Tax Type
BTPP Tax
Description
Property reclassified as a leasehold improvement is real property not subject to tax.
Topic
Classification
Local Taxes Discussion
Property Subject to Tax
Date Issued
03-25-2011
March 28, 2011
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business Tangible Personal Property 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 the ***** (the "County") Business Tangible Personal Property (BTPP) tax assessment for the 2008 tax year.
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 at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.
FACTS
The Taxpayer operates a restaurant in a shopping center located in the County. It retains a leasehold interest in the premises. The Taxpayer filed a 2008 BTPP return that reported leasehold improvements and BTPP. The Taxpayer subsequently filed an amended 2008 BTPP return reclassifying items originally classified as BTPP as leasehold improvements. The County disallowed the Taxpayer's amended return and assessed BTPP tax based on the original return.
The Taxpayer filed an appeal with the County, contending that property it reclassified as leasehold improvements is real property. In its final decision, the County affirmed its conclusion that the reclassified property is subject to BTPP tax based on the Taxpayer's intent. The Taxpayer appeals to the Tax Commissioner, asserting that the property it reclassified as leasehold improvements on its amended 2008 BTPP return is realty.
ANALYSIS
Real vs. Tangible Property
Article X, § 4 of the Constitution of Virginia, segregates all real property for local taxation. All tangible personal property, unless declared intangible under the provisions of Va. Code § 58.1-1100 et seq., is also reserved for local taxation by Article X, § 4 of the Constitution of Virginia.
In Danville Holding Corp. v. Clement, 178 Va. 223, 232, 16 S.E.2d 345, 349 (1941), the Virginia Supreme 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 personally subject to tangible personal property taxation.
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- (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 owner of the chattel to make it a permanent addition to the freehold.
- (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
In order for these 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."
The documentation provided indicates the property the Taxpayer reclassified as leasehold improvements is annexed to the leased property and is adapted to the purpose of the part of the leased property to which it is connected. As such, the issue is whether the Taxpayer intended to make the property in dispute part of the realty. Both parties contend that the Taxpayer's intent can be gleaned from the lease. In addition, the Taxpayer contends that its intent can be determined on the basis that it depreciated most of the disputed property on its federal income tax returns as realty, and the County treated the leasehold improvements as real property. The County asserts that the Taxpayer regarded the disputed property as BTPP because it reported it as such on its original 2008 BTPP return.
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.]
Provisions of the Lease
Section 12 of the lease entitled "Personal Property" states, "Tenant covenants that the furniture, fixtures and all other personal property . . . which Tenant places on the Leased Premises are owned by Tenant . . . ." The County contends that because all "fixtures" are the Taxpayer's property, all of the disputed property is BTPP.
However, Section 13.2 of the lease, under the "Repairs and Alterations" section of the lease states:
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- all additions and improvements and attached equipment and fixtures installed in or on the Leased Premises by the Tenant . . . shall immediately become the property of the Landlord and shall not be removed by Tenant at the termination of this lease, unless requested to do so by the Landlord, in which event Tenant agrees to do so and to repair promptly any damage caused by such removal.
The Taxpayer argues that all of the disputed property was part of the leasehold improvement and, therefore, became realty when it became the property of the landlord. The County, however, contends that this provision gives the Taxpayer the option to keep all additions and improvements at the end of the lease; therefore, all improvements would be BTPP.
When Section 13.2 is read in conjunction with other sections of the lease, it is clear that the overall intent of the Taxpayer and its landlord is that all additions, alterations and improvements attached to or installed on the property become the landlord's property. As such, these items become a part of the realty because they remain the property of the landlord.
Depreciation Schedule
The Taxpayer contends that the disputed property is real property because it depreciated it as realty. While the sole reliance on federal depreciation schedules for the classification of property is not allowable, the consideration of federal depreciation schedules as a factor in determining property classification is acceptable. See Public Document (P.D.) 06-142 (12/8/2006).
Property Assessed as Both Real Property and BTPP
The Taxpayer contends that based on the real estate assessments of the property that the County attributed to the land and improvements that is self-evident that the County is including the Taxpayer's leasehold improvements as real property for purposes of the landlord's real property tax. The Taxpayer has not provided sufficient documentation that demonstrates that its leasehold improvements were included in the landlord's real estate assessment.
Original BTPP Return
The County asserts that the Taxpayer's intent to make the disputed property BTPP can be determined by the fact that the Taxpayer reported its leasehold improvements as BTPP on its original 2008 return. I disagree with the County's argument. The Taxpayer states that it reclassified the disputed property on its amended 2008 return after consulting with its professional advisors. As such, it is reasonable that the Taxpayer would amend its return based on professional advice.
DETERMINATION
The Taxpayer has provided a list of property reclassified as a leasehold improvement that includes such items as concrete, masonry, doors and windows, woods and plastics, plumbing, HVAC, electrical insulation, trim and certain built-in furnishings. These improvements are clearly the type that is permanently attached to real property. The County itself concedes that some of the disputed property could be classified as fixtures, but for the provisions of the lease.
After careful review of the information presented on appeal, I find by the preponderance of the evidence that the Taxpayer has demonstrated that the property that it originally classified as BTPP on its original 2008 return, but reclassified as a leasehold improvement on its amended 2008 return, is real property not subject to the BTPP tax. As such, I am remanding this matter to the County in order that it process the Taxpayer's amended 2008 BTPP return in accordance with this determination.
If you have any questions concerning this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Linda Foster
Deputy Tax Commissioner
- Linda Foster
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AR/1-4571026166.B
Rulings of the Tax Commissioner