Rulings of the Tax Commissioner

November 10, 2020

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 the denial of refunds of Business Tangible Personal Property (BTPP) tax paid by the Taxpayer to ***** (the “County”) for the 2012 through 2016 tax years. I apologize for the delay in responding to your request. 

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 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 is a producer of ready to serve meals for airliners. It filed its BTPP tax returns classifying itself as business service. The Taxpayer subsequently filed refund claims pursuant to Virginia Code § 58.1-3980 with the County for the 2012 through 2016 tax years, contending it should have been classified as a manufacturer for purposes of the BTPP tax. The County denied the Taxpayer’s classification request. The Taxpayer appealed the County’s response contending that all of the business tangible property located in the County was exempt from BTPP taxation because it was a manufacturer.

ANALYSIS

Jurisdiction

In its letter issued in December 2018, the County denied the refund request for the 2012 tax year on the basis that it was outside the statute of limitations and further denied the refund request for the 2013 through 2016 tax years, concluding that the Taxpayer was a business service. The County instructed the Taxpayer that any additional appeals were to be filed with a circuit court pursuant to Virginia Code § 58.1-3984. The Taxpayer appealed the County’s determination to the Department pursuant to Virginia Code § 58.1-3983.1.

In Public Document (P.D.) 19-62 (6/17/2019), the Department determined that it lacked jurisdiction to address the Taxpayer’s appeal because the local determination was not signed by the chief assessing officer or a person designated by the chief assessing officer to issue final local determinations. As such, the case was remanded back to the County in order for it to issue a final local determination as required by the Guidelines for Appealing Local Business Taxes in P.D. 04-28 (6/25/2004). The Taxpayer was instructed that it may then appeal the final local determination to the County pursuant to either Virginia Code §§ 58.1-3980 or 58.1-3983.1. 

Virginia Code § 58.1-3983.1 B 6 provides that any taxpayer whose administrative appeal to the a local assessing official has been pending for more than one year without a final local determination, may elect to treat the application as denied and, with at least 30 days’ notice, appeal to the Department.  Because a final local determination was not issued by the County within a year of the filing of the local appeal, the Taxpayer elected to treat the application as denied and filed an appeal with the Department. 

2012 Tax Year

The Taxpayer requested a refund from the County in November 2016, for the 2012 through 2016 tax years. Pursuant to Virginia Code § 58.1-3990, a locality cannot issue a refund for requests made more than three years after the last day of the tax year so assessed. As such the refund request for the 2012 tax year is outside the limitations period. The Department does not have jurisdiction to address an appeal in which a locality lacks jurisdiction. See P.D. 19-111 (9/27/2019). 

Manufacturing

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.

The definition of a “manufacturer” is not in the Code of Virginia. However, the Supreme Court of Virginia has developed a test involving three essential elements in determining whether a manufacturing activity is being undertaken. These elements are: (1) original material, referred to as raw material; (2) a process whereby the original material is changed; and (3) a resulting product, which by reason of being subject to such processing, is different from the original material. County of Chesterfield v. BBC Brown Boveri, 238 Va. 64, 380 S.E.2d 890 (1989). For local tax purposes, a manufacturer is one engaged in a processing activity, whereby the original materials are transformed into a product that is substantially different in character from the original materials. It does not matter whether the transformation is a step in getting the product ready for market or it is a complete process. What matters for purposes of local taxation is whether the transformation of the material takes place in the locality. See Commonwealth v. Meyer, 180 Va. 466, 23 S.E.2d 353 (1942). 

The Taxpayer contends that it would qualify as an industrial manufacturer under Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B 1. This regulation defines a manufacturer for purposes of Virginia’s sales and use tax. Local property taxes have their own characteristics, separate and distinct from the retail sales and use tax. See P.D. 13-63 (5/10/2013). As such, the sales tax definition of manufacture does not apply in BTPP cases. 

The Taxpayer asserts that it is a manufacturer under both the SIC and NAICS codes. The Standard Industrial Classification (SIC) system was replaced by the North American Industrial Classification System (NAICS), although the NAICS was not published until 1998. The NAICS code is used in determining a Taxpayer's business for income tax and sales and use tax purposes. While not the determinative factor to be used in classification for local tax purposes, it is instructive. See P.D. 06-79 (8/23/2006). 

The Taxpayer argues that other states have classified it as a manufacturer for tax purposes. The way that other states classify its taxpayers for purposes of state and local taxation may be informative, but reflects the unique law of their respective states and is not applicable to Virginia. 

In this case, the Taxpayer contends that it meets the definition of manufacturer as provided by BBC Brown Boveri because it takes raw meats, vegetables, fruits and other foodstuffs and transforms them through a cooking process into separate meals. The County asserts that the Taxpayer merely portions bulk processed foods into individual meals.

In Prentice v. City of Richmond, 197 Va. 724, 90 S.E.2d 839 (1956), the Virginia Supreme Court held that that the slaughtering, picking and cleaning of poultry does not constitute manufacturing because there is no change or transformation of the live poultry into an article or product of substantially different character. However, the curing of hams and bacon was held to be manufacturing because “[t]he color ... is changed; its texture is changed; its taste is changed; putrefaction is prevented, and it may be kept wholesome for an indefinite time.” See Commonwealth v. Meyer, 180 Va. 466, 473, 23 S.E.2d 353, 356 (1942). In 1993 Op. Atty Gen. Va 231, the Attorney General determined that the removal of shells, cooking and packaging of frozen seafood is manufacturing for local tax purposes. 

The Taxpayer states that it has three separate kitchens for the preparation of airliner meals which include one for Halal and kosher meals as well as one for customers with food allergies. The Taxpayer describes a process in which raw produce and meats are cut up to prepare for cooking. Marinades and seasonings are prepared and applied to raw meats. Industrial ovens are used to bake raw meats and steam real vegetables. Large industrial mixers are used to cream and mash potatoes. Burners and grill are used to grill chicken, beef, fish and vegetables. Stocks for soups, stews and sauces are made from strained vegetables. After cooking, the food is place in blast coolers to chill. It is then arranged by hand into individual meal containers. Servings of individual foods are measured on a food scale and place in the container. The individual meals are wrapped in foil and then loaded onto trays which are then packed into airplanes steward service carts for delivery to the airlines.

The County made a site visit to the Taxpayer in order to observe its meal preparation procedures. It described one kitchen in which individual servings of salads, snack trays, and cold cut sandwiches. In another kitchen, hot meals were heated and blanched then blast chilled and stored. The foods it observed in the refrigerated rooms were various cooked foods such as mashed potatoes, soups, cooked grains and breaded chicken. It also observed foods prepackaged entrees and desserts. 

DETERMINATION

I find that the description of the process used in making individual meals for airlines that was provided by the Taxpayer is consistent with manufacturing because it involved the transformation of raw foodstuff into a product of different character. I also find however, the description of the process of producing individual meals for airlines as presented by the County is not consistent with manufacturing because prepared foods are merely portioned into individual meals. Because neither the Taxpayer nor the County has provided clear and objective evidence as to the facts in this case for the tax years at issue, I am remanding this case to the County to re-evaluate its findings in light of the above analysis. 

The Taxpayer must work with the County to provide any further relevant information the County may request. Failure of the Taxpayer to provide sufficient documentation to support its position will result in the assessment being upheld. Likewise, the County must thoroughly review and address any and all information the Taxpayer is able to provide. If the County finds the manufacturing portion of the business is substantial, it must classify the Taxpayer as a manufacturer. Upon the conclusion of its review, the County must issue a new final determination. Once the County has issued its final determination, the Taxpayer may file an appeal with the Department pursuant to Virginia Code § 58.1-3983.1 or to the appropriate circuit court pursuant to Virginia Code § 58.1-3980 if it disagrees with any of the County’s conclusions. 

If you have any questions regarding this response, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/3338