June 4, 2025
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality Assessing Tax: County of *****
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 Machinery and Tools (M&T) tax issued to the Taxpayer by the County of ***** (the “County”) for the 2020 and 2021 tax years.
The M&T tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 D authorizes the Department to issue determinations on taxpayer appeals of M&T 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.
FACTS
The Taxpayer operated a business that extracted limestone from open pit quarries in the County. It also had similar operations in other Virginia localities and in ***** (State A). At this site, the Taxpayer also produced various limestone products.
The Taxpayer filed its M&T tax returns for the 2020 and 2021 tax years, excluding assets other than M&T used in its mining and manufacturing operations. The County determined that the Taxpayer was conducting both processing and manufacturing, but not mining, activities at the site and issued assessments accordingly. The Taxpayer appealed to the County, and the County issued a final determination, upholding the assessments on the basis that the Taxpayer was engaged in quarrying and not mining. The Taxpayer appealed that determination to the Department.
In Public Document (P.D.) 24-27 (3/20/2024), the Department determined that the term “mining” in Virginia Code § 58.1-1101 includes the extraction of limestone from a quarry. Accordingly, the Department remanded the case to the County to determine what property was subject to M&T tax as equipment used in its mining operations. Because any property directly involved in a manufacturing process would also have been subject to M&T tax, the issue was effectively narrowed to what equipment, if any, was not involved in either the mining or manufacturing operations. Any such equipment would have been exempt from local property taxation.
In response to the Department’s determination in P.D. 24-27, the Taxpayer provided additional information to the County and the County conducted a site visit. In August 2024, the County issued a new final local determination letter, listing the equipment it had determined was not taxable and the equipment that the Taxpayer had agreed was taxable. In addition, the County determined that three assets used in the lime load-out process were critical components of the Taxpayer’s manufacturing process and thus subject to M&T tax. The Taxpayer appealed to the Department regarding the classification of these three assets.
ANALYSIS
Tangible and Intangible Personal Property
Virginia Code § 58.1-1101 A 2 classifies certain property that is “tangible in fact” as intangible and segregates that property for state taxation only. Intangible property consists of, in part:
Capital 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), mining, water well drilling, radio or television broadcasting, dairy, dry cleaning or laundry businesses. Machinery and tools, motor vehicles and delivery equipment of such businesses shall not be defined as intangible personal property for purposes of this chapter and shall be taxed locally as tangible personal property according to the applicable provisions of law relative to such property . . . .
As such, certain tangible personal property owned by a mining or manufacturing business would be classified as intangible property not subject to local property tax, but any machinery and tools used in mining or manufacturing would be subject to the M&T tax. See Virginia Code § 58.1-3507 A. The County’s position is that the assets in question were used in the manufacturing of limestone products because the finished lime products would not have been marketable without being stored and delivered using the three assets at issue.
Used in Manufacturing
In City of Winchester v. American Woodmark, 250 Va. 451, 458 (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.”
[T]he Attorney General has consistently opined that “machinery and tools used in a particular manufacturing business are the machinery and tools that 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. at 458 (citing 1985-1986 Att’y Gen. Ann. Rep. 316 at 317; see also 1987-1988 Att’y Gen. Ann. Rep. 590).
In The Daily Press, Inc. v. County of Newport News, 265 Va. 304, 311 (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.
This language does not imply that each piece of machinery or each 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 P.D. 04-39 (8/2/2004), 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.
The County argues that the lime load-out assets were a crucial component of the manufacturing process because the marketability of the lime products would have been destroyed if they were not stored and delivered using such assets. The County compares this case to the facts in P.D. 08-30 (4/2/2008), where the Department found that certain packaging assets of a food manufacturer were part of the manufacturing process. In that case, however, the packaging at issue formed a necessary component of the final marketable food product.
Here, the production process was complete and the lime products were already in their final marketable state when they arrived at the lime load-out facility. Although the lime load-out assets maintained the products in a marketable state, these assets did not perform any further function to create a part of the final marketable product like the packaging assets at issue in P.D. 08-30. In the Department’s opinion, therefore, the lime load-out assets in question were not directly involved in the Taxpayer’s mining or manufacturing operations.
DETERMINATION
Based on the information and arguments presented, the Department has determined that the lime load-out assets at issue were not directly used in the mining or manufacturing of the Taxpayer’s products. Therefore, such assets are properly classified as “intangible” under the provisions of Virginia Code § 58.1-1101 A 2 and are not subject to the M&T tax.
The case will be remanded to the County in order to adjust the assessments of M&T tax for the tax years at issue in accordance with this determination and issue updated bills or refunds, as warranted.
The Code of Virginia sections cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at ***** or *****@tax.virginia.gov.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR 5074.Q