Document Number
14-68
Tax Type
BTPP Tax
Description
Provider of cable television and broadband internet services
Topic
Local Taxes Discussion
Records/Returns/Payments
Reports
Tangible Personal Property
Taxable Income
Date Issued
05-21-2014

May 21, 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. You request a refund of Business Tangible Personal Property (BTPP) tax paid to the ***** (the "City") for certain property owned by the Taxpayer for the 2008 tax year.

The BTPP tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 D authorizes the Department to issue determinations on taxpayer appeals of BTPP tax assessments. On appeal, a BTPP 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, public documents, and tax bulletins cited are available on-line at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department's website.

FACTS


The Taxpayer is a provider of cable television and broadband internet services. Under audit, the City determined that (1) the Taxpayer's headend equipment, optical electronics, converters, and modems were machines subject to BTPP tax; (2) capitalized labor and overhead expenses associated with certain electronics equipment were also taxable because electronics were machines; and (3) the expenses of preparing utility poles for the installation of aerial cables were taxable because the aerial cables were "trunk and feeder" cables subject to BTPP tax. The Taxpayer filed an appeal with the City, arguing that the property in question was intangible property under Va. Code § 58.1­-1101 A 2a and not taxable by a locality. The City upheld the assessment, concluding in its final determination that all of the property was taxable tangible personal property. The Taxpayer paid the assessment and filed an appeal with the Tax Commissioner, contending that all of the property in question is intangible property not subject to local taxation.


ANALYSIS


Converters

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 2a classifies certain property that is tangible in fact as intangible and segregates that property for state taxation only. Intangible property consists of, in part:
    • Personal property, tangible in fact, used in cable television businesses. Machines and tools, motor vehicles, delivery equipment, trunk and feeder cables, studio equipment, antennae and office furniture and equipment of such businesses shall not be defined as intangible personal property for purposes of this chapter and shall be taxed locally as tangible personal property according to the applicable provisions of law relative to such property.

The Taxpayer cites Arlington Cable Partners v. County of Arlington, Virginia, Law No. 26719 (3/20/1987), in which the Circuit Court of the County of Arlington held that converters are not subject to the BTPP tax. The County cites the decision in Comcast of Chesterfield County, Inc. v. Board of Supervisors for Chesterfield County, Law No. CL07-1003 (1/11/2008) (Comcast), which held that converters are machines and, therefore, would be subject to BTPP tax by a locality. As a result, Virginia courts are split on the issue whether cable converters are subject to local property taxation.

The Taxpayer contends that the legislative history of Va. Code § 58.1-1101 A establishes that converters are properly classified as intangible property. The County counters that there is no need to address the legislative history of Va. Code § 58.1-1101 A because converters fit within the plain meaning of machine as defined in the dictionary.

A review of the legislative history does show whether converters are subject to property taxation. In 1983, the General Assembly added cable television companies to the list of businesses whose property was tangible in fact, but deemed to be intangible and set apart for state taxation. Virginia Code § 58-405 2 (the predecessor to Va. Code § 58.1-1101) stated the following was defined as intangible property:
    • Personal property, tangible in fact, used in manufacturing, mining, radio or television broadcasting, cable television, dairy, dry cleaning or laundry businesses, except machinery and tools, motor vehicles and delivery equipment of such businesses and the trunk and feeder cables, studio equipment, tuners, converters, antennae and office furniture and equipment of cable businesses.

In its next session, the General Assembly again amended Va. Code § 58.2-405 2 (which was also recodified as Va. Code § 58.1-1101). In Chapter 692, 1984 Acts of Assembly, Va. Code § 58-405 was amended to provide a separate subsection for cable television businesses [Va. Code § 58-405 2(a)] as follows:
    • Personal property, tangible in fact, used in cable television businesses, except machines and tools, motor vehicles and delivery equipment of such businesses, trunk and feeder cables, studio equipment, antennae and office furniture and equipment of such businesses.

The reference to tuners and converters was removed from the list of property subject to local taxation. The County argues that the term "machines" in the statute includes the tuners and converters and, therefore, they are subject to local taxation. I do not agree.

Following the 1984 General Assembly session, the Department issued Virginia Tax Bulletin (VTB) 84-7 (6/11/1984). In that document, the Department explained:
    • H.B. 827, enacted by the 1984 Session of the General Assembly, separately states and redefines the personal property, tangible in fact, of cable television businesses which constitutes intangible personal property. As redefined, intangible personal property includes, for cable television businesses only, all personal property, tangible in fact, except machines and tools, motor vehicles, and delivery equipment, trunk and feeder cables, studio equipment, antennae and office furniture and equipment.
    • The new definition removes any property of cable television businesses from the "machinery and tools" category for local taxation. Tuners and converters used in the cable television business, previously subject to local taxation, have been defined as intangible personal property by this amendment. [Emphasis in original.]

The Tax Bulletin is consistent with the Legislative Impact Statement prepared by the Department, which stated, "The bill also redefines tuners and converters used in cable television businesses as intangible personal property." House Bill 827, 1984 Legislative Impact Statement (2/23/1984). Based on these documents, the converter boxes are intangible personal property not subject to local taxation under Va. Code § 58.1-1101 A 2a.

Further, the Department recently addressed this issue in Public Document (P.D.) 12-162 (10/16/2012), P.D. 12-163 (10/16/2012), P.D. 12-198 (12/6/2012), and P.D. 12-199 (12/6/2012). In those determinations, the Department recognized the longstanding policy as announced at the time the 1984 legislation was passed and presumed that the General Assembly had knowledge of the Department's interpretation based on the Legislative Impact Statement and Tax Bulletin 84-7. A lack of corrective amendments by the General Assembly indicates legislative acquiescence in the Department's interpretation.

Headend Equipment, Optical Electronics, Modems, and Capitalized Labor and Overhead

The Taxpayer contends that its headend equipment, optical electronics, and modems are not "machines" for purposes of Va. Code § 58.1-1101 A 2a. The Taxpayer also contests the inclusion of a Capitalized (Cap) Labor and Overhead account in the assessment apparently because the underlying property consists of electronics equipment the Taxpayer does not consider to be "machines."

The Taxpayer cites another decision by the Circuit Court of Arlington County in Arlington Cable Partners v. City of Arlington, No. 90-1616 (5/26/1992), holding that the amplifiers, power supplies, and radios of a cable television business are not "machines and tools," but rather intangible personal property not subject to local taxation. The City again cites Comcast in which the court ruled that modems and certain electronics of a cable television business were taxable as "machines" under Va. Code § 58.1-1101 A 2a. Again, there is a split among Virginia courts as to whether the term "machine" applies to other equipment of a cable television business.

The Taxpayer contends that the legislative history of Va. Code § 58.1-1101 A establishes that all of this additional equipment, like the converters, is properly classified as intangible personal property. The County counters that there is no need to address the legislative history of Va. Code § 58.1-1101 A because these types of equipment fit within one or more plain meanings of "machine" as defined in dictionaries.

VTB 84-7 states that "the new definition removes any property of cable television businesses from the 'machinery and tools' category for local taxation." The Taxpayer seems to suggest this statement confirms that none of the additional equipment at issue was intended to be considered "machines." This statement, however, was merely referring to the separation from the machinery and tools category for Va. Code § 58.1- 1101 A 2 a.

The Taxpayer argues that the intent of the legislation was to limit the meaning of the term machines to only actual machines such as motors or ditch diggers. Unlike the reclassification of tuners and converters, however, no mention was made in VTB 84-7 or the Legislative Impact Statement of the limitation of "machines" to machines like motors or ditch diggers. VTB 84-8 (6/1/1984) explained that "machines and tools" are actual machines and tools of cable television businesses but did not mention motors or ditch diggers or limit the category in any other way.

The General Assembly did not define "machines" for purposes of Va. Code § 58.1-1101 A 2 a. The Department recognizes that the word has different meanings that vary in scope. Clearly, the General Assembly intended that certain property of a cable television business would be classified as "machines and tools."

On appeal, a BTPP tax assessment is deemed prima facie correct. In the Department's opinion, the Taxpayer has not shown that the General Assembly intended to exclude its head end equipment, optical electronics, modems, and Cap Labor and Overhead electronics from the category of machines and tools subject to local taxation.

Capitalized Costs

The "Make Ready" account represented the costs incurred to prepare utility poles for the installation of aerial cables used in the Taxpayer's distribution network. The City included these costs in its assessment because the City treated them as the capitalized labor costs of "trunk and feeder cables," a taxable category of tangible personal property.

The original capitalized cost of business tangible personal property generally refers to the cost of property, including all costs associated with putting the property in use. This would normally include sales tax, installation, delivery and freight charges, labor, etc. See P.D. 08-85 (6/6/2008). The Taxpayer contests the inclusion of this account in the assessment but does not make any specific argument as to why it should not have been included. To the extent the capitalized costs reported in the Make Ready account were related to taxable property, it would be subject to BTPP tax.

DETERMINATION


Pursuant to established policy, the converters were intangible personal property exempt from BTPP tax under Va. Code § 58.1-1101 A 2 a. The Taxpayer, however, has failed to show that its headend equipment, optical electronics, modems, and Cap Labor and Overhead electronics were intended to be exempt.

With respect to the Make Ready account, the Taxpayer has not met its burden of proving the City's assessment was incorrect. Accordingly, the City's adjustments for capitalized costs are upheld.

In accordance with this determination, I am remanding the case back to the City to make the appropriate adjustments to the assessment for the 2008 tax year. 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/1-5343578530.M

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46