Machinery & Tools Tax Valuation Methods Dispute

Original Purchase Price Whose Point of View? T. Scott Harris, MCR Commissioner of the Revenue Hanover County

Code of Virginia 58.1-3507. Certain machinery and tools segregated for local taxation only; notice prior to change in valuation, hearing. B. Machinery and tools segregated for local taxation pursuant to subsection A, other than energy conservation equipment of manufacturers, shall be valued by means of depreciated cost or a percentage or percentages of original total capitalized cost excluding capitalized interest. In valuing machinery and tools, the commissioner of the revenue shall, upon the written request of the taxpayer, consider any bona fide, independent appraisal presented by the taxpayer.

VA Dept. of Taxation Document 05-129 Machinery & Tools Tax: Method of valuation of tangible personal property August 3, 2005

PD 05-129 Issue: Taxpayer appeals county method of determining taxable value of machinery & tools used in a manufacturing business County contends that state code requires the use of a percentage of original purchase price in determining taxable value of equipment used in a manufacturing business. Taxpayer appeals assessment asserting that the County s method of valuation ignores the constitutional principal of fair market value and provides an independent appraisal of equipment value for consideration

PD 05-129 Issues cont. County rejects independent appraisal and determines that it is precluded from accepting an outside appraisal under 58.1-3507 B of the Code of Virginia Taxpayer appeals final local determination to the Department of Taxation, contending that the County is not prohibited by statute or rulings from considering appraisals when such appraisals reveal the property is assessed above fair market value.

PD 05-129 Tax Commissioner analysis and ruling At issue is the relationship between the constitutional requirement that all property be assessed at fair market value and the County s interpretation of the statutory requirements set forth in 58.1-3507 B and it s interpretation of earlier tax department opinions Cites 1984-1985 Attorney General opinion which found A private appraisal may be considered to the extent that it casts doubt upon the accuracy of the percentage of cost method in reaching the actual fair market value of a specific piece of property. That is, localities may consider the appraisal in deciding what method to use in valuing a particular property

PD 05-129 Tax Commissioner determination 58.1-3507 gives the COR the option to choose among different methods of valuation of tangible property to best meet the constitutional requirement of fair market value (confirmed by Supreme Court in R. Cross v. Newport News (1993)) County is not precluded by statute from considering independent appraisals or other evidence of fair market value in an appeal of a machinery and tool tax assessment.

PD 12-145 Document 12-145 BTPP Tax Outside appraisal to determine if the assessment for the property in dispute reflects fair market value August 30, 2012

PD 12-145 Issues: The City values BTPP at a percentage of total original cost. Taxpayer filed and paid 2011 tax. City issued an assessment of additional BTPP tax on computers and peripherals based on a percentage of total original cost. Taxpayer filed an appeal and provided an appraisal that valued the computer equipment at an amount lower than the city assessed value. Taxpayer argued that the City valued the equipment in excess of its fair market value.

PD 12-145 Issues cont. City rejects taxpayer appeal Taxpayer appeals to the Department of Taxation asserting that the City s method of assessment does not reflect the actual fair market value of the computers and peripherals.

PD 12-145 Tax Commission analysis and determination Appraisals are subjective and may or may not provide objective evidence as to the true market value of a property. Previous opinion determined that localities could consider outside appraisals in determining fair market value 58.1-3503 A16 requires that programmable computer equipment and peripherals be valued by means of a percentage or percentages of original cost to the taxpayer or by such other method as may reasonably be expected to determine the actual fair market value.

PD 13-20 Document 13-20 Machinery Tools Tax :Fair market valuation of machinery and tools February 15, 2013

PD 13-20 Issues: County and taxpayer jointly request an advisory opinion regarding the valuation of machinery and tools County values machinery and tools as a percentage of original total capitalized cost County and taxpayer jointly request the Tax Department define original total capitalized cost and provide an analysis of the relationship between original total capitalized cost and fair market value

PD 13-20 Tax Commissioner analysis and determination Article X of the Constitution provides that all property shall be taxed at a uniform rate among classes, and that all assessments of real estate and tangible personal property shall be at their fair market value to be ascertained as prescribed by general law. It is presumed the General Assembly intended that the prescribed method would both standardized valuation practices across all local governments and result in something approximating fair market value.

PD 13-20 Analysis and determination cont. Previous Tax commissioners have determined that if a local assessment results in an assessment well above fair market value, the locality may use another methodology as prescribed in 58.1-3507 B (PD 05-129 (08/03/2005) Taxpayer and County offer competing views of the definition of original total capitalized cost. County contends the term means the cost of the machinery and tools paid by the owner who first purchased the property as capitalized. Taxpayer argues that original total capitalized cost means the cost when it purchased the facility from the previous owner

PD 13-20 Analysis and determination cont. The General Assembly has not defined the term original total capitalized cost within the context of the Virginia Code Absent a statutory definition, the plain and ordinary meaning of the term is controlling. Original total capitalized cost refers to the original price of an asset purchased new. The cost of the tangible property paid by the owner who first purchased the property as capitalized, not the costs paid by any subsequent purchaser.

PD 13-20 Analysis and determination cont. 58.1-3507 B requires a local taxing authority to consider any bona fide, independent appraisal, but the locality is not obligated to accept an appraisal when it determines its method reasonably approximates fair market value.

Attorney General Opinion Issue: Do the terms original cost as used in 58.1-3503 (A)(17) and original total capitalized cost as used in 58.1-3507(B) mean the original cost paid by the original purchaser of the property from the manufacturer, or the current owner s purchase price?

Attorney General Opinion Issues: Hanover County COR assesses a tax on machinery and tools by valuing the property at a percentage (10%) of the original cost paid by the original purchaser of the asset being taxed. Local manufacturer purchases property in a bankruptcy sale in 2012. Manufacturer submits 2013 filing and lists original purchase price of equipment as the price paid at bankruptcy sale. Hanover COR rejects filing as incomplete and statutorily assesses equipment at previously filed original purchase price.

Attorney General Opinion Issues cont.: Hanover COR requests opinion from AG on assessment method AG opinion The GA has provided no definition for the terms original cost and original capitalized cost. The statutes clearly refer simply to the original cost of the property. They do not use any language referencing the purchase price of the taxpayer.

Attorney General Opinion AG opinion cont.: 2009 AG opinion similarly addressed the meaning of original cost in 58.1-3503(A)(17). Opinion stated that words in a statute are to be construed according to their ordinary meaning, given the context in which they are used. 2009 opinion concluded that the term means the acquisition cost of property from manufacturer or dealer, ie., original cost paid by original purchaser of such property from manufacturer or dealer. Since the GA has not amended the language since the 2009 opinion was issued the AG affirms the conclusion of the 2009 opinion.

Attorney General Opinion AG opinion cont.: AG affirms that original cost means the cost paid by the original, or first, purchaser of such personal Property and not the purchase price paid by a subsequent owner paying the tax. AG conclusion: The term original cost as used in 58.1-3503(A)(17) and original total capitalized cost as used in 58.1-3507(B) means the original cost paid by the original purchaser of the property from the manufacturer or dealer.