Can a Virginia locality without a merchants-capital ordinance still tax short-term rental property like cars and party rentals as tangible personal property?

Plain-English summary

In 2010, the General Assembly amended Va. Code § 58.1-3510.6(E) to take short-term rental property out of the tangible-personal-property category for local tax purposes. The amendment moved it under merchants' capital, recognizing that businesses that rent out items short-term (think party rentals, equipment rentals, daily rental vehicles) are essentially merchants whose stock is the rental inventory rather than goods for resale. Culpeper County's Commissioner of the Revenue asked the AG how to handle the situation in a locality that has adopted neither a merchants' capital tax nor a short-term rental property tax.

The AG broke it into three crisp conclusions.

First, short-term rental property is a distinct sub-classification of merchants' capital. A locality may apply the merchants' capital tax authorized under § 58.1-3510.6, or it may tax the property as short-term rental property under § 58.1-3509, but not both. The locality may not classify or tax this property as tangible personal property. The General Assembly has spoken to its character.

Second, a locality is not required to tax merchants' capital. The Code provides that "no county, city or town shall be required to impose a tax on [merchants'] capital." So a locality can decline.

Third, the absence of a local ordinance imposing either tax represents an affirmative policy choice by the local governing body not to tax this property. The Commissioner of the Revenue cannot fill the gap by classifying short-term rental property as tangible personal property and applying the personal property tax rate. If the locality wanted to tax this property, it would adopt an ordinance. The silence is the policy.

This opinion is short, but it has real consequences. Before the 2010 amendment, a locality without a merchants' capital ordinance could plausibly catch daily rental cars and similar inventory under the broader personal property tax. After the amendment, that path is closed. Without either a merchants' capital ordinance or a short-term rental property ordinance, the short-term rental business pays no local property tax on its rental fleet.

Currency note

This opinion was issued in 2013. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

What is "merchants' capital"?
A class of taxable property that the General Assembly has segregated for local taxation, made up of business inventory and similar items. The merchants' capital tax is one of the constitutionally distinct categories of local property tax, separate from real estate and from ordinary tangible personal property. Short-term rental property is now a sub-classification within it.

What is short-term rental property?
Property held by a business primarily for rental in short-term transactions, the kind of inventory rented to customers for short periods (tools, lawn equipment, vehicles, party supplies, and the like).

Why did the General Assembly move short-term rental property to merchants' capital?
The 2010 amendment recognized that short-term rental businesses operate like merchants: they hold inventory that customers temporarily use and return. Taxing the same inventory as tangible personal property (the same way a homeowner's furniture is taxed) didn't fit the economic substance. The reclassification gave localities the option to tax it as merchants' capital or as its own distinct class.

Can a locality tax both as merchants' capital and as short-term rental property?
No. The Code makes them alternatives, not concurrent: a locality may tax the property as short-term rental property under § 58.1-3509 or apply the merchants' capital tax under § 58.1-3510.6, "but not both."

What happens to a locality's short-term rental businesses that previously paid personal property tax?
After the 2010 amendment, they're no longer subject to that tax. If the locality wants to continue collecting tax revenue from them, it must adopt one of the authorized ordinances. Otherwise, they pay no local property tax on rental inventory.

Background and statutory framework

The Constitution of Virginia structures local property tax. Article X, § 1 establishes the general rule that "[a]ll property, except hereinafter provided, shall be taxed" and authorizes the General Assembly to "define and classify taxable subjects." The opinion also quotes, without their section labels, the constitutional provisions committing tangible personal property to local taxation and authorizing the General Assembly to let localities exempt or partially exempt business, occupational, and professional licenses or merchants' capital, or both.

Acting under this framework, the General Assembly has classified all personal property into four buckets: intangible personal property, merchants' capital, short-term rental property, and tangible personal property. Tangible personal property is the residual category, consisting of personal property "not otherwise classified" as intangible, merchants' capital, or short-term rental property. The 2010 amendment expressly moved short-term rental property out of the tangible personal property residual and into a sub-classification of merchants' capital. From that point on, taxing short-term rental property requires action under either the merchants' capital tax (§ 58.1-3510.6) or the short-term rental property tax (§ 58.1-3509).

Citations

• Va. Const. art. X, § 1
• Va. Code § 58.1-3509 (short-term rental property tax)
• Va. Code § 58.1-3510.6 (merchants' capital tax)
• Va. Code § 58.1-3510.6(E) (2010 amendment excluding short-term rental property from tangible personal property)

Source

• Landing page: https://www.oag.state.va.us/annual-reports-opinions/official-opinions
• Original PDF: https://www.oag.state.va.us/files/Opinions/2013/12-105_Yowell.pdf

Original opinion text

COMMONWEALTH of VIRGINIA
Office of the Attorney General
Kenneth T. Cuccinelli, II
Attorney General

July 12, 2013

900 East Main Street
Richmond, Virginia 23219
804-786-2071
FAX 804-786-1991
Virginia Relay Services
800-828-1120
7-1-1

The Honorable Terry L. Yowell
Commissioner of the Revenue
Culpeper County
151 North Main Street, Suite 201
Post Office Box 1807
Culpeper, Virginia 22701

Dear Ms. Yowell:

I am responding to your request for an official advisory opinion in accordance with § 2.2-505 of the Code of Virginia.

Issue Presented

You ask for guidance regarding the taxation of short-term rental property in a locality that does not have a local ordinance establishing either a merchant's capital tax or a tax on short-term rental property.

Response

It is my opinion that short-term rental property is to be classified as a distinct category of merchants' capital and may be taxed by a locality as merchants' capital or as short-term rental property, but may not be classified or taxed as personal tangible property. It further is my opinion that a locality lawfully may decline to impose a tax on merchant's capital, including short-term rental property. Finally, it is my opinion that the absence of a local ordinance imposing a tax on merchant's capital or short-term rental property represents a choice by the locality's governing body not to impose a tax on such property.

Background

As you relate, in 2010, the Virginia General Assembly amended § 58.1-3510.6(E) of the Code of Virginia, Short-Term Rental Property Tax, to exclude short-term rental property from being classified and taxed as tangible personal property. The Code now provides that short-term rental property may be taxed as merchants' capital, or a locality may adopt a local ordinance authorizing a short-term rental property tax. You state that the locality you serve has adopted neither a merchant's capital tax nor a short-term rental property tax.

Applicable Law and Discussion

Article X, § 1 of the Constitution of Virginia prescribes that "[a]ll property, except hereinafter provided, shall be taxed[,]" and further provides that "[t]he General Assembly may define and classify taxable subjects." The Constitution also establishes that "[t]angible personal property is subject to local taxation only, to be assessed for local taxation in such manner and at such times as the General Assembly may prescribe by law." Additionally, the General Assembly is authorized to allow a local governing body "the option to exempt or partially exempt from taxation any business, occupational or professional license or any merchant's capital, or both."

The General Assembly, pursuant to this constitutional authority, has provided that tangible personal property shall consist of all personal property not otherwise classified as intangible personal property, as merchants' capital, or as short-term rental property. The General Assembly further has declared that "[s]hort-term rental property shall constitute a classification of merchants' capital . . . ." While the Code is clear that localities may tax such property as short-term rental property under § 58.1-3509, or may apply the merchants' capital tax authorized under § 58.1-3510.6, but not both, the General Assembly also expressly has provided that "no county, city or town shall be required to impose a tax on [merchants'] capital."

Thus, although the General Assembly has enabled localities to tax short-term rental property, whether as merchant's capital or, in its own name as a distinct classification thereof, Virginia law does not require localities to do so. Based upon these facts, I necessarily must conclude that the absence of a local ordinance imposing a tax on either merchant's capital or short-term rental property represents a choice by the locality's governing body to decline to tax such property.

Conclusion

Accordingly, it is my opinion that short-term rental property is to be classified as a distinct category of merchants' capital and may be taxed by a locality as merchants' capital or as short-term rental property, but may not be classified or taxed as personal tangible property. It further is my opinion that a locality lawfully may decline to impose a tax on merchant's capital, including short-term rental property. Finally, it is my opinion that the absence of a local ordinance imposing a tax on merchant's capital or short-term rental property represents a choice by the locality's governing body not to impose a tax on such property.

With kindest regards, I am

Very truly yours,

Kenneth T. Cuccinelli, II
Attorney General