Tax Type
Machinery Tools Tax
Description
Documentation is insufficient to determine use of the pollution control equipment
Topic
Classification
Local Taxes Discussion
Records/Returns/Payments
Date Issued
06-17-2011
June 17, 2011
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 your client, ***** (the "Taxpayer") with the Department of Taxation. You appeal the assessments of Machinery and Tools (M&T) tax issued to the Taxpayer by the ***** (the "County") for the 2006 through 2008 tax years.
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, the M&T 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, a manufacturer located in the County, filed amended M&T tax returns for the 2007 through 2009 tax years requesting removal of certain equipment included on the original returns as machinery and tools. The County agreed to some of the Taxpayer's amendments and refunded the associated tax but declined to allow the removal of all of the equipment requested by the Taxpayer.
The Taxpayer filed an appeal with the County. In its final determination, the County made additional adjustments to the M&T tax assessments for the 2007 through 2009 tax years. As a result, an additional refund for the 2007 tax year and additional assessments were issued for the 2008 and 2009 tax years.
The Taxpayer appeals the County's final determination, contending certain equipment was incorrectly classified by the County as machinery and tools. It argues that certain pollution control and recycling equipment were not machinery and tools. In addition, the Taxpayer disagrees with the County's treatment of replacement costs for certain assets. The Taxpayer believes the County should not be permitted to assess M&T tax on both the original equipment cost and the replacement parts that are necessary for the continuing operations of the equipment. Finally, the Taxpayer requests information about interest on refunds of M&T tax.
ANALYSIS
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 City of Winchester v. American Woodmark, 250 Va. 451, 458, 464 S. E.2d 148, 152 (1995), 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. County 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.
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. In Public Document (P.D.) 04-39 (8/02/2004), the Department found equipment and tools that did not directly transform or even touch the product being produced could be used directly in the manufacturing process. The question, therefore, is not whether a particular piece of machinery transforms a product, but whether such machinery or tool is used directly in a manufacturing process.
Pollution Control Equipment
The equipment at issue was used to remove fumes from the Taxpayer's manufacturing facility caused by certain processes in the manufacturing process. Specifically, they were used to control particulates, volatile organic compounds and carbon monoxide emissions. This equipment was located on the roof of the facility.
The Taxpayer contends that under Daily Press, the definition of machinery and tools is limited to machinery and tools actually and directly used in the process of manufacturing. The Taxpayer avers that the purpose of the pollution control equipment was to convert harmful particles into clean air in compliance with federal and state law. It further argues that the pollutant cleaning process was separate and apart from the process of manufacturing and, therefore, was not related to the manufacturing process.
Citing 1987-1988 Op. Va. Att'y Gen. 590, the County contends that property connected with the operation of machinery actually and directly used in the manufacturing process includes equipment beyond that actually and directly used in the manufacturing process. In its opinion, the Attorney General extends the definition of machinery and tools to include equipment "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." The County asserts that the equipment was connected with the operation of the machinery that is used in manufacturing because it controlled the particulates and emissions generated by the machinery that is integral in the manufacturing process.
In P.D. 08-88 (6/16/2008), the Department held that pollution control equipment not used in manufacturing is not machinery and tools. However, a determination as to whether pollution control equipment was connected with the operation of machinery actually and directly used in the manufacturing process is a factual matter.
In this case, the pollution control equipment was used to control particulates and emissions into the air. However, it is not clear what happens to the waste materials generated by the pollution control equipment. There is some indication that the Taxpayer is permitted to use the waste materials to provide power and heat for the manufacturing plant. If the particulates and emissions were in fact used to provide power to the manufacturing machinery, the pollution control equipment could be classified as machinery and tools.
Recycling Equipment
The Taxpayer contends that the recycling equipment, a fines bin, met the standards of the exemption under Va. Code § 58.1-3661. The exemption for certified recycling equipment and facilities is a general property tax exemption offered as an option to localities. If the locality does not adopt an ordinance providing for such an exemption, it is not available. Because the County has not adopted such an ordinance, the exemption does not apply.
The fines bin collects waste wood material from the manufacturing process that is burned to more efficiently provide power and heat to the manufacturing facility. In P.D. 04-39, the Department found that equipment used for recycling water and oil was machinery and tools because the recycled water was re-circulated through manufacturing machinery to keep it cool. Here, the waste wood material collected in the bins provides power to machinery and tools used in the plant. Unlike the equipment in P.D. 04-39, the fines bin is not connected by a series of pipes to the actual manufacturing machinery.
Modification Costs
The Taxpayer capitalized certain modifications to items of machinery. Most of the modifications involved replacing significant parts on original equipment. The Taxpayer asserts that these capitalized costs should be classified as repairs for purposes of the M&T tax and not included in the cost of the machinery. The Taxpayer believes that assessing the refurbishment costs resulted in some equipment being taxed on both the original cost and the replacement cost, which is essentially double taxation. The County counters that allowing for the removal of all replacement costs fails to consider the value added to the upgraded equipment.
Fair market value is the constitutional requirement for valuation of tangible personal property. Virginia Code § 58.1-3507 B allows local taxing authorities to choose among three specific methods of valuation of tangible property to best meet the constitutional requirement of fair market value. The valuation of machinery and tools must reasonably approximate 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. See P.D. 05-129 (8/3/2005).
In some cases, repairs to an asset may make the fair market value of that asset greater than the actual assessed value. Historically, the Virginia Supreme Court has recognized that property is often assessed at less than fair market value and has not objected to such assessments so long as they are applied uniformly. See Norfolk and Western Railway Company v. Commonwealth of Virginia, et al. 211 Va. 692, 179 S.E.2d 623 (1971). In such instances, the assessment will stand. Again, the locality is responsible for finding a methodology for reasonably approximating the fair market value of an asset for property taxation.
Under the provisions of Va. Code § 58.1-3109 6, the local taxing official is empowered with the authority to require records and other information necessary to make an accurate assessment of a person's tangible personal property. It is incumbent upon a taxpayer to prove to the satisfaction of the local commissioner of the revenue that the repairs should not be included. See Va. Code § 58.1-3983.1 B 4.
Interest
The Taxpayer seeks to confirm that the County is required to pay interest on refunds granted to the Taxpayer prior to the Taxpayer's appeal to the Department. Pursuant to Va. Code § 58.1-3916, localities may provide by local ordinance for interest to be collected on delinquent taxes. Localities may set the rate of interest so long as it does not exceed 10% per year. Under this statute, localities also must provide for the payment of interest at the same rate for overpayment of taxes.
The County's ordinance provides for the accrual of interest on assessments at 10% commencing the first day following the day taxes are due. Pursuant to Va. Code § 58.1-3916, the County would be required to pay interest at the same rate on refunds.
DETERMINATION
Based on the documentation presented, I find that the fines bin should be classified as machinery and tools. However, the documentation is insufficient to determine whether the pollution control equipment was used to produce power and heat for the Taxpayer's manufacturing plant.
In addition, while I understand the Taxpayer's concern about the modification and replacement costs, such refurbishment costs generally increase the value of an asset by extending their life or increasing efficiency. Further, the Taxpayer has provided no objective evidence that the County's method of valuing the modified machinery exceeds fair market value or results in double taxation.
Accordingly, I am remanding this matter to the County with the instructions that it consider any other documentation the Taxpayer may be able to provide to demonstrate that the pollution control equipment was not used to produce power and heat for the manufacturing plant. Further, the Taxpayer may provide additional evidence as to the fair market value of the modified machinery.
The documentation or evidence required in accordance with this determination should be provided to the County within 30 days of the date of this determination. If the Taxpayer is unable to provide adequate documentation, the County may include the pollution control equipment as machinery and tools in its assessment of M&T tax for the taxable year at issue. Once its review of the additional documentation is complete, the County should provide the Taxpayer with a detailed calculation of the final assessment.
If you have any questions regarding this determination, you may call ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
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AR/1-4704522196.B
Rulings of the Tax Commissioner