Document Number
12-212
Tax Type
Machinery Tools Tax
Description
Decline in demand for building product/ Underutilization of the Taxpayer's machinery.
Topic
Accounting Periods and Methods
Local Taxes Discussion
Records/Returns/Payments
Tangible Personal Property
Date Issued
12-13-2012

December 13, 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 an assessment of machinery and tools tax issued to the Taxpayer by the ***** (the "City") for the 2010 and 2011 tax years.

The machinery and tools tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue determinations on taxpayer appeals of machinery and tools tax assessments. On appeal, a machinery and tools 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 and public document 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 manufactures a building product in a manufacturing facility located in the City. In 2007, it expanded its facility and began to operate new machinery. At the time the new machinery went into operation, the housing and construction markets went into a recession, resulting in a sharp decline in demand for the Taxpayer's building product. As such, there was a substantial underutilization of the Taxpayer's machinery.

For purposes of the machinery and tools tax, the City assesses the value of machinery and tools based on the depreciated cost of the property. In July 2011, the Taxpayer requested that the City reduce the assessed value of the machinery and tools using a method that took into account the economic obsolescence of the subject equipment. The Taxpayer's proposed valuation methodology was made pursuant to an economic obsolescence analysis prepared by the Taxpayer's representative. In its final local determination, the City denied the Taxpayer's request for the revaluation because it determined that the statutory methodology of valuation was proper.

The Taxpayer appeals the City's final local determination, asserting that the City's method of valuation does not reflect the actual fair market value of the machinery and tools.

ANALYSIS


Taxation of Machinery and Tools

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. Article X, §§ 1 and 2 of the Constitution of Virginia provide that all property, unless specifically exempted within the provisions of the Constitution, shall be taxed at a uniform rate among classes, and that "all assessments of real estate and tangible personal property shall be at their fair market value to be ascertained as prescribed by general law." This provision of the Constitution contains the presumption that the General Assembly's prescribed valuation method will both standardize valuation practices across all the local governments in the Commonwealth and result in something approximating fair market value. Virginia Code § 58.1-3103 specifically charges local commissioners with the responsibility of assessing property at fair market value.
    • As part of his duties each commissioner of the revenue shall ascertain and assess, at fair market value, all subjects of taxation in his county or city on the first day of January in each year, except as otherwise provided by law. [Emphasis added.]

Fair market value is generally defined as the price a property will bring when offered by one who desires, but is under no obligation, to sell it, and the buyer has no immediate necessity to purchase it. See Tuckahoe Women's Club v. County of Richmond, 119 Va. 734, 101 S.E.2d 571 (1958). If the valuation methodology employed by a locality results in an assessment well above fair market value, the locality may use another methodology prescribed in Va. Code § 58.1-3507 B. See Public Document (P. D.) 05-129 (8/3/2005).

In attempting to achieve property valuations that reasonably approximate fair market value, the General Assembly has statutorily prescribed different methodologies for use in the valuation of different classifications of property. For purposes of business tangible personal property taxation, the machinery and tools of manufacturers are separate from the general classification of tangible personal property. The method of valuation to ascertain the fair market value of machinery and tools used in a manufacturing business is set forth in Va. Code § 58.1-3507 B.
    • Machinery and tools segregated for local taxation . . . shall be valued by means of depreciated cost or a percentage or percentages of original total capitalized cost excluding capitalized interest. In valuing machinery and tools, the commissioner of the revenue shall, upon written request of the taxpayer, consider any bona fide, independent appraisal presented by the taxpayer [Emphasis added.]

The City asserts that it uniformly applies the depreciated cost methodology in its valuation of machinery and tools used in manufacturing. The Taxpayer contends that the preference for uniformity in assessing the value of tangible personal property cannot eclipse other evidence of fair market value. The Virginia Supreme Court has consistently held that the constitutional requirements of uniformity and fair market value should be construed together, with the preference given to uniformity. This does not diminish the importance of fair market value, however. See Skyline Swannanoa v. Nelson County, 186 Va. 878 (1947); quoted with approval, R. Cross Inc. v. City of Newport News, 217 Va. 202 (1976).

The Taxpayer argues that the fair market value of its machinery and tools is less that the fair market value as determined by the City's methodology due to the equipment's economic obsolescence. It contends that this economic obsolescence is the result of a reduction in demand for building materials. The Taxpayer used the utilization method, which measures the decrease in demand as compared to production capacity to quantify the loss in market value of its machinery and tools.

Economic obsolescence, also referred to as external obsolescence, is the loss in the value of property that results from external influences. Various external factors affect potential economic returns, thus having a direct impact on the market value of tangible property. A number of methods, including utilization, are used to quantify economic obsolescence.

In valuing machinery and tools, Va. Code § 58.1-3507 B requires localities to consider a bona fide independent appraisal pursuant to a taxpayer's written request. While economic obsolescence could be a component of an appraisal, submission of a document using one method of measuring economic obsolescence does not constitute a bona fide independent appraisal.

DETERMINATION


Virginia Code § 58.1-3507 B gives the City the option to choose among three specific methods of valuation of tangible property to best meet the constitutional requirement of fair market value. The valuation method employed by the City in this case is consistent with the statutory requirements. The Taxpayer has not provided sufficient evidence to show that the City's valuation method is invalid.

Accordingly, I am remanding this matter to the City with the instructions that it consider any bona fide independent appraisal that the Taxpayer may be able to provide to demonstrate the fair market value of its machinery and tools. The appraisal required in accordance with this determination should be provided to the City within 30 days of the date of this determination. The City will adjust its assessments based on its review of the appraisal. If the Taxpayer fails to provide the appraisal, the City's valuation of the Taxpayer's machinery and tools will be considered to be correct.

If you have any questions regarding this determination, you may call ***** of the Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,



                • Craig M. Burns
                  Tax Commissioner



AR/1-5143320450.B


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46