March 30, 2018
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Merchants' Capital Tax
Business Tangible Personal Property (BTPP) Tax
Dear *****:
This final state determination is issued upon the application for correction filed by ***** (the “Taxpayer”), with the Department of Taxation. The Taxpayer appeals the assessment of Merchants' Capital Tax and BTPP tax issued by the ***** (the “County”) to the Taxpayer for the 2016 tax year.
The Merchants' Capital and BTPP taxes are imposed and administered by local officials. Virginia Code § 58.1-3983.1 D 1 authorizes the Department to issue determinations on taxpayer appeals of certain Merchants' Capital and BTPP tax assessments. On appeal, a tax assessment by a local assessing officer 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, public document and Attorney General Opinions cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.
FACTS
The Taxpayer grew shrubbery, flowers and other non-food plants (the “plants”) at its location in the County. The plants were primarily sold wholesale to garden centers and fundraising organizations located outside Virginia. A small percentage of the plants were sold directly to landscapers and other customers directly on site. Mulch is also offered for sale to the Taxpayer's on-site customers. The Taxpayer used various equipment to grow and harvest the plants. It also owned trucks utilized to ship harvested plants to its customers.
Under audit, the County determined that the Taxpayer's plants were inventory subject to the Merchants' Capital tax. It also held that the Taxpayer was subject to the BTPP tax on its equipment. The Taxpayer appealed, contending that it was a farm that was exempt from both the Merchants' Capital tax and the BTPP tax.
The County issued a final determination upholding the assessment, concluding that the Taxpayer could not claim the exemption from the BTPP tax because it was a nursery rather than a farm. It also determined that the Taxpayer's plants were inventory subject to the Merchants' Capital tax.
The Taxpayer appealed to the Department, contending that its plants were an agricultural product that were exempt from local taxation. It also argues that its equipment was exempt from the BTPP tax because it was a farm.
ANALYSIS
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. The capital of merchants and business tangible personal property are segregated for local taxation only. See Virginia Code §§ 58.1-3509 and 58.1-3500, respectively.
Merchants' Capital
Merchants' capital, as defined in Virginia Code § 58.1-3510, includes inventory of stock for sale as merchandise. A locality may impose either a Business, Professional, Occupational License (BPOL) tax or a Merchants' Capital tax on merchants, but it is forbidden from assessing both. See Virginia 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. The County imposes a Merchants’ Capital tax in lieu of the BPOL tax.
The Taxpayer contends that its plants were exempt from the Merchants’ Capital tax under Virginia Code § 58.1-3505 C. The County asserts that the plants are inventory that are subject to the Merchants’ Capital tax. In Public Document (P.D.) 17-15 (3/10/2017), the Department opined that it is reasonable to conclude that the inventory subject to the Merchants’ Capital tax could include the plants and other horticultural products that a business offers for sale as inventory for purposes of the Merchants’ Capital tax unless an exemption applies.
Virginia Code § 58.1-3505 C provides that “[g]rain; tobacco; wine produced by farm wineries . . . and other agricultural products shall be exempt from taxation while in the hands of a producer.” [Emphasis added.] Shrubbery, flowers and other horticultural items are agricultural products. Therefore, businesses that grow their plants from seeds, seedlings or clippings would be considered producers and the plants at their location would be exempt from the Merchants’ Capital tax. Nurseries and other vendors that sell plants can be subject to the Merchants’ Capital tax on such plants that they sell but do not grow.
The Taxpayer started with small clippings of plants from its own stock, potted them and provided fertilizer and water. As the plants grew, they were transplanted to larger pots before sale. The activities conducted by the Taxpayer are substantially similar to producers of grain, tobacco and other plant crops. Consequently, the Department would consider the Taxpayer to be engaged in the production of agricultural products within the meaning of Virginia Code § 58.1-3505 C.
Business Tangible Personal Property
Virginia Code § 58.1-3505 A segregates farm animals, grains and other feeds, agricultural products, farm machinery, farm implements and equipment as a separate class of tangible personal property. Under specific circumstances, the statute further segregates trucks or tractor trucks, other motor vehicles and trailers used for agricultural purposes or for the transporting farm animals, other farm products or for the transport of farm-related machinery.
The governing body of any locality may exempt or partially exempt such property from local taxation by ordinance. The exemption, however, only applies to that that equipment used in the growth and/or harvesting of the farm produce. Equipment used after the end of farming cannot be considered farm machinery or farm implements. See 1982-1983 Op. Atty. Gen. Va. 536. Under the statute, machinery used by farms for the planting and harvest of agricultural products, as well as vehicles used in farm operations and for the transport of farm products are separately segregated. Generally, equipment used after the planting and harvesting by farms are not considered farm equipment under Virginia Code § 58.1-3505 A. For example, equipment used to plant and harvest grapes at a winery are segregated as farm machinery and are exempt under local ordinance, but the tanks used for fermentation are not exempt. See 1982-1983 Op. Atty. Gen. Va. 536.
The County's local ordinance exempts all farm machinery and farm implements from the BTPP tax. The Taxpayer contends that its equipment is exempt from the BTPP tax because it is a farm. The County asserts that the Taxpayer is subject to the BTPP tax because it is a nursery, not a farm.
Virginia Code § 58.1-3505 does not define farming. In addition, the Title 58.1 does not define the terms “farm machinery” and “farm implement” for local tax purposes. The Taxpayer contends that various sections of the Code of Virginia including Virginia Code §§ 3.2-300, 46.2-100, 46.2-698 C, 58.1-609 and 58.1-3703 either define its activities as farming or exempt its equipment as farm equipment. A review of these sections indicates their application is limited to the title or, chapter or the Code of Virginia in which they are located. Chapter 35 of the Code of Virginia addresses the taxation of tangible personal property, machinery and tools and merchants’ capital. None of the statutes cited by the Taxpayer is located in Chapter 35 of the Code of Virginia. Definitions in other sections of Virginia law can be instructive with regard to local property taxation. However, they are not binding unless specified cited in Virginia's property tax statutes or local ordinances.
While the Code does not define “farm” or “farming”, the Attorney General has issued several pertinent opinions. The terms “farm machinery” and “farm implement” have been held to connote usage by a farmer in farming activities. See 1991 Op. Atty. Gen. Va. 293. In 1987-1988 Op. Atty. Gen Va. 545, the Attorney General opined that the tools of a greenhouse and landscaping business could not be defined as farm machinery based solely on the fact that the real property owned by the same business is defined as horticultural under the Code. The Attorney General has also opined that the determination as to whether animals such as ostriches, giraffes, camels and monkeys fall with the categories listed in Virginia Code § 58.1-3505 is a factual matter to be decided by the local commissioner of the revenue. See 1995 Op. Atty. Gen. Va. 264. Based on the above opinions, the Attorney General declined to define the undefined terms in Virginia Code § 58.1-3505 and concluded that such determinations were to be made by the localities.
In P.D. 17-15, the Department determined that a locality may or may not define a farm to include nurseries for purposes of the exemption when the term “farm” is not defined in its local ordinance. In such situations, it is a locality's decision whether to classify a business as a farm for purposes of the BTPP tax exemption. In this case, the County classified the Taxpayer as a nursery rather than a farm and disallowed the exemption for farm machinery.
DETERMINATION
Because the Taxpayer produced its plants from small clippings and nurtured them until they were a salable plant, the Department finds that the Taxpayer was a producer of agricultural products. Consequently, the Taxpayer's plants located at its place of business were agricultural products exempt from the Merchants’ Capital tax.
The County, however, was within its discretion to classify the Taxpayer's business as a nursery and not allow the exemption for farm machinery and farm implements. The case will be remanded to the County in order for the assessment for the 2016 tax year to be adjusted in accordance with this determination.
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/1512.B