86-48 | Virginia Tax

Tax Type

Recordation Tax

Description

Loan Security

Topic

Documents Subject to Tax

Date Issued

03-14-1986

March 14, 1986

Re: Section 58.1-1821 Application for Correction Recordation Tax

- Section 58-55 (58.1-803) Deeds of Trust
  Section 58-65.1 (58.1-814; 58.1-3800 to 3804)
  Local Tax on Deeds of Trust

Dear ********************

The taxpayer is a corporation with property located in Virginia and other states. As part of the security for a large loan, the Taxpayer recorded a deed of trust (Deed of Trust) in two Virginia localities conveying real estate in each jurisdiction. Information provided by Taxpayer indicates that the balance of the loan is secured by real estate in other states and by accounts receivable and capital stock.

The instrument conveys only real estate located in Virginia. It states that part of the property given to secure the debt is located outside the Commonwealth of Virginia and that repayment is only "...secured in part by the execution of this Deed of Trust...." The portion of the debt secured by the Deed of Trust is not set forth in the instrument.

The taxpayer paid the State recordation tax based on the maximum principal amount of the loan that can be outstanding at any one time and filed this application within 90 days claiming a) that the State recordation tax assessed was excessive because the computation of the State tax failed to take into account that the loan was secured only in part by the Deed of Trust, and b) that the local taxes were excessive because they were not limited to one third of the State recordation tax, taking full advantage of the declining scale provided in §58-55 (recodified as 58.1-803).

Amount On Which Tax Is To Be Based

The document presented for recordation appears to be an open or revolving deed of trust. The recordation tax on deeds of trust is imposed on "the amount of bonds or other obligations secured...[by the deed of trust]." Section 58-55. For purposes of this statutory provision the amount of the obligation with an open or revolving deed of trust is the maximum amount which can be outstanding at any one time. However, where the amount which is secured under a deed of trust is not ascertainable, the recordation tax is to be based upon the fair market value of the property conveyed, determined as of the date of the deed of trust. Section 58-55.

Applying the foregoing statutory language to the facts under consideration, I find that the tax should have been calculated based upon the fair market value of the property conveyed and not on the maximum principal amount of the loan that can be outstanding at any one time. The Deed of Trust specifically provides that only a portion of the loan amount is secured thereby but is silent as to that portion. The amount secured is, therefore, not ascertainable. In such situations, §58-55 clearly provides that the State tax is to be calculated on the fair market value of the property conveyed, determined as of the date of the deed of trust. See 1981 - 1982 Report of the Attorney General at 388. The fair market value of the property conveyed must be determined by the clerk under §58-65 based upon evidence satisfactory to the clerk.

Local Recordation Tax

The property conveyed by the Deed of Trust is located in more than one Virginia locality. The amount of the loan and value of the property within Virginia are both well in excess of $10 million. Under §58-55 the rate of State recordation taxes is reduced on amounts in excess of $10 million. In both localities the Clerk of the Circuit Court computed the local tax at one third of the highest State tax rate on the first $10 million within the locality and at lower rates on the excess over $10 million. The total amount paid, therefore, exceeded one third of the State recordation tax. The Taxpayer contends that the total of all local taxes imposed may not exceed one third of the State tax imposed. For the reasons to follow, I am in agreement with the Taxpayer.

- Section 58-65.1 authorizes localities to impose a "recordation tax in an amount equal to one third of the amount of State recordation tax collectible for the State on the first recordation..." Effective January 1, 1985, the pertinent portions of this section have been recodified without substantive change as 58.1-814 and 58.1-3800 to 58.1-3801.

Where an instrument conveys property located in more than one Virginia jurisdiction, the State recordation tax is collected by the Clerk of the first jurisdiction in which the deed of trust is recorded. The local recordation tax may be imposed by each locality but is to be computed only with respect to the property located in that particular county or city.

Reading the provisions on local recordation tax as a whole, I construe §58-65.1 as limiting local recordation taxes imposed on an instrument to one third of the State tax. Where an instrument conveys property located in more than one jurisdiction, the statute provides a method to allocate the one third cap amount; §58-65.1 does not permit the aggregate local recordation tax to exceed that amount. Accordingly, the total amount of local recordation taxes collected may not exceed one third of the State tax imposed and collected on the first recordation. Each locality may impose a local tax which is a percentage of one third of the amount of the State tax based on the ratio of the fair market value of the property located in that jurisdiction to the fair market value of all property within Virginia conveyed by the instrument.

Refund Procedure

Based on the foregoing, the taxpayer is entitled to a refund of State recordation taxes although the amount of the refund cannot be ascertained until the clerks have determined the fair market value of the property conveyed. The clerks are required to forward State recordation taxes to the State Treasurer. Accordingly, you will receive from the State Treasurer a check for the excess State recordation tax imposed on the privilege of recording the Deed of Trust after the department receives notification of the fair market value.

The construction of §58-65.1 herein indicates that Taxpayer also paid excess local recordation taxes. However, these taxes are retained by the locality. A request for a refund must be addressed to the locality.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner