June 23, 2020
Re: Request for Advisory Opinion
Machinery and Tools Tax
Dear *****:
This is in response to your letter in which you request an advisory opinion regarding whether certain boilers that generate steam at a facility operated by your client (the “Taxpayer”) are subject to the machinery and tools tax.
The machinery and tools (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 and Decisions section of the Department’s web site.
FACTS
The Taxpayer manufactures resins and chemicals at its facility. The Taxpayer has begun using steam from gas boilers that it constructed at the plant site. The steam is used as a heat and energy source for: (1) turbines that drive and turn the equipment; (2) equipment that lowers pressure in other equipment; and (3) heat exchangers and as a heat source for processing. The Taxpayer has different chemical processing areas that use the steam as an energy source, but the boilers are not located in any of the processing areas. The steam is distributed throughout the facility through a piping system.
OPINION
Taxation of Machinery and Tools
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 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.
“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 Virginia Code § 58.1-1101 A 2 and its precursors means machinery used in the actual process of manufacturing.” The Court also cited previous opinions of the Attorney General in deriving the meaning of “used in manufacturing:”
The Attorney General has consistently opined that ‘machinery and tools’ used in a particular manufacturing business are the machinery and tools which are necessary in the particular manufacturing business and which are used in connection with the operation of machinery which is actually and directly used in the manufacturing process. Id., citing 1985-1986 Att'y. Gen. Ann. Rep. 316 at 317; see also 1987-1988 Att'y. Gen. Ann. Rep. 590. Id.
In The Daily Press, Inc. v. County of Newport News, 265 Va. 304, 576 S. E. 2nd 430 (2003), the Court amplified the principles set forth in American Woodmark:
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.
This language does not imply that each piece of machinery or 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 (8/02/2004), 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 P.D. 11-110 (6/17/2011), a manufacturer used certain pollution control equipment located on the roof of its facility to remove fumes. It was specifically used to control particulates, volatile organic compounds and carbon monoxide emissions. The Department noted that the business was permitted to use the waste materials captured by the pollution control equipment to provide power and heat for the manufacturing plant. The Department stated that if the particulates and emissions were used to provide power to the manufacturing machinery, the pollution control equipment could be classified as machinery and tools.
In this case, it appears that the boilers at issue provide energy that is used in the Taxpayer’s manufacturing processes. It appears that such processes are made possible by the energy generated by the boilers. If that is the case, then it is the Department’s opinion that the boilers should be classified as taxable machinery and tools. The fact that the Taxpayer could purchase energy from a third party is not determinative of the outcome. The question is how the equipment the Taxpayer itself owns and operates at its facility is used in the manufacturing process.
A determination as to whether particular equipment is subject to the M&T tax is, however, a matter of fact. See P.D. 14-22 (2/26/2014). 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 call ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3376.M