December 18, 2018
Re: Appeal of Final Local Determination
Business Tangible Personal Property Tax
This final state determination is issued upon the application for correction filed by you on behalf of the ***** (the “Taxpayer”) with the Department of Taxation. The Taxpayer appeals the assessment of business tangible personal property (BTPP) tax issued to it by the ***** (the “County”) for the 2017 tax year.
The BTPP 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 BTPP 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 document cited are available on-line in the Laws, Rules and Decisions section of the Department’s web site, located at www.tax.virginia.gov.
The Taxpayer is a corporation that manufactures equipment and provides information technology (IT) systems in its facilities located in both in Virginia and throughout the world. Approximately 60% of its sales are attributable to manufacturing.
The Taxpayer has a data center located in the County. The data center provides a backup for all of the Taxpayer’s operations worldwide including its manufacturing and service sectors. In addition, a portion of the data center is dedicated to providing IT operations services and a call center for a government agency. No manufacturing occurs in the County facility.
The Taxpayer filed an original BTPP tax return in the County for the 2017 tax year for the data center reporting zero taxable BTPP on the basis that it is a manufacturer and all of its property was classified as intangible property. It subsequently filed an amended BTPP tax return reporting business tangible personal property. The County then issued an assessment of BTPP tax based on the amount of BTPP tax reported on the amended return. The Taxpayer appealed the assessment to the County, contending that the business tangible personal property at issue was exempt from BTPP taxation. The County issued a final determination asserting that the Taxpayer was subject to the BTPP tax because it failed to show that its business tangible property was used in manufacturing. The Taxpayer has filed an appeal with the Department, contending that all of the business tangible property located in the County was exempt from BTPP taxation because it was a manufacturer.
All tangible personal property, unless declared intangible under the provisions of Virginia 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 Virginia 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:
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.
In City of Winchester v. American Woodmark Corporation, 250 Va. 451, 463 S.E.2d 148 (1995), the company’s executive officers, accounting personnel, credit management personnel, computer systems managers and operators, senior sales marketing personnel, operations and customer service personnel, and senior manufacturing officers were located in the City of Winchester. American Woodmark’s manufacturing facilities and distribution centers were located elsewhere. The Virginia Supreme Court found that the business activity undertaken at the company’s location in Winchester was integral to the overall business of the manufacturer. As such, the taxpayer’s personal property in question constituted capital used in a manufacturing business, and, therefore, under the provisions of Virginia Code § 58.1‑1101 B, was not subject to taxation by Winchester.
Virginia Code § 58.1‑5 provides that “[w]hen any person, firm or corporation is engaged in more than one business which is made by law subject to taxation, such person, firm or corporation shall pay the tax provided by law on each branch of his, their or its business.” In Coca-Cola Bottling Company of Roanoke, Inc. v. County of Botetourt, 259 Va. 559, 526 S.E.2d 746 (2000), the taxpayer owned a franchise from the Coca‑Cola Company for the production, distribution and sale of its products. It also operated vending machines that sold beverages it manufactured. The issue was whether vending machines used to make retail sales of the taxpayer’s product were used in its manufacturing business.
The Virginia Supreme Court held that because vending machines do not expedite the manufacturing business, aid in production or production control, regulate, enhance or otherwise impact the manufacturing of Coca‑Cola products, they were not used in manufacturing. The vending machines were used in selling the finished product. As such, the taxpayer’s vending machine sales constituted a separate business and, therefore, were subject to the BTPP tax. The Supreme Court distinguished American Woodmark by opining that the vending machines were used “merely in selling the product” while the computer and office equipment in American Woodmark were used “in whole or part, in planning, directing or administering the manufacturing function.”
The Taxpayer acknowledges that a portion of the data center was dedicated solely to providing IT and call center services under a government contract. The tangible personal property in this portion of the Taxpayer’s facilities was segregated from the portion of center supporting the Taxpayer’s operations. Such assets would appear to be subject to the standards set forth in the Coca-Cola case.
The Taxpayer relies on American Woodmark, contending that as a manufacturer it is subject to tax only on its machinery and tools. Therefore, it asserts that its business tangible property is exempt from taxation in all Virginia localities including those where non-manufacturing activities occur. The County does not contest that the Taxpayer is a manufacturer. Rather, the County relies on Coca-Cola to support its position that the Taxpayer was subject to the BTPP tax because its operations in the County were a separate line of business from the manufacturing operations.
In Public Document (P.D.) 06-51 (4/24/2006), a manufacturer of lumber products maintained a warehouse and sales office in a Virginia locality. All of the manufacturing occurred outside of the locality. The warehouse and sales office employed warehouse workers, sales staff and administrative personnel. In addition, the lumber manufacturer sold lumber products made by unrelated corporations at the sales office. The Department determined that:
Unlike the vending machines used for retail sales in Coca‑Cola, which were considered to be a separate business activity not essential to the business of manufacturing, the distribution and sales of the [lumber manufacturer’s] products “expedite the manufacturing business” and are integral to the [lumber manufacturer’s] manufacturing business. As such, for purposes of personal property taxation, it is my determination that the property located at the [warehouse and sales office] should be classified as intangible . . .
The Department further determined that the sale of the other manufacturer’s goods did not destroy the character of the lumber manufacturer because the sale of its own goods was the prominent activity.
When viewed together, American Woodmark, Coca-Cola, and P.D. 06-51 indicate that when business property is used in the non-manufacturing activities of a manufacturer, such activities do not constitute a separate business, or separate business branch so long as they directly or indirectly support manufacturing. In this case, the Taxpayer is a manufacturer whose data center operations are used to back up all portions of the Taxpayer’s business, including manufacturing. As such, the data center cannot be considered a separate business as required by Virginia Code § 58.1‑5 and Coca-Cola because such operations support the Taxpayer’s manufacturing operations.
Accordingly, I find that the business tangible property located at Taxpayer’s data center unrelated to the IT and call center services for the government agency was not subject to the BTPP tax for the 2017 tax year. I note that this determination is based on the information provided during the appeal. However, the Taxpayer has not clearly explained what property is included on the amended return and how some or all of it is used in manufacturing as opposed to the non-manufacturing services it provides. Accordingly, I am remanding the case back to the County to review the Taxpayer’s 2017 amended BTPP return. Based on this review, the County should issue the appropriate refund. While American Woodmark held that the intangible classification is construed in favor of the citizen, that principle of statutory construction does not relieve the Taxpayer of the obligation to keep, and provide upon request, adequate records sufficient to allow the County to verify the correctness of the tax paid or refund claimed. See Virginia Code § 58.1-3983.1 K.
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Craig M. Burns