March 10, 2017
Re: Appeal of Assessment: Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Merchants' Capital Tax
Dear *****:
This final state determination is issued upon the application for correction filed by ***** (the “Taxpayer”) with the Department of Taxation. The Taxpayer requests a refund of merchants' capital tax paid to the county of ***** (the “County”) for the 2015 and 2016 tax years.
The merchants' capital tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 D 1 authorizes the Department to issue determinations on taxpayer appeals of merchants' capital tax assessments. On appeal, a local 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's web site, located at www.tax.virginia.gov.
FACTS
The Taxpayer operates a recreational vehicle dealership located in the County. The County issued an assessment of merchants' capital tax based on inventory values provided during the audit. The Taxpayer paid the assessment and requested a refund, contending the assessed value was based on incorrect financial information and the assessments were based on an incorrect rate.
In its final determination, the County determined that the inventory amounts were correct because they were based on the Taxpayer's income tax returns. It also concluded that it applied that rate in effect for the applicable tax year, and the rate did not apply retroactively.
The Taxpayer appeals that County's final local determination contending that the new recreational vehicles on its lot were not inventory because they were owned by a bank. It also asserts that the County's assessment was based on incorrect information. Finally, it argues that the County's tax rate is excessive.
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. The capital of merchants is segregated for local taxation only. See Va. Code § 58.1-3509.
Merchants' capital, as defined in Va. Code § 58.1-3510, includes inventory for sale as merchandise and daily rental vehicles. A locality may impose either a BPOL tax or a merchants' capital tax on merchants, but it is forbidden from assessing both. See Va. Code § 58.1-3704. Accordingly, for those businesses that are selling merchandise, a locality may impose either a license tax on the privilege of doing business, or it may impose a merchants' capital tax on the businesses' inventory.
Pursuant to Va. Code § 58.1-3511 A, the situs of inventory for the merchants' capital tax is the locality in which such property may be physically located on the tax day. Tangible personal property is assessed as of the “tax day,” which is generally January 1. See Va. Code § 58.1-3515.
Inventory
Virginia Code § 58.1-3510 A defines merchants' capital as, in pertinent part, “[i]nventory of stock on hand.” There is no statutory definition of “inventory of stock on hand.” However, the Attorney General has opined that the meaning of “inventory of stock on hand” would be goods and materials kept on hand by a commercial establishment for sale. See 2006 Op. Va. Att'y Gen 06-036. As such, recreational vehicles that are held for sale by a dealership could be considered inventory for purposes of the merchants' capital tax.
Inventory that is in possession of a dealer is subject to the merchants' capital tax if it is owned by the dealer, not if the dealer is holding the inventory on consignment for an owner. See 1972-1973 Op. Att'y Gen 407 and Public Document (P.D.) 11-63 (4/21/2011). As such, recreational vehicles sold on consignment by a dealership would not be inventory. Recreational vehicles that are purchased by a dealership for resale would be inventory. See id.
In 1972-1973 Op. Att'y Gen 407, the Attorney General opined, “With respect to the retention of title by the local bank which finances the dealer's inventory, such transaction does not affect the dealer's tax liability, as he is the owner of the property for purposes of taxation, the title being held solely for security.” The documentation provided by the Taxpayer shows that the new recreational vehicles held on its lot were titled in the Taxpayer's name and held as collateral by the financing bank.
Valuation
The statutes do not prescribe a methodology for valuing inventory for merchants' capital tax purposes. The Attorney General, however, has opined that inventory subject to the merchants' capital tax must be valued on a cost basis. See 1990 Op. Att'y Gen 262 and 1988 Op. Atry Gen 560. The County values inventory at its original cost. Original cost means an asset's net price. See P.D. 14-142 (8/13/2014).
The Taxpayer contends that the County's merchants' capital tax assessments were based on erroneous information provided by an employee. The County asserts that the inventory amounts were provided by the employee from the Taxpayer's income tax returns. Under Va. Code § 58.1-3103, a commissioner of revenue is required to “ascertain and assess, at fair market value, all subjects of taxation ....” In order to properly assess the correct tax, local assessing officers are granted the authority to require records and other information necessary to verify the accuracy of a taxpayer's merchants' capital returns. See Va. Code § 58.1-3109 6. As indicated above, an assessment by a locality is deemed to be prima facie correct. A locality, however, is obligated to conduct a thorough investigation to determine a Taxpayer's local tax liability and refund any tax that has been overpaid. See Va. Code § 58.1-3990.
Tax Rates
The Taxpayer maintains that the County's merchants' capital tax rates are excessive as compared to other local jurisdictions. Article VII, § 2 of the Constitution of Virginia grants the power of local taxation to the governing bodies of localities. Virginia Code § 58.1-3001 provides for the governing body of each county to fix the amount of county and district tax rates for the year. As such, the rate of merchants' capital tax is set by each locality that imposes the tax. The only limitation on the rate of merchants' capital tax is that it cannot exceed the rate in effect on January 1, 1978. See Va. Code § 58.1-3509.
DETERMINATION
Based on established policy, the recreational vehicles that were on the Taxpayer's property as of the tax day for the tax years at issue were inventory for purposes of the merchants' capital tax. In addition, the rate at which the County assessed merchants' capital tax is permissible under the Constitution of Virginia and statutory law.
The Department, however, is remanding the case back to the County to thoroughly investigate and resolve the proper inventory amount. It appears that the County may have relied on inaccurate information when determining the value of the inventory.
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/1108.B