Tax Type
Machinery Tools Tax
Description
Taxpayer may have sufficient documentation to demonstrate his claim and satisfy the statute
Topic
Local Taxes Discussion
Records/Returns/Payments
Statute of Limitations
Date Issued
07-03-2013
July 3, 2013
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 your client, ***** (the "Taxpayer") with the Department of Taxation. You appeal assessments of Machinery and Tools (M&T) tax issued to the Taxpayer by the ***** (the "City") for the 2008 through 2010 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, 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 and public documents 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, a manufacturing business, operated several facilities in the City. The City issued an assessment for the 2011 tax year, and also issued bills for delinquent assessments for previous tax years. In February 2012, the Taxpayer filed amended M&T Tax returns for the 2008 through 2011 tax years reporting a reduced assessment for obsolete and discarded equipment. The City disallowed the amendments for the 2008 through 2010 tax years, but allowed adjustments for disposals and idle equipment on the 2011 return.
The Taxpayer appealed the City's assessments for the 2008 through 2010 tax years. In its final determination, the City determined that the amended return for the 2008 tax year was filed outside the statute of limitations. In addition, the City found that the Taxpayer had failed to provide adequate documentation to show that the machinery and tools at issue were idle or disposed of prior to 2011.
The Taxpayer has appealed the City's final determination to the Tax Commissioner, contending that the documentation provided should be considered sufficient to justify its amended return.
ANALYSIS
Jurisdiction
The County held that the Taxpayer had failed to file its 2008 amended M&T tax return within the period of limitations. Under Va. Code § 58.1-3980 any person aggrieved by an assessment of local taxes:
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- may, within three years from the last day of the tax year for which such assessment is made, or within one year from the date of the assessment, whichever is later, apply to the commissioner of the revenue or such other official who made the assessment for a correction thereof. [Emphasis added.]
The term "tax year" generally applies to the calendar year for which local taxes are assessed under Virginia law. See Public Document (P.D.) 08-136 (7/30/2008). The City issued an assessment for the 2008 tax year in May 2008. Three years from the last day of the 2008 tax year was December 31, 2011. The Taxpayer filed its amended return for the 2008 tax year with the City on February 15, 2012, more than three years from the last day of the tax year for which the assessment was made. The amended return for the 2008 tax year was not filed within the limitations period in Va. Code § 58.1-3980. Therefore, the City's determination for the 2008 tax year is upheld.
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. 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 tools and computer tools used in corporate headquarters)." See Va. Code § 58.1-1101 A2.
The machinery and tools, motor vehicles and delivery tools 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.]
Property Transfers/Disposals
In late 2007, the Taxpayer closed its foundry operations in the City. The Taxpayer claims that machinery and tools that could not be used in its other divisions, with the exception of certain gate patterns, were sold or otherwise disposed of when the building was sold in October 2007. The gate patterns were sold in 2009. In addition, many older and obsolete machines from other operations were stored in two warehouses. When the owner decided to sell the buildings, the Taxpayer began disposing of the machinery. Both of the warehouses were sold in 2010.
The Taxpayer asserts that the sales of the buildings clearly show that it no longer owned the machinery. Further, it infers the machinery in the warehouses had to have been removed before the sales of the buildings in order to clean the buildings for the sale.
The City, however, determined that this information was not sufficient to show when specific items of machinery were, in fact, transferred, scrapped or otherwise disposed. The City relied on the Taxpayer's records, which showed that the machinery continued to be included in the depreciation schedules filed with the federal income tax returns.
The Taxpayer indicates that it amended its federal returns to remove the assets in question from the federal depreciation schedules. Because the equipment was fully depreciated, however, there was no effect on the federal taxable income.
Asset journals and depreciation schedules are useful tools in identifying assets that may be subject to local property taxation. Regardless of whether the property was reported on a federal depreciation schedule or not, the determination as to whether a particular item of property was located on a taxpayer's premises on tax day is a factual matter for the local assessing officer to determine. See P.D. 13-53 (4/29/2013). For property transfers and disposals, documentation may include, but not be limited to shipping invoices, sales receipts, warehouse log books, asset inventory logs, and disposal company receipts provided such receipts specifically identify items hauled away.
In this case, the Taxpayer had several warehouses used to store old machinery. While it claims that the foundry equipment was sold with the building in 2007, it has provided no evidence that such is the case. Given the Taxpayer's history of storing old equipment, it could be argued that some of the foundry machinery and tools made its way to one of the other warehouses. In addition, the Taxpayer has provided no receipt to show when the gate forms were sold or documentation for specific items located in the warehouses.
Idle Equipment
The Taxpayer states that the machinery in the warehouses had become obsolete, worn out or otherwise unusable in its manufacturing business. Likewise, the foundry machines, including the gate patterns, were no longer used in manufacturing after the foundry was closed in 2007. In essence, the Taxpayer argues that this machinery, if not disposed of, was certainly idle during the tax years at issue. 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.
Because notification was not provided until February 2012, the only test that could apply in this case would be the one year test. A taxpayer must meet all three prongs of this 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. See P.D. 11-84 (6/2/2011) and P.D. 12-177 (11/5/2012).
The Taxpayer states that it discontinued its foundry operations in 2007. In order to meet the one year test for the 2009 tax year, the foundry machinery and tools must have ceased operation before January 1, 2008 and could not be operating on January 1, 2009. There also must be no reasonable prospect that the equipment would be returned to use during 2009 or 2010.
Likewise, the Taxpayer asserts that no manufacturing activities were going on at the warehouses and the machinery was stored there because it was no longer used in the manufacturing business. The Taxpayer states that it offered to provide the City a tour of the facility in order to show which machinery was currently operating. The City declined to take a tour, but did adjust the 2011 property tax assessment to reflect the disposals.
DETERMINATION
Virginia Code § 58.1-3109 6 grants local assessing officers the authority to require records and other information necessary to make an accurate assessment of a taxpayer's tangible personal property. In addition, pursuant to Va. Code § 58.1-3983.1 B 3, a local assessing officer may require the submission of additional information or documentation in order to make a proper and equitable determination of an application for correction.
As such, a local taxing officer is within his or her authority to request documentation to support the date and method of disposal. In addition, the determination as to whether machinery is idle is a matter of fact to be determined by the locality. An examination of a facility can indicate if machinery or tools are no longer on the premises, but a taxpayer must provide sufficient documentation to a locality to show when it disposed of machinery or when machinery became idle. See P.D. 10-26 (3/31/2010).
While the City has the final authority to determine what constitutes satisfactory documentation, the facts presented on appeal indicate that the Taxpayer may have sufficient documentation to demonstrate that the gate patterns and other foundry machinery were idle prior to December 31, 2007, and remained idle until such point that they were sold or otherwise disposed. As such, the Taxpayer may be able to satisfy the one year test under Va. Code § 58.1-3507 D.
As such, I am remanding this case back to the City to reconsider whether the gate patterns and some of the other machinery could have been considered to be idle for the 2009 or 2010 tax years. 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 City finds that certain of machinery was idle pursuant to Va. Code § 58.1-3507 D, it should adjust the 2009 and 2010 M&T tax assessments as warranted.
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
AR/1-5338790797.D
Rulings of the Tax Commissioner