February 15, 2022
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
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 assessment of business tangible personal property (BTPP) tax issued to the Taxpayer by ***** (the “City”) for the 2018 tax year.
The BTPP 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 BTPP tax assessments. On appeal, a BTPP 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, regulation 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 Taxpayer, a medical spa, was audited by the City, resulting in an assessment of additional BTPP tax for the 2017 and 2018 tax years. The Taxpayer appealed to the City, requesting that certain items be excluded from the assets subject to tax because they were no longer in the Taxpayer’s possession, constituted nontaxable supplies or were inoperable and of no value. The City upheld the assessment because it found the Taxpayer had depreciated each of the items for federal income tax purposes and failed to provide sufficient records confirming disposal of any of the items. The Taxpayer appealed to the Department, conceding that the two items it had disputed as to the 2017 assessment were taxable, but it continues to disagree with the City’s inclusion of three items of property as taxable BTPP for the 2018 tax year.
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. Article X, §§ 1 and 2 of the Constitution of Virginia provide that all property, unless specifically exempted within the provisions of the Constitution, shall be taxed at a uniform rate among classes, and that “all assessments of real estate and tangible personal property shall be at their fair market value to be ascertained as prescribed by general law.”
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.” BTPP is set aside as a separate classification of tangible personal property subject to local taxation under Virginia Code § 58.1-3506 A 26 and is considered a separate category for valuation purposes under Virginia Code § 58.1-3503 A 18.
Localities typically consider a taxpayer’s federal depreciation schedules as a factor in determining property classification for BTPP tax. The Department has previously deemed consideration of federal depreciation schedules as an acceptable factor in determining property classification. See Public Document (P.D.) 06-142 (12/8/2006). While federal treatment is an acceptable factor for consideration, it is not determinative.
***** (Property 1)
The Taxpayer explains that, after a short trial period, Property 1 was returned to the manufacturer. The Taxpayer states that the property was added to its depreciation schedule in error by a prior accountant and the mistake has now been corrected.
Under the provisions of Virginia Code § 58.1-3109 6, the local commissioner of the revenue is empowered with the authority to require records and other information necessary to make an accurate assessment of BTPP. It is incumbent upon the taxpayer to prove to the satisfaction of the local taxing authority that it properly reported the value of all its property on its BTPP returns. See Virginia Code § 58.1-3983.1 B 4.
In addition, when a taxpayer asserts that an item of BTPP is no longer on its premises, the taxpayer must provide sufficient documentation to the locality to show when it disposed of the property in question. See P.D. 11-54 (4/7/2011) and P.D. 12-160 (10/12/2012). In this case, the Taxpayer has provided no objective evidence to show if and when Property 1 was returned.
***** (Property 2)
The Taxpayer asserts Property 2 was a machine that did not work properly and was taken out of service after only several months of use. The Taxpayer makes several arguments as to why this equipment should not be subject to BTPP tax, namely that it has been out of service and the Taxpayer is unsure whether it even has legal title to the equipment. The Taxpayer also appears to argue that at a minimum, the value should be reduced by certain costs included with the equipment’s purchase, including costs for items consumed when Property 2 was used, an extended warranty and interest, and further reduced by the property’s technological obsolescence.
As for the property being out of service, the BTPP tax does not provide designation for idle equipment like the Machinery and Tools (M&T) tax. See Virginia Code § 58.1-3507 G. As such, all tangible personal property that is not exempt either by statute or the Constitution, is subject to BTPP taxation regardless of whether it is currently being used in the business or not. See P.D. 12-160.
The Taxpayer also questions whether it had legal title to the property. This argument is speculative. The Taxpayer, however, had a financing arrangement with the manufacturer, made payments toward the purchase, obtained possession of the property, and was reporting it on its depreciation schedule. As such, the Taxpayer is assumed to be the owner of the property for BTPP tax purposes until it affirmatively demonstrates otherwise.
As for the valuation, Virginia Code § 58.1-3103 specifically charges local commissioners of the revenue with the responsibility of assessing property at fair market value (FMV). FMV is generally defined as the price a property will bring when offered by one who desires, but is under no obligation, to sell it, and the buyer has no immediate necessity to purchase it. See Tuckahoe Women’s Club v. County of Richmond, 199 Va. 734, 101 S.E.2d 571 (1958).
Virginia Code § 58.1-3503 A 18 specifies that for most items of tangible personal property that is used in a trade or business, FMV is to be ascertained either by a percentage or percentages of original cost. Although the General Assembly has provided no definition for the term “original cost,” it has consistently been interpreted to mean the cost paid by the original purchaser from a manufacturer or dealer. See 2009 Op. Va. Att’y Gen. 18, and 2014 Op. Va. Att’y Gen. 20. The Department has held that original cost includes all costs incurred for putting the property in use, i.e., the total sum of money the buyer parts with to get the article. See P.D. 08-85 (6/6/1985) and P.D. 14-68 (5/21/2014). See also S. & L. Straus Beverage Corporation v. Commonwealth of Virginia, 185 Va. 1055, 41 S.E.2d 76 (1947).
If the valuation methodology employed by a locality results in an assessment well above FMV, the locality may use another methodology prescribed in Virginia Code § 58.1-3503 B. That code section provides requirements relevant to valuing BTPP, including that the method of valuation be reasonably expected to determine actual FMV, and that upon request a commissioner of the revenue take into account the condition of property including, but not limited to, technological obsolescence.
Technological obsolescence generally occurs when new technology is developed that makes the old technology obsolete, and it can be considered a factor in determining FMV. See Virginia Code § 58.1-3503 B and Bd. of Supervisors v. Telecomms. Indus., 246 Va. 472, 436 S.E.2d 442 (1993). The mere fact that equipment did not work as intended fails the standard of the Court.
In addition, the Department has observed that FMV must be determined with respect to the market, not the value to the specific taxpayer. See P.D. 18-175 (10/23/2018). The Taxpayer claims that the equipment did not work properly and was in need of repairs, which the Taxpayer says the manufacturer refused to perform, and argues that a piece of equipment that does not work as intended has no value. The Department disagrees. Even assuming that the equipment was not repairable and was no longer usable in any capacity, it may still have had intrinsic value for parts, for example. While the Department does not necessarily disagree that the extent equipment works as intended could be considered in establishing the equipment’s condition for valuation purposes, the Taxpayer must still present evidence that quantifies the value, such as a bona fide independent appraisal.
***** (Property 3)
The Taxpayer argues Property 3 was a universal serial bus (USB) device that contained executable files called “zones” that were consumed when administering the various treatments with Property 2. Once the applications were exhausted, the USB device was not longer useful. In that way, the Taxpayer argues that the property acted as fuel and was an expendable supply that should not have been considered tangible personal property. In the alternative, the Taxpayer argues that, if Property 3 was tangible personal property, the fair market value was zero because the treatments had been used and the property was otherwise worthless.
The definition of tangible personal property in the Code of Virginia is expansive and includes all personal property not otherwise classified as intangible personal property, merchants’ capital, or short-term rental property. Intangible personal property includes inventory, which encompasses supplies of every kind for use in a business if held for resale directly or indirectly. See Title 23 of the Virginia Administrative Code (VAC) 10-340-20. Inventory held for resale indirectly means inventory of materials or component parts which will become an identifiable part of the product or service to be sold or compensated for.
Although Property 3 was in fact tangible personal property within the ordinary meaning of the term, many items that are tangible in fact are excluded from the BTPP tax as intangible or merchant’s capital. Here, the Taxpayer acquired Property 3 in order to resell the treatments stored there on as a part of its services offered to customers. As such, it meets the definition of intangible personal property as inventory and was not subject to the City’s BTPP tax, even if the Taxpayer depreciated it for federal income tax purposes. As stated above, federal depreciation schedules, though useful as a factor in determining BTPP classification, are not determinative.
DETERMINATION
Based on the facts and documentation presented, the Taxpayer has not shown that Property 1 was returned to the manufacturer as the Taxpayer claims. However, I am remanding this issue back to the City in order to consider any other documentation the Taxpayer may be able to provide with regard to this asset.
As to Property 2, the Taxpayer has not provided sufficient evidence to show that the County’s valuation was incorrect. Should the Taxpayer wish to obtain an independent appraisal of Property 2, it should do so and submit it to the City for review.
Any further documentation as to these two items must be submitted to the City within 90 days of the date of this determination, unless the City and the Taxpayer agree to a different deadline. To the extent the Taxpayer submits additional documentation, the City should evaluate the information, revise the assessment if warranted, and issue a new final local determination. If the Taxpayer disagrees with the new determination, it may appeal to the Department within 90 days. If the Taxpayer fails to submit any further documentation, the assessment as to these items will be considered correct.
Further, the facts and documentation presented indicate that Property 3 was inventory considered to be intangible personal property and was not subject to BTPP. Accordingly, the City must remove this item from its assessment. The Taxpayer may wish to consult its tax advisors to verify the proper treatment of these items for federal income tax purposes.
Finally, it appears that the Taxpayer was also subject to an audit of Business, Professional and Occupational License (BPOL) tax, the results of which it does not dispute, but seeks an abatement of penalties. Waivers of BPOL tax penalties are subject to the review and discretion of the locality and are not subject to administrative review by the Department. See P.D. 20-3 (1/7/2020) and 20-18 (2/6/2020). Therefore, the Taxpayer should direct any penalty waiver requests to the City.
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/3656-C