Tax Type
BPOL Tax
Machinery Tools Tax
Description
Property used in the microbrewery may not be considered part of the realty
Topic
Local Power to Tax
Property Subject to Tax
Date Issued
10-05-2006
October 5, 2006
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 the denial of a request for refund of Machinery and Tools (M&T) taxes paid to the ***** (the "County") for tax years 2002 through 2005.
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 M&T tax assessment is deemed prima facie correct. That is, 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 Tax Policy Library section of the Department's web site.
FACTS
The Taxpayer operates a restaurant and microbrewery in the County under a lease agreement that took effect July 31, 2001. The lease agreement states, "Tenant [the Taxpayer] will use and occupy the Demised Premises solely for the purpose of operating a full service sit down American restaurant, which may include a brewery."[Insert and emphasis added.] The lease also states that all improvements required for the tenant to use and occupy the demised premises "shall be constructed, installed and erected by Tenant at its sole cost and expense" and the landlord has no obligation to repair, maintain or improve the demised premises. The landlord retains the right to periodically inspect the premises to insure the tenant is conforming to the requirements of the agreement.
The lease also stipulates that the Taxpayer must ascertain the "existence of zoning . . . permitting the construction and operation of the permitted restaurant and stand-up bar (serving mixed alcoholic beverages, beer and wine)." The Taxpayer must obtain all necessary permits required to operate such an establishment. The initial term of the lease is 10 years, with provision for four 5-year extension periods.
More than 90% of the building's square footage is dedicated to the restaurant, with the remaining percentage occupied by the microbrewery. The Taxpayer classified itself as a restaurant for business license tax purposes during the tax years in dispute.
In filing its tangible property tax returns, the Taxpayer included a schedule of property that included all of the components of its brewing system: tanks, hot water heater, gas burner, brewing platform, pumps, valves, gauges, controls and miscellaneous fittings. This equipment was delivered in pieces and assembled on site. The Taxpayer also installed a silo outside the building. The silo is anchored to a concrete platform.
The County assessed the silo as realty for purposes of local property taxation. The County assessed the brewing equipment at the machinery and tools tax rate.
The Taxpayer objects to the County's machinery and tools tax assessment, contending that the Taxpayer's intent was "to have the brewery be a permanent part of the real estate." As such, the Taxpayer maintains that all fixtures associated with the brewery should be regarded as part of the real estate and assessed accordingly.
ANALYSIS
Real property and all tangible personal property except the rolling stock of public service corporations and that which is declared intangible under the provisions of Va. Code § 58.1-1100 et seq., is reserved for local taxation by Article X, § 4 of the Constitution of Virginia.
The method of taxation of real property is provided under Va. Code § 58.1-3200 et seq., whereas the taxation of tangible personal property is provided under Va. Code § 58.1-3500 et seq. On those occasions when an item of tangible personal property is determined to be a fixture, it is treated as a real property for purposes of local taxation. Fixtures are presumed to be annexed to the realty in some form.
In Danville Holding Corp. v. Clement, 178 Va. 223, 232, 16 S.E.2d 345, 349 (1941), the Virginia Supreme Court (the "Court") set forth three general rules to be used in determining whether an article of tangible personal property is a fixture, thus considered a part of the real estate for purposes of taxation, or remains personality subject to tangible personal property taxation. The three tests are: (1) Annexation of the chattel (property) to the realty, actual or constructive; (2) Its adaptation to the use or purpose to which that part of the realty to which it is connected is appropriated; and (3) The intention of the parties, i.e., the intention of the owner of the chattel to make it a permanent addition to the freehold.
In order for the rules to apply, it is presumed that the property is annexed to the realty in some form. In its discussion of the tests, the Court found:
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- While, under the first test, there must be actual or constructive annexation, the method or extent of the annexation carries little weight, except insofar as they relate to the nature of the article, the use to which it is applied and other attending circumstances as indicating the intention of the party making the annexation.
In its decision, the Court noted that the "intention of the party making the annexation is the paramount and controlling consideration."
First test. The contested brewery equipment consists of tanks, hot water heater, gas burner, brewing platform, pumps, values, gauges, controls, and miscellaneous fittings. The equipment is attached to the building with wires, pipes and exhaust ducts. Based on the evidence, these methods of attachment do not constitute a permanent annexation to realty unless both the second and third tests set out in Danville Holding are satisfied.
The Second Test. The building is to be used as a restaurant. The brewing equipment is essential to the operation of the microbrewery, but not essential to the operation of the restaurant. The equipment can be disassembled and removed from the premises without significant damage to the building. The equipment at issue, therefore, is not permanently adapted to the use or purpose of the realty.
The third test. While the Taxpayer stated its intention to operate a restaurant and microbrewery, it is clear from the lease that the microbrewery was ancillary to the restaurant. According to the conditions of the lease, "The restaurant operated in the Demised Premises shall conduct business under the trade name . . . for a period of two (2) years after opening. Thereafter, Tenant may change the use to any other restaurant. Tenant shall not use the Demised premises in any manner which is inconsistent with the customary character of a first-class retail/restaurant development."
Based on the language of the lease document, while the lease permits the Taxpayer to operate a microbrewery in conjunction with the restaurant, it is the restaurant business that is paramount to the lessor's intent in entering into a lease agreement with the Taxpayer. The lease states that the Taxpayer may operate a microbrewery in conjunction with the restaurant. It does not say that the Taxpayer may operate a restaurant in conjunction with a microbrewery.
The Taxpayer argues that its intention to operate both a restaurant and a microbrewery is clear. The brewery was included in the design of the restaurant, and the Taxpayer bought the brewery equipment in its entirety. Furthermore, the construction of the brewery space is specific to a brewery.
The test the Court adopted in Danville Holding presumes that the property in question is that of the owner. The property in question is that of the lessee, or the Taxpayer. The Taxpayer is charged with the responsibility of constructing installing and erecting all improvements necessary to the operation of the business as a restaurant. There is no provision in the lease that reverts the property to the owner. The lease only requires the Taxpayer to leave the property in "a broom clean and good condition."
In John Wesley Mullins, et al. v. L.E. Sturgill, et al, 192 Va. 653, 66 S.E. 2d 483 (1951), citing 22 Am. Jur., Fixtures, Sec. 6, p. 719, the Court noted that while the intention of the party making the annexation is made the controlling criterion by most of the authorities, and generally it is considered to be the chief test, it is not always determinative. The Court concluded:
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- [I]n cases of doubt it [the intention of the party making the annexation] has a controlling influence and must be considered. However, in order that a chattel may be converted into a fixture, the intention to make it a permanent accession to the realty must affirmatively and plainly appear; if the matter is left in doubt and uncertainty, the legal qualities of the article are not changed, and it must be deemed a chattel. [Insert and emphasis added.]
In the present case, the intention to make the brewery equipment a permanent part of the realty does not "affirmatively and plainly appear." The lease agreement confirms that the intention of the lessor is to have a "first class restaurant "on the premises. The lease is of short term duration, suggesting the property may not necessarily be used as a restaurant and microbrewery in the future. The lease specifies that the Taxpayer may change the nature of the business to a different kind of restaurant. Finally, the lease restricts any subletting of the property to a person who will maintain a first class restaurant. These provisions fail to clarify an intention, either explicit or implicit, by the owner to have the chattel (the brewing equipment) become a fixture.
DETERMINATION
It is my determination that the inclusion of a microbrewery was ancillary to the lessor's intention of the use of the property and to the Taxpayer's primary business -that of a restaurant. As such, the property used in the microbrewery may not be considered part of the realty. The County was correct in its assessment of the Taxpayer's tangible personal property. The County's final local determination stands, and the Taxpayer is not due a refund for the periods at issue.
If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/57008H
Rulings of the Tax Commissioner