Tax Type
Machinery Tools Tax
Description
Appropriate official reviews business activities within the local jurisdiction.
Topic
Guidelines
Local Taxes Discussion
Property Subject to Tax
Date Issued
02-26-2014
February 26, 2014
Re: Request for Advisory Opinion Machinery and Tools Tax
Dear *****:
This is in response to your letter in which you request an advisory opinion as to whether certain equipment used by ***** (the "Taxpayer"), a paper manufacturer, is subject to the Machinery and Tools ("M&T") tax.
The M&T tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 J 2 authorizes the Department to issue advisory opinions on local business tax matters. The following opinion has been issued subject to the facts presented to the Department summarized below. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site.
FACTS
The Taxpayer manufactures paper from wood and recycled materials. When the paper is finished, it is stored on large reels. Machines called winders transform the large rolls into smaller rolls as needed, and slicers cut the paper to the desired size. The product then moves by conveyor to wrapping stations where it is packaged for shipment. The Taxpayer asks whether its winders, slicers, conveyors, wrapping stations and shipping equipment are subject to the M&T tax.
OPINION
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. 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 also 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 or 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." T he Court also cited previous opinions of the Attorney General in deriving the meaning of "used in manufacturing."
In The Daily Press, Inc. v. County of Newport News, 265 Va. 304, 576 S.E.2d 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 [Emphasis added.]
- 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 [Emphasis added.]
This language does not imply that each piece of machinery or each 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 (8/2/2004), 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.
In this case, the Taxpayer performs a manufacturing process by transforming wood and recycled materials into a substantially different product, paper. The finished paper is then stored in the form of large rolls that are later resized and cut to the customers' specifications. Afterwards, the product is packaged and shipped.
Generally, the Department considers machinery used for packaging a product for shipping purposes as not directly used in the manufacturing process because packaging typically has nothing to do with the transformation of the original material into a new product that is substantially different in character. See P.D. 04-39. In this case, there is no indication that the packaging and shipping equipment is used directly in the paper manufacturing process. Further, based on the facts presented, it also does not appear that the winders and slicers are used in the paper manufacturing process, nor do they transform paper into a product substantially different in character.
A determination as to whether particular equipment is subject to the M&T tax is, however, a matter of fact. As such, a thorough examination of a taxpayer's operations, including the machinery at issue and how it is specifically used in the operations must be conducted before such a determination can be made. Such examinations remain the prerogative of the local taxing authority. Therefore, I recommend the Taxpayer contact the appropriate official in order to set up a review of its business activities within the local jurisdiction.
If you have any questions regarding this opinion, 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
Rulings of the Tax Commissioner