Tax Type
Machinery Tools Tax
Description
Taxpayer demonstrated equipment in question was idle prior to tax period in question.
Topic
Local Taxes Discussion
Property Subject to Tax
Records/Returns/Payments
Date Issued
11-05-2012
November 5, 2012
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Machinery and Tools 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 assessments of Machinery and Tools (M&T) tax issued to the Taxpayer by the ***** (the "County") for the 2011 tax year.
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, an M&T 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 cited are available on-line in the Laws, Rules and Decisions section of the Department's web site, located at www.tax.virginia.gov.
FACTS
The Taxpayer operated a manufacturing plant in the County. By letter dated March 23, 2010, the Taxpayer notified the County that the manufacturing plant ceased production as of December 31, 2009. The Taxpayer, however, kept some of the machinery in production through January 7, 2010, in order to complete an order for a customer.
The Taxpayer filed an M&T tax return with the County for the 2011 tax year that excluded all equipment that was not in operation as of December 31, 2009. The County audited the Taxpayer for the 2011 tax year and issued an assessment on the basis that all of the Taxpayer's machinery and tools were subject to the M&T tax.
The Taxpayer filed an appeal with the County arguing that all of its equipment was idled for the 2011 tax year except for the machinery operating in January 2010. The County issued a final determination concluding that all of the Taxpayer's equipment was subject to the M&T tax for the 2011 tax year because it failed to give proper notice and failed to prove that its machinery ceased operation as of December 31, 2009. The Taxpayer has appealed the County's final determination to the Tax Commissioner, contending the equipment at issue was continuously not in use for more than a year and it had given proper notice to the County.
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 established 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, except idle 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. [Emphasis Added.]
The Taxpayer contends that all of its equipment, except the machinery operating in January 2010, qualified as idle machinery for the 2011 tax year because it was discontinued in use for at least one year prior to tax day. It has provided an affidavit from a former employee confirming that the machinery ceased operation as December 31, 2009. It has also provided newspaper articles detailing the closing of the facility.
The County concluded that all of the Taxpayer's machinery was subject to the M&T tax. It argues that the Taxpayer's assertions and affidavit are insufficient to demonstrate that the machinery was idled by the end of 2009, and its letter reporting the idled machinery was not proper written notice.
Virginia Code § 58.1-3507 D provides two tests for determining whether machinery and tools may be classified as idle. Under the statute, machinery and tools will be considered idle if:
1) The machinery and tools have been discontinued in use continuously for at least one year, prior to any tax day, such machinery and tools are not in use on the tax day, and no reasonable prospect exists that the machinery and tools will be returned to use during the tax year; or
2) On or after January 1, 2007, a taxpayer provides a written statement to the locality, on or before April 1, identifying the machinery and tools that a taxpayer intends to remove from service no later than the next tax day, the machinery and tools are not in use on the tax day, and no reasonable prospect exists that the machinery and tools will be returned to use during the next tax year.
Under the one year test, a taxpayer must meet all three prongs of the test in order for the subject machinery and tools to be considered idle. In the first prong, a taxpayer must be able to show that the machinery and tools were not in use for at least one year prior to any tax day. Pursuant to Va. Code § 58.1-3515, January 1 is tax day for M&T tax. In order to meet the second prong, machinery and tools cannot be in use on January 1 of the tax year for which a taxpayer seeks to classify such machinery and tools as idle. The third prong requires a taxpayer to show that there is no reasonable prospect that the machinery and tools would start up during the tax year. Generally, businesses are able to anticipate and prepare for operational needs and, therefore, would be able to demonstrate to a locality whether there would not be a reasonable prospect that machinery and tools would be used during the tax year.
In this case, the Taxpayer argues that it discontinued its operations by the end of December 31, 2009. In order to meet the one year test for the 2011 tax year, the Taxpayer's equipment must have ceased operation before January 1, 2010 and could not be operating on January 1, 2011. There also must be no reasonable prospect that the equipment would be returned to use during the 2011 tax year.
Like the one year test, the notification test includes three prongs. The first prong requires a taxpayer to notify a locality in writing of its intent to classify property as idle machinery and tools by April 1 of the tax year immediately preceding the tax year for which the taxpayer seeks the change in classification. Such machinery and tools must be idle on tax day in order to meet the second prong. Under the third prong, a taxpayer is required to show that there is no reasonable prospect that the machinery and tools would start up during the next tax year.
In order to meet the standards of the notification test, the Taxpayer would have had to notify the County by April 1, 2010 for the 2011 tax year. In this case, the Taxpayer provided notice by letter dated March 23, 2010 that all of its machinery, including the machinery that was in operation as of January 7, 2010 was idle. The County contends that the notice is invalid because it includes equipment that was operating in January 2010. However, because the Taxpayer paid the M&T tax on the equipment operating in January 2010, the mere listing of this equipment in the notice does not automatically render the notice invalid with regard to the Taxpayer's other equipment.
According to the Guidelines for the Local Taxation of Idle Machinery and Tools, issued as Public Document (P.D.) 08-1 (01/1/2008), notification must include the following information:
- Taxpayer's legal name and any trade name;
- Taxpayer's contact information, including address and phone number;
- Taxpayer's federal employer identification number;
- Specific identification of the machinery and tools that will be withdrawn from service before tax day of the next tax year;
- A statement that the machinery and tools will be withdrawn from service prior to tax day of the next tax year and that there is no reasonable prospect of them being returned to use during the next tax year; and
- Location of the idle machinery and tools.
Under the provisions of Va. 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 a person's tangible personal property. It is incumbent upon the Taxpayer to prove to the satisfaction of the local taxing authority that it properly reported the value of its property on its BTPP returns. See Va. Code § 58.1-3983.1 B 4.
DETERMINATION
In this case, the Taxpayer produced an affidavit and newspaper articles that show that the operations ceased as of December 31, 2009. While the County has the final authority to determine what constitutes satisfactory documentation, it is the Department's opinion that the Taxpayer has demonstrated that the equipment in question became idle prior to December 31, 2009, remained idle on January 1, 2011 and was not returned to use during the 2011 tax year.
As such, I am remanding this case back to the County in order to reconsider its determination. If it concludes that additional documentation is required, it must identify the specific documentation that is required and permit the Taxpayer adequate time to provide such documentation. If the County agrees with the Department, it should abate the M&T tax assessment for the 2011 tax year.
If you have any questions about this determination, you may contact ***** 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/1-5167367089.B
Rulings of the Tax Commissioner