January 8, 2015
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 a final local determination upholding a Business Tangible Personal Property (BTPP) tax assessment for the 2013 tax year issued by the ***** (the "City").
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 tax bulletin cited are available on-line at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department's website.
FACTS
The Taxpayer is affiliated with a cable television provider. In order to receive the cable service, customers must have a converter, also known as a set top box. The converters are owned by the Taxpayer and are issued to cable customers by the cable television provider.
The Taxpayer did not report the converters as tangible personal property on its 2013 BTPP return filed with the City. After reviewing the return, the City determined that additional tax was due on the omitted converters. The Taxpayer has filed an appeal with the Tax Commissioner, contending the converters are intangible property not subject to the local taxation.
ANALYSIS
Article X, § 4 of the Virginia Constitution provides that all tangible personal property shall be segregated for local taxation in such a manner as the General Assembly provides by law. Virginia Code § 58.1-1101 A 2a classifies certain property that is tangible in fact as intangible and segregates that property for state taxation only. Intangible property consists of, in part:
Personal property, tangible in fact, used in cable television businesses. Machines and tools, motor vehicles, delivery equipment, trunk and feeder cables, studio equipment, antennae and office furniture and equipment of such businesses shall not be defined as intangible personal property for purposes of this chapter and shall be taxed locally as tangible personal property according to the applicable provisions of law relative to such property.
Machinery
The Taxpayer cites Arlington Cable Partners v. County of Arlington, Virginia, Law No. 26719 (3/20/1987), in which the Circuit Court of the County of Arlington held that converters are not subject to the BTPP tax. The City cites the decision in Comcast of Chesterfield County, Inc. v. Board of Supervisors for Chesterfield County, Law No. CL07-1003 (1/11/2008), which held that converters are machinery and, therefore, would be subject to BTPP tax by a locality. As a result, Virginia courts are split on the issue as to whether cable converters are subject to local property taxation.
The Taxpayer contends that the legislative history of Va. Code § 58.1-1101 A establishes that converters are properly classified as intangible property. The City counters that the there is no need to address the legislative history of Va. Code § 58.1-1101 A because converters fit within the plain meaning of machinery as defined in the dictionary.
A review of the legislative history does show whether converters are subject to property taxation. In 1983, the General Assembly added cable television companies to the list of businesses whose property was tangible in fact, but deemed to be intangible and set apart for state taxation. Virginia Code § 58-405 2 (the predecessor to Va. Code § 58.1-1101) stated the following was defined as intangible property:
Personal property, tangible in fact, used in manufacturing, mining, radio or television broadcasting, cable television, dairy, dry cleaning or laundry businesses, except machinery and tools, motor vehicles and delivery equipment of such businesses and the trunk and feeder cables, studio equipment, tuners, converters, antennae and office furniture and equipment of cable businesses. [Emphasis added.]
Based on this language, cable television tuners and converter boxes were considered tangible personal property subject to local taxation.
In its next session, the General Assembly again amended Va. Code § 58-405 2 (recodified as Va. Code § 58.1-1101). In Chapter 692, 1984 Acts of Assembly, Va. Code § 58-405 was amended to provide a separate subsection for cable television businesses [Va. Code § 58-405 2(a)] as follows:
Personal property, tangible in fact, used in cable television businesses, except machines and tools, motor vehicles and delivery equipment of such businesses, trunk and feeder cables, studio equipment, antennae and office furniture and equipment of such businesses.
The reference to tuners and converters was removed from the list of property subject to local taxation. The City argues that the term "machines" in the statute includes the tuners and converters and, therefore, they are subject to local taxation. I do not agree.
Following the 1984 General Assembly session, the Department issued Virginia Tax Bulletin (VTB) 84-7 (6/11/1984). In that document, the Department explained:
H.B. 827, enacted by the 1984 Session of the General Assembly, separately states and redefines the personal property, tangible in fact, of cable television businesses which constitute intangible personal property. As redefined, intangible personal property includes, for cable television businesses only, all personal property, tangible in fact, except machines and tools, motor vehicles, and delivery equipment, trunk and feeder cables, studio equipment, antennae and office furniture and equipment.
The new definition removes any property of cable television businesses from the "machinery and tools" category for local taxation. Tuner and converters used in the cable television business, previously subject to local taxation, have been defined as intangible personal property by this amendment. [Emphasis in original.]
The Tax Bulletin is consistent with the Legislative Impact Statement prepared by the Department, which stated, "The bill also redefines tuners and converters used in cable television businesses as intangible personal property." House Bill 827, 1984 Legislative Impact Statement (02/23/84). Based on these documents, the converter boxes are intangible personal property not subject to local taxation under Va. Code § 58.1-1101 A 2a.
Further, the Department addressed this issue in Public Documents (P.D.) 12-162 (10/16/2012), 12-163 (10/16/2012), P.D. 12-199 (12/6/2012), 14-68 (5/21/2014), 14-69 (5/21/2014) and 14-70 (5/21/2014). In those determinations, the Department recognized the longstanding policy as announced at the time the 1984 legislation was passed and presumed that the General Assembly had knowledge of the Department's interpretation based on the Legislative Impact Statement and Tax Bulletin 84-7. A lack of corrective amendments by the General Assembly evinces legislative acquiescence in the Department's interpretation.
Electronic Equipment
In 1984-85 Va. Op. Atty. Gen. 338, the Attorney General held that certain radio equipment including antennae, monitoring and control equipment, projection equipment, synchro generating equipment, radio and testing equipment, and transmitters were machinery subject to the BTPP tax. In City of Virginia Beach v. International Family Entertainment, 263 VA. 501, 561 S.E.2d 696 (2002), the Virginia Supreme Court held that transponders are machinery and tools under Va. Code § 58.1- 3507. The City contends that the set top boxes are analogous to the types of equipment deemed machinery in the 1985 Attorney General opinion and International Family Entertainment. The Taxpayer asserts that the 1985 Attorney General opinion interpreted the term "machinery" which was specifically removed when Va. Code § 58.1- 1101 A 2 a was amended and replaced by "machine." It also argues that VTB 84-7 specifically exempted set top boxes from the BTPP tax.
The General Assembly did not define "machines" for purposes of Va. Code § 58.1-1101 A 2a. The Department recognizes that the word has different meanings that vary in scope. Clearly, the General Assembly intended that certain, but not all, property of a cable television business would be classified as "machines and tools." In addition, the 1985 Attorney General opinion and International Family Entertainment addressed specific types of radio equipment and transponders respectively, not cable television equipment.
VTB 84-7 states that "the new definition removes any property of cable television businesses from the 'machinery and tools' category for local taxation." The Taxpayer seems to suggest this statement confirms that none of the additional equipment at issue was intended to be considered "machines." This statement, however, was merely referring to the separation from the machinery and tools category for Va. Code § 58.11101 A 2a. See P.D. 14-68 (5/21/2014).
The City also cites a Massachusetts court case and an Alabama sales tax statute that regard converter boxes as machines subject to local taxation. The Massachusetts court case and the Alabama sales tax statute, while informative, reflect the unique law of their respective states and are not applicable to Virginia.
DETERMINATION
Based on information provided, I find that the converters were intangible property exempt from BTPP tax under Va. Code § 58.1-1101 A 2a. As such, I am remanding the case back to the City to abate any assessment issued for the 2013 tax year based on the converters being subject to the BTPP tax.
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5769013547.B