
The Taxpayer contends that the 2007 adjustments by the County were made to account for "ghost assets" (i.e., assets in the accounting records, but do not actually exist), assets that are actually real property, idle equipment, and intangible assets. It argues that these same adjustments should be applied to the 2004 through 2006 taxable years. The County states that it could not make the same adjustments to the machinery and tools tax assessments for the 2004 through 2006 tax years because the Taxpayer never provided machinery and tools inventory lists for those years. The Taxpayer avers that the County originally agreed to accept the machinery and tools inventory lists for the 2007 years for the prior years, and that the County never gave it the opportunity to provide equipment lists for those years.
Under Va. Code § 58.1-3983.1 B 3, a local taxing authority can require submission of additional evidence in order to make an informed final determination, If such information is not provided, a local assessing officer's assessment of tangible personal property, is considered to be prima facie correct.
DETERMINATION
Virginia Code § 58.1-3507 B gives the County the option to choose among three specific methods of valuation of tangible property to best meet the constitutional requirement of fair market value. The County must also consider any bona fide, independent appraisal presented by the taxpayer when valuing machinery and tools when requested in writing by the taxpayer. As such, I am remanding this matter to the County with the instructions that the County must consider the Taxpayer's appraisals in determining the fair market value of the Taxpayer's machinery and tools for the 2007 taxable year.
In addition, the Taxpayer must provide the County with evidence of which assets should have been classified as machinery and tools for the 2004 through 2006 tax years within 45 days of the date of this determination. The County must then review the evidence and determine what adjustments, if any, are warranted for the 2004 through 2006 tax years.
If you have any questions regarding this determination, you may call ***** of the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-3561323495.B
Rulings of the Tax Commissioner