Tax Type
BTPP Tax
Description
Real vs. Tangible Property
Topic
Tangible Personal Property
Date Issued
04-04-2013
April 4, 2013
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business Tangible Personal Property Tax
Dear *****:
This final state determination is issued upon the application for correction filed by ***** (the "Taxpayer") with the Department of Taxation. The Taxpayer appeals assessments of business tangible personal property (BTPP) taxes issued to the Taxpayer by the ***** (the "County") for the 2010 and 2011 tax years.
The BTPP tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 D 1 authorizes the Department to issue determinations on taxpayer appeals of BTPP tax assessments. On appeal, a local 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 has property at four data center sites within the County that are leased from unrelated third parties. The Taxpayer filed amended returns for the 2010 and 2011 tax years removing certain assets from these returns on the basis that they were either real property or application software.
The County accepted some of the Taxpayer's adjustments, but stated it was unable to determine whether some assets were either real property or software because the Taxpayer had not provided requested documentation. As such, it issued a final local determination granting the Taxpayer an opportunity to file amended returns that reflected the County's adjustments.
The Taxpayer appeals the County's final determination to the Tax Commissioner, asserting that certain generators, transfer switches, and power whips are real property. It also contends that certain other assets it removed from the amended returns are application software that is exempt from the BTPP tax.
ANALYSIS
Real vs. Tangible Property
Real property and all tangible personal property except the rolling stock of public service corporations and that which is 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.
The method of taxation of real property is provided under Va. Code § 58.1-3200 et seq., whereas the taxation of tangible personal property is provided under Va. Code § 58.1-3500 et seq. On those occasions when an item of tangible personal property is determined to be a fixture, it is treated as real property for purposes of local taxation. Fixtures are presumed to be annexed to the realty in some form.
In Danville Holding Corp. v. Clement, 178 Va. 223, 232, 16 S.E.2d 345, 349 (1941), the Virginia Supreme Court (the "Court") set forth three general rules to be used in determining whether an article of tangible personal property is a fixture, and thus considered a part of the real estate for purposes of taxation, or remains personal property subject to taxation as BTPP. The three tests are: (1) the annexation of the chattel (property) to the realty, actual or constructive; (2) its adaptation to the use or purpose to which that part of the realty to which it is connected is appropriated; and (3) the intention of the parties, i.e., the intention of the owner of the chattel to make it a permanent addition to the freehold.
In order for the rules to apply, it is presumed that the property is annexed to the realty in some form. In its decision, the Court noted that the "intention of the party making the annexation is the paramount and controlling consideration."
Annexation
Annexation of chattel must be actual or constructive. In Danville Holding, the Court concluded "the method or extent of the annexation carries little weight, except insofar as they relate to the nature of the article, the use to which it is applied and other attending circumstances as indicating the intention of the party making the annexation." In other words, so long as chattel is attached to a building to carry out the purpose for which such building was erected and to increase its value for occupation or use, such chattel may become part of the realty even if it may be removed without injury to itself or the building. Although no the documentation has been provided, equipment such as generators, transfer switches, and power whips are generally attached to the realty.
Adaptation
If attached property is essential to the purposes for which the building is used or occupied, it would generally be considered a fixture even if its annexation to such building is such that it may be severed without injury to either the chattel or the building.
The Taxpayer argues that the leased buildings' highest and best use is as data centers and that the equipment at issue is an integral part of these buildings. In this case, the Taxpayer is leasing facilities for its data centers. No information has been provided concerning the zoning for the facilities at issue, the purpose for which the facilities were constructed or what type of businesses were engaged in by previous tenants. For marketability purposes, it would appear desirable for a commercial landlord to maintain facilities that could be easily converted to the needs of a particular customer. In this case, the lease information provided indicates the Taxpayer was permitted to make some modifications to the buildings so they would be suitable for data centers.
In addition, the Taxpayer contends that the landlord would retain the equipment for future tenants because the buildings would continue to be used as data centers. The lease information provided, however, lists the generators, transfer switches, and power whips among property that remains under the ownership of the Taxpayer that could be removed at the conclusion of the lease term. Further, because business needs and practices are constantly evolving, it is impossible to determine in what business future tenants of the facilities would engage.
Further, the Taxpayer states that the County is taxing the property at issue both as BTPP and real property. The County counters that the Taxpayer is not being double taxed because it does not own any real estate in its jurisdiction. Again, the lease information would appear to indicate that the property at issue remains in the possession of the Taxpayer and would not be included in the landlords' valuation for real estate tax purposes. No documentation has been provided that would either confirm or contradict double taxation in this case.
Intention
The Court has emphasized the intention of the party making the annexation is the chief test to be considered in determining whether the chattel has been converted into a fixture. Although the intention does not need to be expressed in words, it should be able to be inferred from the nature of the property annexed, the purpose for which it was annexed, the relationship of the party making the annexation, and the structure and mode of annexation.
Regardless of the stated intention of an owner, a taxing authority must also consider how the owner is using the property in its business in order to determine whether such property is operating tangible property or realty. See Public Document (P.D.) 11-117 (6/22/2011). Property would generally be classified as real property if its purpose supports the universal functions of a building or structure. If the purpose of property is specific to the nature of the operations of a business, such equipment could be tangible personal property, especially when coupled with the owner's stated purpose for the equipment or operations.
The Taxpayer argues that generators, transfer switches and power whips are part of the real property it leases. An examination of the lease for the data center facilities, however, indicates the back-up generators, modular digital center equipment, electrical transformers, and electrical switchgear are the Taxpayer's tangible personal property subject to removal from the datacenter by the Taxpayer at the end of the lease term. Equipment that is removable at the end of a lease term is generally considered to be tangible personal property, not realty.
Software
Article X, § 4 of the Virginia Constitution provides that all tangible personal property shall be segregated for local taxation in such a manner as the General Assembly provides by law. Virginia Code § 58.1-1101 A 8 classifies certain property that is tangible in fact as intangible and segregates that property for state taxation only. Intangible property consists of, in part:
-
- Computer application software . . . defined as computer instructions, in any form, which are designed to be read by a computer and to enable to perform specific operations with data or information stored by the computer . . .
- Computer application software . . . defined as computer instructions, in any form, which are designed to be read by a computer and to enable to perform specific operations with data or information stored by the computer . . .
The classification of software as intangible property is limited to "application software." Application software is computer software designed to do specific jobs such as bookkeeping, billing and statistical analysis. See 1983 Op. Att'y Gen. 389. Unlike application software, systems software or basic operational software consists of computer instructions in any form that control the hardware and allow it to compile, assemble, interpret and process application software. Ibid.
The Taxpayer contends that certain assets deemed to be personal property by the County were in fact application software and should be removed from its list of tangible personal property subject to tax. According to the County, however, almost all property that the Taxpayer claimed to be software was actually tangible assets (i.e., application switches).
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. The Taxpayer has provided no documentation to show the disputed assets were software applications.
DETERMINATION
After a careful review of the information presented on appeal, I find the back-up generators, modular digital center equipment, electrical transformers and electrical switchgear were properly classified as tangible personal property for the tax years at issue and subject to BTPP tax.
With regard to the application software, the Taxpayer has not provided sufficient evidence to show that the application switches were not tangible or even software. Accordingly, I find no reason to overturn or adjust the County's conclusion that the application switches were tangible personal property.
Based on this determination, the County's final determination is upheld. In its final determination, the County instructed the Taxpayer to file amended returns for the 2010 and 2011 tax years in accordance with the County's findings. The amended returns should be filed within 30 days of this letter. The County will process the returns in accordance with its determination, make any necessary adjustments to its assessments, and issue the appropriate refunds with applicable interest. If the amended returns are not filed within the time allowed, the County's assessments of BTPP for the 2010 and 2011 tax years will be deemed correct.
If you have any questions regarding this response, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
-
-
-
-
-
-
-
- Sincerely,
-
-
-
-
-
-
Craig M. Burns
Tax Commissioner
AR/1-5215749700.B
Rulings of the Tax Commissioner