Document Number
03-96
Tax Type
BPOL Tax
Description
Business Tangible Personal Property Tax
Topic
Appropriateness of Audit Methodology
Property Subject to Tax
Date Issued
12-17-2003

December 17, 2003



Re: Appeal of Assessment: 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 a final local determination of an assessment of business tangible personal property (BTPP) taxes made by the Commissioner of the Revenue for the ***** (the "City") for tax years 1999, 2000, 2001, 2002 and 2003.

The local personal property taxes are imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue determinations on taxpayer appeals of certain BTPP tax assessments. On appeal, a BTPP tax assessment is deemed prima facie correct. In other words, 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 as summarized below. This determination addresses the question of whether the City used the appropriate methodology in assessing the Taxpayer's commercial tractors and trailers. The Taxpayer also requests abatement of penalties due for tax years 1999, 2000, 2001, 2002 and 2003. The Code of Virginia sections cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.
FACTS

The Taxpayer, an out-of-state corporation, owns commercial petroleum tanker trucks that are garaged within the City. The Taxpayer leases the tanker trucks through a Virginia corporation to a petroleum company. The Taxpayer's vehicles were not registered with the City for purposes of the BTPP tax and were "discovered" during a routine site visit by the local commissioner of the revenue on April 18, 2002. After obtaining the necessary information regarding the original cost of the vehicles, on July 31, 2002, the City assessed the property for taxes owing and due, along with penalties and interest for tax years 1999, 2000, 2001 and 2002.

For BTPP tax purposes, the vehicles at issue are generally referred to as "heavy commercial trucks" and are separated into the categories of "tractor trucks" and "trailers." A "tractor truck" is defined in Va. Code § 46.2-100 as "every motor vehicle designed and used primarily for drawing other vehicles and not so constructed as to carry a load other than a part of the load and weight of the vehicle attached thereto." A "trailer" is defined in Va. Code § 46.2-100 as "every vehicle without motive power designed for carrying property or passengers wholly on its own structure and for being drawn by a motor vehicle, including manufactured homes."

The City uses the percentage of cost method in calculating the value for all heavy trucks subject to assessment in its jurisdiction. Under this method, the City utilizes the total acquisition cost, including all applicable taxes, and applies a basis of up to 70 percent dependent upon the date of acquisition, depreciable at 10 percent per annum, to a floor of 10 percent of original cost. The City prorates the BTPP tax on trailers, as provided for in Va. Code § 58.1-3516, but does not prorate the tax on tractors.

The Taxpayer contests the City's assessment as follows:

1. The City's use of the percentage depreciation of original cost methodology resulted in assessments that exceeded fair market value.
2. The City wrongly included federal excise taxes in determining acquisition cost.
3. The City's web site states that the City uses the "nationally recognized pricing guides" for purposes of assessment of motor vehicles, and it failed to do so in this case. The Taxpayer argues that the City must abide by its own representation of policy as stated on the web site.
4. The City should abate the penalties assessed because the Taxpayer has been negotiating in good faith.
5. The City overvalued two units because they were no longer new in 1999.

The Taxpayer asks that the City be directed to correct the assessments for tax years 1999, 2000, 2001, 2002 and 2003, to reflect the true fair market value as listed in recognized pricing guides and by excluding the federal excise tax paid by the Taxpayer on the properties in dispute. The Taxpayer also requests that the City be directed to abate the assessed penalties for tax years 1999, 2000, 2001, 2002 and 2003.

The City and the Taxpayer were in negotiations over this assessment for more than a year. The Taxpayer formally submitted an application for review of the City's assessment on April 22, 2003. The City issued its final local determination on June 6, 2003. In its final local determination, the City stated that as a policy, "[f]rom time to time we do review our procedures and schedules to determine whether our assessment methods are in fact fair." The City also noted that it had, in fact, adjusted its depreciation schedule downward earlier in 2002 to "more accurately reflect true market values." The City applied this new schedule to the Taxpayer's final assessment. In reconsidering its initial assessment of the Taxpayer's property, the City consulted several industry publications and web sites. In addition, the City obtained a Vehicle Identification Number (VIN) Table to "decode the VIN for each vehicle under review." The City found that "our assessed values reflected average sales values listed in every instance."
ANALYSIS

Standards for Valuation and Assessment of Tangible Personal Property

Article X, § 1 of the Constitution of Virginia provides that all property shall be taxed, and that all taxes on property "shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax." Article X, § 2 of the Constitution states, "All assessments of ... tangible personal property shall be at their fair market value, to be ascertained as prescribed by law." The Virginia Supreme Court has consistently held that these two sections of the Constitution must be construed together:
    • If it is impractical or impossible to enforce both the standard of true value and the standard of uniformity and equality, the latter provision is to be preferred as the just and ultimate end to be attained. See R. Cross, Inc. v. City of Newport News, 217 Va. 202, 207 (1976).

Under Va. Code § 58.1-3503, separate categories of tangible personal property are listed for valuation purposes, but these categories are not to be considered separate classes for rate purposes. Among the 18 separate categories enumerated are: (1) automobiles; (2) trucks weighing less than two tons; and (3) other trucks and vehicles. In accordance with Article X, § 2 of the Constitution, Va. Code § 58.1-3503(A)(5) provides the methods of valuation for large commercial vehicles that weigh over two tons. Such vehicles "shall be valued by means of either a recognized pricing guide using the lowest value specified in such guide or a percentage or percentages of original cost. [Emphasis added.] The statute further provides that:
    • Methods of valuing property may differ among the separate categories, so long as each method used is uniform within each category, is consistent with requirements of this section and may reasonably be expected to determine actual fair market value as determined by the commissioner of revenue or other assessing official; ... The commissioner of revenue shall make available to taxpayers on request a reasonable description of his valuation methods. See Va. Code § 58.1-3503(B). [Emphasis added.]

In a 1991 opinion, the Attorney General opined:
    • No constitutional or statutory provisions prevents a commissioner of the revenue from changing the method of assessment of a particular class of personal property, as long as the new method meets the uniformity requirement of Article X, §1, and can reasonably be expected to determine fair market value of the property as required by Article X, §2 and § 58.1-3503(A)(17). 1991 Op. Att'y Gen. (05/27/1991). [Emphasis added.]

In assessing heavy commercial trucks under the provision of § 58.1-3503(A)(5), the commissioner of the revenue has the discretion to use either a "recognized pricing guide or a percentage or percentages of original cost." He must be consistent, however, in his method of assessment. In the present case, the commissioner of the revenue has consistently followed the policy of valuing personal motor vehicles for purposes of BTPP assessments using a recognized pricing guide for passenger cars. The City has also consistently followed the policy of assessing all "heavy commercial trucks" at original cost with a fixed depreciation schedule.

In Board of Supervisors of Fairfax County et al. v. Telecommunications Industries, Inc., 246 Va. 472 (1993), the Virginia Supreme Court, citing several cases, stated:
    • A clear presumption favors the validity of the assessment, and that presumption can be rebutted only upon a showing of manifest error or total disregard of controlling evidence.

The Taxpayer contends that the discrepancy between the fair market value of the vehicle as listed in the NADA commercial truck pricing guide and the actual original cost method used by the City is great enough to constitute "manifest error." In Board of Supervisors, the discrepancy between the fair market value and the depreciation methodology used by the County in valuing the computers at issue was in the hundreds of thousands of dollars.1

In this case, a review of the two examples the Taxpayer presents to support its contention that the City must use a commercial truck guide to ascertain fair market value, reveals an artificially large discrepancy between the valuation of the vehicle using the City's method, and what it determines to be the "fair market value using NADA Commercial Truck Pricing Guides." As discussed in the following section, the Taxpayer excludes the federal excise tax from the latter numbers, but not the former. In addition, the Taxpayer fails to connect the values assigned to the vehicles in the commercial truck guide with "fair market value.2 The Taxpayer does not include the federal excise tax in its presentation of the guide's valuation. After factoring in the federal excise tax, the difference in these examples is quite small.

In its research during the period of reconsideration, the City was able to establish that the assessing methodology it used for the heavy trucks owned by the Taxpayer reflected the average sales price for such vehicles. Additionally, during this period of review, the commissioner of the revenue checked his method of assessment against some of the pricing guides and found very little discrepancy between the resulting "fair market values."

Inclusion of the Federal Excise Tax in Determining the Basis of Original Cost

The Taxpayer contends that the "federal excise tax" should not be included in the "original cost" basis of taxation.

Title 26 § 4051 of the Internal Revenue Code (IRC) provides for the imposition of a 12 percent federal excise tax on certain heavy tractors and trailers. This tax is imposed upon the first retail sale of heavy trucks, tractors and trailers or a short-term lease of the same by a lessor. The 12 percent federal excise tax is to be excluded from the tax base in calculating the federal excise tax due. See 26 IRC § 4052. Furthermore, this section of the IRC also provides that any state or local retail sales tax be excluded from the federal excise tax base.

In the present case, the Taxpayer, as the lessor, is responsible for the payment of the tax. The basis of "original cost" for purposes of the valuation of business tangible personal property is different from that base utilized in determining the amount of federal excise tax due. Any such property may be sold or leased at retail at a cost that includes the excise tax, or if applicable, state and local sales taxes.3

The Virginia Supreme Court has ruled:
    • Taxes of all kinds, property taxes, privilege taxes, tax on capital, income tax and others are usually elements that are combined with cost of material, labor, insurance, rent and many other items to arrive at the selling price of the article produced, and when the article is bought, the amount of the purchase is the total sum of the money the buyer parts with to get the article, regardless of what proportion of that amount is taxes and what proportion is labor or material or other cost. S. & L. Straus Beverage Corporation v. Commonwealth of Virginia, 185 Va. 1055, 1061 (1947).

In calculating the basis of "original cost," the City uses the price or cost that the Taxpayer uses in negotiating its sales or leases of the heavy trucks. That cost includes the federal excise tax paid by the Taxpayer.

The City's web site

The City's web site does not go into detail about the different methodologies used in assessing passenger vehicles and smaller trucks, and heavy commercial trucks. It is, however, quite clear in the instructions that all taxpayers "must complete a vehicle registration and personal property tax return and file it with the Commissioner of the Revenue within 60 days of moving a vehicle into the City of Fairfax." Furthermore, Va. Code § 58.1-3518 requires "Every taxpayer owning any of the property subject to taxation under this chapter on January 1 of any year" to file a return or appropriate form with the commissioner of the revenue of that jurisdiction. It is incumbent upon the taxpayer to meet its obligations.

In this case, the Taxpayer failed to register its property for purposes of the BTPP tax for the four years at issue. Had the Taxpayer properly registered its property with the City in 1998, it would have been advised at that time of the methodology the local commissioner of the revenue utilizes in assessing heavy commercial trucks. The fact that the information available on the web site is not complete or may be misleading, does not change the fact that the methodology the City utilizes in assessing heavy commercial trucks has been used consistently and applied uniformly to all vehicles under that classification.

Under the provisions of Va. Code § 58.1-3519, when a taxpayer fails to file a personal property tax return, the commissioner of the revenue "shall, from the best information he can obtain, enter the fair market value of such property and assess the same as if it had been reported to him." After discovering the tractors and trailers, the commissioner of the revenue was able to obtain the necessary information from the Taxpayer regarding the original cost of the vehicles. This information enabled the City to utilize the percentages of cost depreciation method it had historically used in assessing heavy commercial trucks with situs in the City. Thus, the City was able to adhere to the principle of uniformity in its assessment of heavy commercial trucks.

Abatement of Penalties

The Taxpayer contends that nonpayment and late payment penalties should be abated because it has been "negotiating the amount of the total assessment and the proper valuation method of the tractors and trailers in good faith with the commissioner's representatives."

All cities, counties and towns are granted the authority to provide, by ordinance, penalties for failure to file applications for licenses, permits and returns and for delinquent payment of taxes, and to provide for payment of interest on delinquent taxes.

See Va. Code § 58.1-3916. Pursuant to this authority, section 90-166 of the City of Fairfax's ordinances provides that:
    • Except where personal property taxes are prorated by law, all taxes on tangible personal property and machinery and tools shall be due and payable on October 5 in the year assessed and if not timely paid, shall be subject to a penalty of ten percent of the amount of the tax payable. Any penalties where so assessed shall become part of the tax.

Any penalties imposed by the City that are unrelated to the period during which the administrative appeals process was initiated and pending are at the discretion of the locality. In this case, the Taxpayer filed a formal application for review with the City on April 23, 2003. At that time, collection activity should have been suspended and no additional penalties imposed until the commissioner of the revenue issued a final local determination on June 6, 2003. The Taxpayer filed a formal application with the Tax Commissioner on September 2, 2003, at which time collection activity should have again been suspended and no additional penalties imposed. As long as the penalties at issue were not imposed by the City based on nonpayment because of the Taxpayer's pending appeal, relief from the penalties is solely at the discretion of the City.

Wrongly Identified Vehicles

The Taxpayer identified two vehicles that were wrongly valued as new in 1999, contending that they were in fact in use in 1998. This is a factual matter for the local commissioner of the revenue to determine. If, in fact, a mistake was made, under the provisions of § 58.1-3980, the commissioner of the revenue can correct the error. This part of the Taxpayer's appeal is being returned to the City for reconsideration based upon the facts as determined by the local commissioner of the revenue.

DETERMINATION


Based on a review of the facts as presented and relevant case law, I find the following:

1. The City's methodology of using percentages of original cost as opposed to fair market value as represented in national pricing guides is acceptable. The City met the standard of uniformity, and the Taxpayer failed to prove that the use of the original cost plus depreciation method resulted in a manifest error in valuation.

2. The federal excise tax is properly included in calculating original cost.
    3. While the City's web site may not be complete in its presentation of the methodology it utilizes in assessing heavy commercial trucks for the BTPP tax, this is not sufficient to invalidate the City's valuation method.
      4. Virginia Code § 58.1-3983.1 provides for the abatement of penalties only during the times when a taxpayer has timely filed an application for correction with the local commissioner of the revenue, or later in the process, after an appeal or a letter of intent to file an appeal has been timely filed with the Tax Commissioner. Penalty provisions associated with failure to file or failure to pay taxes are adopted by local ordinance, and are not under the jurisdiction of the Tax Commissioner.
        5. The question as to whether the City overvalued two units because they were no longer new in 1999 was not adequately addressed in the City's response. Therefore, I am returning this issue to the City for further consideration.

        Based on these findings, it is my determination that there is no basis to correct the City's assessments for tax years 1999, 2000, 2001, 2002 and 2003, with the possible exception of finding #5 above.

        If you have any questions regarding this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

                      • Sincerely,

                      • Kenneth W. Thorson
                        Tax Commissioner


        AR/47859H
        1In this case, the trial court found that the computers were assessed at greater than fair market value and that the disparity between the fair market value and the assessed value constituted a manifest error. Evidence presented at trial revealed that the fair market value of the computers in 1990 was $328,000, but the County assessed the computers at $709,921. In 1991, the fair market value of the computers was $180,000, but the County assessed the computers at $432,960. The Virginia Supreme Court held that the evidence of record supported the trial court's finding of manifest error. Board of Supervisors, Id.
        2 The listings in the NADA price guide are based in "Base MSRP," which is the manufacturer's suggested retail price for the base configuration of the vehicle, which includes a minimum level of equipment and accessories. It does not reflect the actual acquisition cost, which may include many additional enhancements.
        3Virginia Code § 58.1-2403(23) exempts heavy commercial trucks as defined in § 46.2-100 from the Virginia motor vehicle sales and use tax. As a general principle, however, the incidence of such taxes, like the federal excise tax, would ultimately fall on the consumer.

        Rulings of the Tax Commissioner

        Last Updated 08/25/2014 16:46