Document Number
06-142
Tax Type
BTPP Tax
Description
Alteration not intended to become permanently affixed to the realty
Topic
Local Taxes Discussion
Property Subject to Tax
Tangible Personal Property
Date Issued
12-08-2006


December 8, 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. The Taxpayer appeals an assessment of Business Tangible Personal Property (BTPP) taxes made by ***** (the "County") for tax year 2005.

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. 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 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 in a shopping center located in the County. It retains a leasehold interest in the premises. The Taxpayer contends that certain tangible personal property it has installed in the premises is essential to the business's operation as a restaurant and should be assessed as realty for purposes of local property taxation.

The primary issue involves the County's reclassification of certain assets from real property to tangible personal property. The property at issue consists of stainless steel chef's tables attached to the walls, stainless steel panels installed for the purpose of supporting mop sinks and related hanging shelves, panels installed for purposes of support of hoods and splash guards at the coffee and service stations and certain wall panels and accompanying guards, and a window for a stainless steel door.

In making its assessment, the County "looked at how the assets [were] attached to the real estate and whether their removal would damage the real estate." The County also took into consideration how the Taxpayer depreciated the items for income tax purposes. The reclassification of these items resulted in additional assessments of***** and ***** in tax years 2004 and 2005, respectively.

The Taxpayer asserts that the County's reliance on recovery periods under the Modified Accelerated Cost Recovery System (MACRS) for federal income tax purposes is inappropriate to distinguish real property and tangible personal property. The Taxpayer also contends that because the County issued a "final determination" in 2004 in which it classified certain property as realty, the County's reclassification of the same property as tangible personal property is erroneous.

ANALYSIS


Tangible Personal Property versus Real Property

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 for under Va. Code § 58.1­3200 et seq., whereas the taxation of tangible personal property is provided for under Va. Code § 58.1-3500 et seq. When an item of tangible personal property is determined to be a fixture, it is treated as real property for purposes of local taxation.

In Danville Holding Corp. v. Clement, 178 Va. 223, 232, 16 S.E.2d 345, 349 (1941), the Virginia Supreme Court set forth three general rules to be used in determining whether an article of tangible personal property is a fixture and, thus, considered a part of the real estate for purposes of taxation, or remains personality subject to tangible personal property taxation.
    • (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 owner of the chattel to make it a permanent addition to the freehold.

In order for these rules to apply, it is presumed that the property is annexed to the realty in some form. In its decision, the Court noted that the "intention of the party making the annexation is the paramount and controlling consideration."

In this case, the County determined that the property in dispute could be removed from the premises without significant damage to the realty. In its ruling, the County did not respond to the Taxpayer's assertion that its intention of annexing the property in question was to make it a permanent part of the realty. The actual intent of the parties, "the paramount and controlling consideration," may be found in the language of the lease.

Provisions of the Lease

Under the terms of the lease, the Taxpayer may make no alterations to the premises without the express written consent of the landlord. Furthermore, "All Alterations to the Demised Premises, whether made by the Lessor [the landlord] or the Lessee, [the Taxpayer] and whether at the Lessor's or Lessee's expense, or the joint expense of Lessor and Lessee, shall be and remain the property of the Lessor." [Emphasis added.] 1 The lease also states, "The Lessee shall remove all of the Lessee's property at the expiration or earlier termination of the Lease. In the event Lessee does not remove Lessee's property at the expiration or earlier termination of the Lease, such property shall become the property of Lessor."

In other words, if the property is to be removed at the expiration or earlier termination of the lease, it is presumed that the parties did not intend for the property to become a fixture and, thus, it is not considered to be part of the real estate. With respect to alterations, it is clear that the parties' intent is that they become a part of the realty because the alterations remain the property of the lessor.

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.
    • [I]n cases of doubt it 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." [Emphasis added.]

In the present case, the intention to make the Taxpayer's restaurant equipment a permanent part of the realty does not "affirmatively and plainly appear." That equipment which constitutes "alterations" approved by the landlord can be considered a permanent part of the realty and assessed accordingly. All other tangible property that is considered to be the property of the Taxpayer must be assessed as BTPP. This determination must be made by the local commissioner of the revenue.

MACRS

The Taxpayer protests the County's reliance on MACRS depreciation rules in distinguishing real property and real property. In Public Document (P.D.) 04-09 (03/26/2004), the Tax Commissioner addressed a situation in which a locality had changed its classification of certain real property to tangible personal property solely on the basis of the taxpayer's use of MACRS on its federal tax return. The Tax Commissioner found that relying solely on MACRS for classification purposes is unacceptable. Nothing in either the Constitution of Virginia or in the Code of Virginia links the treatment of assets for purposes of the federal income tax to local tax treatment of tangible personal property. The Tax Commissioner did not rule out the use of MACRS as a factor in determining the appropriate classification of property for local taxation, however.

In this case, the County stated that after a physical review of the assets in question, it "also took into consideration how they were depreciated." This is far different from using MACRS as the sole point of reference in determining the appropriate classification of assets. The consideration of federal depreciation schedules as a factor in determining property classification is acceptable.

Reclassification of Property

The Taxpayer objects to the County's reclassification of certain property from realty to tangible personal property following a site visit. Virginia Code §§ 58.1-3981 B and 58.1-3981 C provide the commissioner of the revenue with the opportunity to correct erroneous assessments. In this case, the commissioner of the revenue exercised the authority to change the original classification of certain property after physically examining the restaurant and upon further review of the facts.

DETERMINATION


The County concluded that the installation of the property in question did not constitute an alteration that the landlord and the Taxpayer intended to become permanently affixed to the realty. In reaching its determination, the County conducted due diligence in its examination of the premises and the assets at issue. Upon review of the spreadsheets reflecting the County's classification of assets as realty or as business tangible personal property, I find no reason to disagree with the County's findings. Accordingly, the County's decision stands and the Taxpayer is not entitled to a refund.

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

                • Janie E. Bowen
                    • Tax Commissioner



AR/57156H
1Alterations, in this context, are presumed to constitute structural changes or permanent fixtures that become part of the realty.

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46