Tax Type
Machinery Tools Tax
Description
Property part of the manufacturing process or not.
Topic
Local Taxes Discussion
Property Subject to Tax
Records/Returns/Payments
Tangible Personal Property
Date Issued
04-07-2011
April 7, 2011
Re: Appeal of Final Local Determination
Locality: *****
Taxpayer: *****
Machinery and Tools Tax
Dear *****:
This final state determination is issued upon the application for correction filed by you on behalf of your client, ***** (the "Taxpayer") with the Department of Taxation. You appeal the assessments of Machinery and Tools (M&T) tax issued to the Taxpayer by the ***** (the "City") for the 2006 through 2008 tax years. I apologize for the delay in responding to your appeal.
The M&T tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue determinations on taxpayer appeals of M&T tax assessments. On appeal, the M&T tax assessment is deemed prima facie correct, i.e., the local assessment will stand unless the taxpayer proves 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 in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov.
FACTS
In 2005, the Taxpayer acquired a manufacturing facility in the City. In April 2009, the Taxpayer filed amended returns with the City for the 2006 through 2008 tax years to report equipment that had been shipped to another facility, property that was not a part of the manufacturing process, assets that were written down to zero book value, and disposals.
The City requested additional information, toured the plant, and examined the property at issue. In its final determination, the City agreed to remove assets that were transferred to other locations with proof of shipment and furniture and fixtures that were erroneously included in the asset basis. Because the Taxpayer failed to provide verification of disposals and additional transfers of assets, the City issued a partial refund to the Taxpayer. The City agreed to use the amended M&T asset basis for tax years beginning 2009. The Taxpayer appeals the City's final determination, contending that computers, furniture and fixtures outside of the plant, and vehicles were not machinery and tool items, and should be removed from the M&T tax return.
The Department met with the City and the Taxpayer. On appeal, the only outstanding issue involves the personal property tax schedule used by the Taxpayer as a starting point for determining its machinery and tools subject to tax for the tax years at issue. The Taxpayer argues that the schedule includes property that was not machinery and tools or was not located at the plant during one or more of the tax years at issue.
ANALYSIS
All tangible personal property, unless 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. Included in the category of tangible property that is declared intangible and subject to state taxation only is "[c]apital 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)." See Va. Code § 58.1-1101 A 2.
The machinery and tools, motor vehicles and delivery equipment of a manufacturing business are not defined as intangible personal property. Such property is to be taxed locally as tangible personal property. Virginia has elected to create a separate classification of tangible personal property for machinery and tools used in manufacturing. Virginia Code § 58.1-3507 A provides:
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- Machinery and tools . . . used in a manufacturing . . . business shall be listed and are hereby segregated as a class of tangible personal property separate from all other classes of property and shall be subject to local taxation only.
"Used" in Manufacturing
In American Woodmark, 250 Va. 451, 458, the Virginia Supreme Court (the "Court") stated, "Since 1950, the Tax Commissioner has opined that the phrase 'machinery and tools' contained in Va. Code § 58.1-1101 A 2 and its precursors mean 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:"
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- The Attorney General has consistently opined that 'machinery and tools' used in a particular manufacturing business are the machinery and tools which 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., citing 1985-1986 Att'y. Gen. Ann. Rep. 316 at 317; see also 1987-1988 Att'y. Gen. Ann. Rep. 590. Id.
In The Daily Press, Inc. v. City of Newport News, 265 Va. 304, 576 S. E. 2nd 430 (2003), the Court amplified the principles set forth in American Woodmark:
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- 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. 265 Va. 304, 311.
This language does not imply that each piece of machinery or tool used directly in the manufacturing process must be directly connected to the complete transformation of a material into something substantially different in character. Computer hardware that is used directly, in the manufacturing process and computer software used to drive that hardware are classified as machinery and tools and are subject to the M&T tax. See Public Document (P.D.) 08-85 (6/6/2008).
The Taxpayer believes that only the property classified as M&T on the asset detail should be included in the basis for the assessment, and classifications such as computers, furniture and fixtures outside of the plant and vehicles are nontaxable items. The Taxpayer also avers that many of the items listed on the asset detail were not located within the City's border
The City issued a partial refund for items detailed in the amended return as furniture and fixtures. The City requested evidence of assets transferred to other facilities or erroneously recorded within the City's jurisdiction. The City agrees to remove such items when documentation is provided.
Computers
Under Virginia Code § 58.1-3507, computer hardware that is used directly in the manufacturing process and computer software used to drive that hardware are classified as machinery and tools and are subject to the M&T tax.
Motor Vehicles
Virginia Code § 58.1-3507 C provides that motor vehicles owned by a manufacturer and registered pursuant to § 46.2-600 with the Department of Motor Vehicles shall be taxed as tangible personal property by the locality. All other motor vehicles and delivery equipment owned by a manufacturer shall be included in and taxed as machinery and tools.
Research and Development
Virginia Code § 58.1-3500 states that tangible personal property shall consist of all personal property, not otherwise classified by Va. Code § 58.1-1100 as intangible property or Va. Code § 58.1-3510 as merchant's capital. Business tangible personal property (BTPP) is subject to local taxation under Va. Code § 58.1-3506, and classifications such as research and development are included in this chapter.
CONCLUSION
It is my determination that, the County has adhered to the applicable principles in its assessment of the Taxpayer's machinery and tools. Issues regarding the classification of properly are a matter of fact to be determined by the locality. An examination of a facility by a locality can indicate if machinery or tools are used in the manufacturing process or no longer on the premises, but the taxpayer must provide sufficient documentation to a locality to show when it disposed of the property in question. I am returning this matter to the City with instructions to review the Taxpayer's manufacturing process.
Under the provisions of Va. Code § 58.1-3994, a local commissioner of the revenue is authorized to accept offers in compromise from taxpayers who have failed to comply with the provisions of the tax law. This authority may be used to settle past liabilities of taxpayers that voluntarily disclose tax issues. All such offers must be submitted in writing and are accepted solely at the discretion of the commissioner of the revenue or other local assessing official responsible for the assessment of any local tax appealable under the provisions of Va. Code §§ 58.1-3703.1 and 58.1-3983.1.
lf you have any questions regarding this determination, you may call ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Craig M. Burns
Tax Commissioner
- Craig M. Burns
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AR/1-4455409868.D
Rulings of the Tax Commissioner