Tax Type
Machinery Tools Tax
Description
Determining the fair market value of machinery and tools; appraisals
Topic
Accounting Periods and Methods
Local Taxes Discussion
Tangible Personal Property
Date Issued
03-16-2012
March 16, 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 tax year.
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 documents cited are available online in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov.
FACTS
In May 2010, the Taxpayer purchased the facility of a manufacturer during a bankruptcy proceeding. For purposes of its 2010 machinery and tools tax return, the Taxpayer valued its machinery and tools as a percentage of the purchase price. For purposes of the machinery and tools tax, the City assesses the value of machinery and tools using a valuation method based on a percentage of original cost for the property. Using this methodology, the City determined the assessed value of the Taxpayer's machinery and tools was higher than the Taxpayer's valuation. The City revised the assessment using its statutory method of valuation. The Taxpayer appealed to the City, which upheld the assessment in its final determination.
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. It also contends that the City based its assessment on improvements made to the equipment by the Taxpayer made subsequent to the purchase.
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. 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 (8/03/2005).
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. [Emphasis added.]
The City asserts that it uniformly applies the percentage of the original cost methodology in its valuation of machinery and tools used in manufacturing. The Taxpayer contends that the property's actual sales price reflects the actual fair market value because of the diminution of the industry in which the property is used and because the only other potential buyers of the facility were scrap dealers. The City asserts that the price paid for the facility did not reflect fair market value because the sale was a distress sale.
The original cost is the cost of the tangible property paid by the owner who first purchased the property, not the costs paid by any subsequent purchasers. See 2009 Op. Va. Att'y Gen (8-109). Historically, the Virginia Supreme Court has recognized that property is often assessed at less than fair market value and has not objected to such assessments so long as they are applied uniformly. See Norfolk and Western Railway Company v. Commonwealth of Virginia, et al., 211 Va. 692, 179 S.E.2d 623 (1971). While it would appear that fair market value could not exceed the sales price, the seller in this case was obligated to sell the manufacturing facility along with its machinery and tools pursuant to the bankruptcy.
The Taxpayer avers 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 Virginia Supreme Court has also held that fair market value can exceed the sales price of property sold in bankruptcy. See City of Martinsville v. Commonwealth Boulevard Associates, LLC, 268 Va. 697, 604 S.E.2d 69 (2004).
The Taxpayer also asserts that the Virginia Supreme Court decision in Board of Supervisors v. Telecommunications Industries, Inc., 246 Va. 472, 436 S.E.2d 442 (1993) provides that a locality must consider both the physical condition and "technological obsolescence" when determining fair market value for purposes of the machinery and tools tax. This case, however, addressed the valuation of business tangible personal property, not machinery and tools. Virginia Code § 58.1-3503 authorizes localities to factor in technological obsolescence in their valuation of tangible personal property of businesses that are not manufacturers. There is nothing in the statute that permits a taxpayer who is a manufacturer to factor in the condition "technological obsolescence" of equipment when valuing machinery and tools. See P.D. 04-16 (5/14/2004) and P.D. 09-70 (5/15/2009).
In connection with the Department's review of this appeal, the Taxpayer provided an appraisal, which valued the facility that included the machinery and tools as of July 2010. It also provided a list of improvements made to machinery and tools after the acquisition.
Virginia Code § 58.1-3507 B requires a commissioner of revenue to consider any bona fide, independent appraisal presented by the taxpayer when valuing machinery and tools when requested in writing by the taxpayer. The Taxpayer has presented an appraisal to the Department after the City's final determination was made. This appraisal, which was issued after the facility and machinery and tools were purchased by the Taxpayer, represents a value greater than that asserted by the Taxpayer and less than the amount which was the basis of the City's assessment. The Taxpayer asserts that the fair market value determined by the appraisal reflects the additional capitalization costs accrued after the purchase of the facility in order to make machinery and tools operational.
In the City, machinery and tools must be valued for purposes of the machinery and tools tax as of January 1 of the tax year at issue. As such, the appraisal and list of improvements may have limited value in determining fair market value for the 2010 tax year because the improvements occurred after January 1, and the appraisal was issued in July 2010.
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. It is my determination that the valuation method employed by the City in this case is consistent with the statutory requirements. In addition, the City may consider any bona fide, independent appraisal presented by the Taxpayer when valuing machinery and tools when requested in writing by the Taxpayer. Therefore, I am remanding this matter to the City with the instructions that the City consider the Taxpayer's appraisal in accordance with the above in determining the fair market value of the Taxpayer's machinery and tools for the 2010 tax year.
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/1-4847460950.B
Rulings of the Tax Commissioner