11-117 | Virginia Tax

Tax Type

BTPP Tax

Description

Classify HVAC systems,fit outs and backup generators

Topic

Classification

Local Taxes Discussion

Records/Returns/Payments

Tangible Personal Property

Date Issued

06-22-2011

June 22, 2011

Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business Tangible Personal Property (BTPP) 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 a final local determination by the ***** (the "City") upholding BTPP tax audit assessments for the 2006 through 2009 tax years.

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, i.e., 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 in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.virginia.gov.

FACTS

The Taxpayer is engaged in business at a facility in the City. The facility is owned by the Taxpayer. Under audit, the City found a number of items of property that were not listed on the Taxpayer's BTPP returns. The property included that two heating, ventilation and air conditioning (HVAC) units with related HVAC "fit outs" and a backup generator with a related transfer switch.

The Taxpayer filed an appeal with the City, contending the HVAC systems and backup generator were real property. In its final determination, the City concluded that the HVAC equipment was tangible personal property used to cool computers, and the generator and transfer switch were subject to BTPP tax because they were placed in service after the Taxpayer began operating the building and their removal would not impact the value of the building.

The Taxpayer appeals to the Tax Commissioner, contending the HVAC systems and generator were permanently affixed to the real property and it would be economically infeasible to remove any of the equipment. The Taxpayer also asserts that the HVAC equipment was used to cool the building and not the computers. Further, according to the Taxpayer, the generator and transfer switch were part of the realty because they were a necessary part of the technical nature of the Taxpayer's business and would not be removed if the Taxpayer left the building.

ANALYSIS

Real property and all tangible personal property except the rolling stock of public service corporations and that which is 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.

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 real property for purposes of local taxation. Fixtures are presumed to be annexed to the realty in some form.

In Danville Holding Corp. v. Clement, 178 Va. 223, 232, 16 S.E.2d 345, 349 (1941), the Virginia Supreme Court (the "Court") set forth three general rules to be used in determining whether an article of tangible personal property is a fixture, and thus considered a part of the real estate for purposes of taxation, or remains personal property subject to taxation as BTPP. The three tests are: (1) the 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."

Annexation

Annexation of chattel must be actual or constructive. In Danville Holding, the Court concluded "the method or extent of the annexation carries little weight, except insofar as they relate to the nature of the article, the use to which it is applied and other attending circumstances as indicating the intention of the party making the annexation." In other words, so long as chattel is attached to a building to carry out the purpose for which such building was erected and to increase its value for occupation or use, such chattel may become part of the realty even if it may be removed without injury to itself or the building. The documentation provided shows the equipment at issue was attached to the realty.

Adaptation

If attached property is essential to the purposes for which the building is used or occupied, it would generally be considered a fixture even if its annexation to such building is such that it may be severed without injury to either the chattel or the building.

The Taxpayer states that the HVAC systems and "fit outs" were not used to cool computers, but were essential to the purpose of the building because the special lighting in the building produced excessive heat. The City contends that the purpose of the HVAC equipment was to cool computers. During the course of the audit, the City toured the Taxpayer's facility with the facility manager. According to the City, the facility manager indicated that some of the HVAC systems were used to cool the building while other HVAC units were used to cool specific areas that housed computers. The City only applied BTPP tax to those units and "fit outs" that were used to cool the specific areas.

The Taxpayer indicates that the backup generator and switch were necessary because a backup power source is essential to the operations of technical businesses. The City asserts that this property was not essential for purposes of the building because it was put into service two years after the Taxpayer began operations at the facility, and the removal would not negatively impact the value of the building.

Intention

The Court has emphasized the intention of the party making the annexation is the chief test to be considered in determining whether the chattel has been converted into a fixture. Although the intention does not need to be expressed in words, it should be able to be inferred from the nature of the property annexed, the purpose for which it was annexed, the relationship of the party making the annexation, and the structure and mode of annexation.

The Taxpayer indicates that it does not intend to remove the property at issue if it leaves that facility. In addition, the Taxpayer has provided a third party appraisal obtained for purposes of a real property assessment. The appraisal included the equipment at issue as real property. The Taxpayer asserts that the appraisal demonstrates that the equipment at issue is permanent in nature and was integral to the operation and maintenance of the building. The Taxpayer also contends that the property at issue was included in the City's real estate tax assessment. The Taxpayer also contends that removing the property would be economically infeasible.

According to the City, the appraisal was provided to the City assessor's office in 2008. The City admits that specific information from the appraisal was used to adjust the real estate assessment, but the City assessor has confirmed that the property at issue was not taxed as real estate and was not related to the real estate that was adjusted as a result of the appraisal. The City also counters that the Taxpayer had confirmed during the tour that the HVAC equipment was used to cool the computers, and the backup generator and switch were needed only because of the highly specialized nature of the Taxpayer's equipment located in the building.

Regardless of stated intention of an owner, a taxing authority must also consider how the owner is using the property in its business in order to determine whether such property is operating tangible property or realty. Property would generally be classified as real property if its purpose supports the universal functions of a building or structure. However, if the purpose of property is specific to the nature of the operations of a business, such equipment could be tangible personal property, especially when coupled with the owners stated purpose for the equipment or operations.

DETERMINATION

The evidence provided concerning the HVAC units and fit outs is not conclusive. Consideration must be given to whether the special lighting is necessary to the function of the building, whether the HVAC units would be required if the special lighting were removed, or whether the HVAC units would be required for the universal climate control of the building if a different type of business were operating in the facility.

With regard to the backup generator and transfer switch, the Taxpayer has stated that they were necessary for its technical operations. Although the generator may provide backup power to the building and the Taxpayer states that it does not intend to remove the generator, I find that the Taxpayer's statements and primary use of the backup generator and transfer, switch indicate an intention to treat the equipment as tangible personal property. Accordingly, I find that the City properly included the backup generator and transfer switch in the BTPP tax assessments for the 2006 through 2009 tax years.

The Taxpayer has the burden of producing evidence regarding the classification of chattel for property tax purposes. Accordingly, I am remanding the case back to the City in order for the Taxpayer to produce the documentation necessary for the City to appropriately classify the HVAC systems and fit outs. In the event that the City determines, based on the evidence provided by the Taxpayer and the rules as set forth herein, that any of the HVAC systems and fit outs were incorrectly classified as tangible personal property, the City must reclassify the property and correct the related assessments.

In addition, the City should verify that the property at issue in the Tax Commissioner's final determination is not included in both the BTPP assessment and the real estate assessment for the tax years 2006 through 2009 tax years. Documentation of such should be provided to the Taxpayer within 30 days from the date of this determination.

If you have any questions concerning this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Craig M. Burns
        Tax Commissioner

AR/1-4689193606.B

Rulings of the Tax Commissioner