Tax Type
Machinery Tools Tax
Description
Taxpayer failed to provide written notice on idle machinery and tools
Topic
Local Taxes Discussion
Records/Returns/Payments
Tangible Personal Property
Date Issued
06-02-2011
June 2, 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 ***** (the "Taxpayer") with the Department of Taxation. You appeal assessments of Machinery and Tools (M&T) tax issued to the Taxpayer by the ***** (the "County") for the 2009 and 2010 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, an M&T 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 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 operates a manufacturing plant in the County. The plant had seven manufacturing lines at the end of 2007. One line operated continuously since 2007. Three of the seven lines were never placed in service. Three other lines were placed in service in 2007, but were shut down prior to January 1, 2008. The lines were then placed back in service in 2010 when demand increased for the product that the equipment produced.
The Taxpayer did not file M&T tax returns with the County for the 2008 through 2010 tax years. As a result, the County issued assessments for M&T tax. The Taxpayer appealed to County claiming that a six of the seven manufacturing lines were not subject to the M&T tax for the tax years at issue.
The County issued a final determination concluding that the line that was in continuous operation from 2007 was subject to the M&T tax and the three lines that were never put into service were not subject to the M&T tax. The County's final determination also held that the three lines put in service in 2007, but ceased production prior to 2008 were not idle machinery because the Taxpayer had failed to provide written notice that these lines were idled prior to April 1 of the previous tax year. The Taxpayer appealed the County's final determination to the Tax Commissioner, contending that the three manufacturing lines at issue should have been classified as idle machinery for the 2009 and 2010 tax years.
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 established 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, except idle 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. [Emphasis Added.]
The Taxpayer concedes that the manufacturing lines at issue were not idle machinery for the 2008 tax year because they were not out of service for an entire year, and the County was not notified in writing that these lines had been withdrawn from service prior to April 1, 2007. The Taxpayer contends, however, that the lines qualified as idle machinery for the 2009 and 2010 tax years because they were discontinued in use for at least one year prior to any tax day. The County concluded that the lines were not idle machinery and tools because the Taxpayer failed to provide written notice by April 1 of the prior year.
Virginia Code § 58.1-3507 D provides two tests for determining whether machinery and tools may be classified as idle. Under the statute, machinery and tools will be considered idle if:
1) The machinery and tools have been discontinued in use continuously for at least one year, prior to any tax day, such machinery and tools are not in use on the tax day, and no reasonable prospect exists that the machinery and tools will be returned to use during the tax year; or
2) On or after January 1, 2007, a taxpayer provides a written statement to the locality, on or before April 1, identifying the machinery and tools that a taxpayer intends to remove from service no later than the next tax day, the machinery and tools are not in use on the tax day, and no reasonable prospect exists that the machinery and tools will be returned to use during the next tax year.
Under the one-year test, a taxpayer must meet all three prongs of the test in order for the subject machinery and tools to be considered idle. In the first prong, a taxpayer must be able to show that the machinery and tools were not in use for at least one year prior to any tax day. Pursuant to Va. Code § 58.1-3515, January 1 is tax day for M&T tax. In order to meet the second prong, machinery and tools cannot be in use on January 1 of the tax year for which a taxpayer seeks to classify such machinery and tools as idle. The third prong requires a taxpayer to show that there is no reasonable prospect that the machinery and tools would start up during the tax year. Generally, businesses are able to anticipate and prepare for operational needs, and therefore would be able to demonstrate to a locality whether there would not be a reasonable prospect that machinery and tools would be used during the tax year.
In this case, the Taxpayer discontinued operations on the three manufacturing lines in late 2007 and the lines were idle on January 1, 2009 and 2010. Because the lines were put back in operation in 2010, there is a question as to whether the Taxpayer could have reasonably anticipated that these lines may have been put into operation in 2009 or 2010. A determination as to whether a taxpayer had a reasonable prospect that a piece of machinery or tool would remain idle for the remainder of a tax year is a factual matter that must be made on a case-by-case basis by the local taxing authority.
Like the one-year test, the notification test includes three prongs. The first prong requires a taxpayer to notify a locality in writing of its intent to classify property as idle machinery and tools by April 1 of the tax year immediately preceding the tax year for which the taxpayer seeks the change in classification. Such machinery and tools must be idle on tax day in order to meet the second prong. Under the third prong, a taxpayer is required to show that there is no reasonable prospect that the machinery and tools would start up during the next tax year.
In order to meet the standards of the notification test, the Taxpayer would have had to notify the County by April 1, 2008 for the 2009 tax year and by April 1, 2009 for the 2010 tax year. No such notice was provided to the County.
DETERMINATION
Based on the evidence presented, the Taxpayer failed to meet the notification test because it did not make a proper written notification to the County. Furthermore, the Taxpayer has provided no evidence with its appeal that would indicate that it reasonably anticipated that the three manufacturing lines would be idle for all of 2009 and 2010. On the other hand, the County never determined that there was a reasonable expectation of the equipment being returned to use.
Accordingly, I am remanding this case to the County with instructions to hold collection action on the M&T tax assessments for the 2009 and 2010 tax years pending the receipt of sufficient evidence from the Taxpayer that they had a reasonable prospect that the machinery and tools would be idle for all of the 2009 and 2010 tax years. The Taxpayer should provide this documentation to the locality within 30 days of this determination.
If the County is satisfied by the evidence provided, it must adjust the assessments for the 2009 and 2010 tax years accordingly. If the Taxpayer is notable to provide sufficient documentation to the County, the assessments will be upheld as issued and the County may proceed with collection action.
If you have any questions about this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Craig M. Burns
Tax Commissioner
- Craig M. Burns
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AR/1-4658730689.B
Rulings of the Tax Commissioner