Rulings of the Tax Commissioner

November 23, 2021

Re:    Appeal of Final Local Determination
          Taxpayer: *****
          Locality Assessing Tax: *****
          Business Tangible Personal Property Tax and Merchant’s Capital 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 an assessment of business tangible personal property (BTPP) tax and merchant’s capital tax issued to the Taxpayer by ***** (the “County”) for the 2020 and 2021 tax years.

The BTPP tax and merchant’s capital tax are imposed and administered by local officials. Virginia Code § 58.1-3983.1 D authorizes the Department to issue determinations on taxpayer appeals of BTPP tax and merchant’s 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 online at www.tax.virginia.gov in Laws, Rules, and Decisions section of the Department’s website.

FACTS

The County issued assessments of BTPP tax and merchant’s capital tax for the 2020 and 2021 tax years because the Taxpayer failed to file complete BTPP and merchant’s capital tax returns. The Taxpayer filed an appeal with the County. The County’s final local determination upheld the assessment because the Taxpayer did not provide information indicating that the assessment was incorrect. The Taxpayer appealed to the Department, contending that the County overestimated the tax liability based the amount of sales and inventory of a previous owner. 

ANALYSIS

Business Tangible Personal Property

Virginia Code § 58.1-3500 defines tangible personal property as “all personal property not otherwise classified by (i) § 58.1-1100 as intangible personal property, (ii)  § 58.1-3510 as merchants’ capital, or (iii) § 58.1-3510.4 as short-term rental property. Such tangible personal property is hereby segregated for and made subject to local taxation only pursuant to Article X, Section 4 of the Constitution of Virginia.” 

Virginia Code § 58.1-3503 provides for the general classification of tangible personal property. Under this section, certain tangible personal property is classified for valuation purposes by separate categories that are not, however, to be considered separate classes for rate purposes. Virginia Code § 58.1-3503(B) notes that the methods of valuing property may differ among the separate categories, so long as each method used is uniform within each category. Included among the 20 enumerated categories is all tangible personal property employed in a trade or business, except such property for which a more specific categorization in the statute applies.

Merchant’s Capital

The capital of merchants is also segregated for local taxation only. See Virginia Code § 58.1-3509. Merchants’ capital, as defined in Virginia Code § 58.1-3510, includes inventory for sale as merchandise. The Attorney General has opined that inventory is goods and materials kept on hand by a commercial establishment for sale. See 2006 Op. Va. Att’y Gen 06-036. 

A locality may impose either a business, professional and occupational license (BPOL) tax or a merchants’ capital tax on merchants but is prohibited 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.

Merchants’ capital and tangible personal property are two separate classes of property in Virginia that have been segregated for local taxation only. See 1985-86 Op. Va. Att'y Gen. 289. Merchants’ capital is specifically excluded from the definition of tangible personal property. See Virginia Code § 58.1-3500. Therefore, because merchant’s capital and tangible personal property are two separate classes of property, a locality may impose both a merchant’s capital tax and a business tangible personal property tax on its taxpayers. See Public Document (P.D.) 17-15 (3/10/2017).

Return Requirements 
 
Virginia Code § 58.1-3518 generally requires a taxpayer who owns any property subject to BTPP or merchant’s capital tax to file a return with the commissioner of the revenue in the taxpayer’s respective locality. If a taxpayer neglects or refuses to file within the time prescribed, Virginia Code § 58.1-3519 authorizes the commissioner of the revenue to issue an assessment based on the best information available. 
 
For the tax years at issue, the County had a business filing form. Taxpayers who had taxable business tangible personal property were required to complete a schedule listing a description of each item of property, the date it was acquired and its original cost. Taxpayers were also required to list the value of any inventory on hand as of January 1 of the respective year.

Final Local Determination

In its final determination, the County stated that the Taxpayer’s filing was not complete and not in compliance with its requirements. The County also explained that the assessment was based on information obtained from the Taxpayer and from a site visit of the business. The Taxpayer’s appeal alleges that the County overestimated the tax liability because the County used the sales and inventory amounts of a prior owner of the business and those amounts did not accurately reflect the extent of the Taxpayer’s current business operations.

While it is true that a locality’s assessment is deemed prima facie correct and that a taxpayer thus bears the burden of proving that the assessment was incorrect, Virginia Code § 58.1-3983.1 B 5 also requires that local determinations set forth the facts and arguments in support of the decision. Implied in this mandate is that the determination must set forth the factual basis of the decision in sufficient detail to inform the taxpayer why an assessment has been issued for the amount in question. While the County’s determination in this case states that the assessment was based on “information obtained from you and the site visit,” it fails to clearly explain what information was used or how the assessment amounts were derived. 

DETERMINATION

Based on the information available, I find that neither the Taxpayer nor the County provided sufficient information for the Department to make an informed final determination in this appeal. Accordingly, this case will be remanded back to the County for further consideration. If the Taxpayer wishes to submit new additional information to the County, it should do so within 30 days of the date of this letter, or within another time mutually agreed upon with the County. Whether or not the Taxpayer chooses to submit new information, the County should issue a revised final local determination that more fully sets forth the facts and arguments in support of its assessment. If the Taxpayer does submit new information, the final determination should also include an analysis of how that information affects the case, if at all. 

Once the County has issued a revised determination letter, the Taxpayer will have 90 days to file an appeal with the Department if it disagrees with the outcome. In that event, the Taxpayer’s appeal must also set forth the facts, issues and authorities in support of its position. For further information concerning local business tax appeals, the Taxpayer is directed to the Department’s Guidelines for Appealing Local Business Taxes, issued as P.D. 04-28 (6/25/2004). 

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/3842-C