November 25, 2014
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 you on behalf of ***** (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 "City") for the 2011 through 2013 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 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 owned and operated an indoor athletics facility in the City during the tax years at issue. The facility housed fields, courts, party rooms, a playground and a concessions area. Granite countertops were installed at the concessions and condiment counters. In addition, glass walls were installed around the fields, volleyball area and playground.
Under audit, the City determined that the countertops, glass walls and certain other items of property were tangible personal property subject to the BTPP tax. Accordingly, the City issued assessments for additional BTPP taxes due for the 2011 through 2013 tax years. The Taxpayer appealed to the City. In its final determination, the City removed some of the items from the assessments but concluded that the countertops and glass walls should remain classified as tangible personal property. The Taxpayer appeals to the Tax Commissioner, contending the countertops and glass walls were fixtures and should have been considered real property not subject to the BTPP tax.
ANALYSIS
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." Id.
Depreciation Schedule
In its final determination, the City did not explain the basis for its conclusion that the countertops and glass walls were properly classified as tangible personal property. A review of the City's audit documentation, however, indicates that the Taxpayer's depreciation schedules were used as a source in preparing the audit. While the sole reliance on federal depreciation schedules for the classification of property is not allowable, the consideration of federal depreciation schedules is a factor in determining whether a property classification is acceptable. See Public Document (P.D.) 06-142 (12/8/2006).
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." Id. 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.
The documentation provided shows that the countertop at the condiment counter was attached to the wall and underlying cabinets, which were themselves attached to the floor. Similarly, the countertop at the concessions stand was attached to the stand, which was also attached to the floor. In addition, the glass walls were fixed in an aluminum framing, the bases of which were bolted to the concrete floor.
Adaptation
If attached property is essential to the purposes for which the building (or realty) 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.
In this case, the Taxpayer operated an indoor athletic facility. The countertops provided the concession area with surfaces that were needed to prepare and serve food. In addition, the glass walls were necessary to safely contain activities to their respective areas inside the facility but still allow the activities to be viewed by nonparticipants such as parents or facility staff. As such, the countertops and glass walls were essential to the purposes of those parts of the facility where they were installed.
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.
Under this test, an owner of real property usually places permanent improvements upon such property in order to enhance its usefulness and market value. Thus, when an owner of realty annexes chattels to such realty, a doubt as to his intention to annex them permanently will in most cases be resolved in favor of such intent. See Danville Holding at 232 and 233.
In this case, the Taxpayer owned and operated the facility. Based on their nature and the, manner of their installation, it does not appear that either the countertops or glass walls could have been moved or removed easily. In the concessions area, counter space was required in order to ensure the proper functioning of the concessions operation. Barriers were also necessary to partition and safely contain all of the various activities happening in the facility to their respective areas. In addition, an officer of the Taxpayer stated that these items were designed to be permanently attached to the realty. This statement is supported by the general contractor who oversaw the installation of the items. Taken together, these factors indicate that the Taxpayer intended to make the countertops and glass walls permanent additions to the realty.
DETERMINATION
In this case, the countertops and glass walls were annexed to the realty and adapted to the use of those parts of the realty where they were installed. In addition, the evidence indicates that the Taxpayer intended to make the countertops and glass walls permanent additions to the realty. I find, therefore, that the countertops and glass walls were fixtures to realty, not tangible personal property subject to the BTPP tax. The City is hereby directed to reclassify the property and make the appropriate adjustments to the assessment.
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5719788612.M