Was a church trustee's musical equipment exempt from local business tangible personal property tax when it was also used in a band business?

Subject

Equipment was not used exclusively for religious purposes, as required by statute

Plain-English summary

A church music director and designated trustee also performed through a band business. He depreciated all of the disputed musical equipment on federal Schedule C, deducted the expenses in calculating band income, and held a local business license for the band. The city assessed the equipment as business tangible personal property.

Virginia upheld the local assessment. Although property held by a designated trustee of an unincorporated church could be treated as church-owned, Va. Code § 58.1-3617 limited the exemption to property used exclusively for charitable, religious, or educational purposes. Using and depreciating the equipment in the private band business showed that the exclusive-use requirement was not met.

The ruling also emphasized that property-tax exemptions are strictly construed, local assessments are presumed correct on appeal, and use-based exemption questions are factual matters for the local assessing official.

What this means for you

• Church ownership or trustee status did not by itself exempt equipment from local BTPP tax.
• Mixed religious and private-business use failed the statute's exclusive-use requirement.
• Tax-return depreciation and a business license were evidence that the equipment served a taxable business purpose.

Citations and references

• Va. Const. art. X, §§ 1 and 6, taxation and authorized property exemptions.
• Va. Code § 58.1-3983.1, Department review of local BTPP determinations.
• Va. Code §§ 58.1-3609 and 58.1-3617, religious-organization classification and exclusive-use rule.
• Department of Taxation v. Wellmore Coal Corp., strict construction of exemptions.
• Op. Att'y Gen. 02-088, use-based exemption as a factual local determination.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-65

Original ruling text

May 10, 2007

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 appeal an assessment of business tangible personal property (BTPP) tax issued to the Taxpayer by the *** (the "City") for tax years 2002 through 2004.

The BTPP tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue determinations on taxpayer appeals of BTPP tax assessments. On appeal, a BTPP tax assessment is deemed prima facie correct. That is, 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 cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.

FACTS

The Taxpayer's primary source of income during the tax years at issue resulted from his employment as the music director of * (the "Church"). During this same period, the Taxpayer was also engaged in the business of providing musical entertainment as a member of the *** (the "Band").

The Taxpayer's federal individual income tax returns for the years in question included a federal Schedule C to report the business of the Band. The Taxpayer depreciated all the musical equipment used in the Band's business, and deducted the depreciated expenses as a business expense on his federal returns. The Taxpayer also obtained a local business license for the Band.

Under audit, the City classified the Taxpayer's property as business tangible personal property and assessed the Taxpayer accordingly. The Taxpayer contested the City's assessment on the grounds that, because he is a duly designated trustee of the Church, the musical equipment is exempt from BTPP taxation. The City denied the Taxpayer's appeal.

ANALYSIS

Article X, § 1 of the Constitution of Virginia provides that all property shall be subject to taxation unless specifically exempted in the Constitution.

Exemption by Classification

Article X, § 6 of the Constitution of Virginia exempts certain types of property from state and local taxation, including property used by its owner for religious purposes. Such exemptions must be provided for by classification or designation by an ordinance adopted by the local governing body and subject to such restrictions and conditions as provided by general law.

Virginia Code § 58.1-3609 provides a BTPP tax exemption for certain real and personal property by classification. This includes property of religious organizations providing that the organization and property are used for the "particular purpose for which such organization is classified." That is, such organizations must be operated exclusively on a nonprofit basis for charitable, religious or educational purposes. See Va. Code § 58.1-3617. This section also provides that the property of a duly designated trustee of an unincorporated church or religious body is deemed to be owned by such church, association or denomination or religious body.

In the present case, if this were the sole provision governing the tax exemption, as a duly designated trustee of the Church, it would appear that the property of the Taxpayer would be exempt from property taxes. The statute contains more restrictive language, however. In defining that property of a religious organization that may be exempt from tangible personal property taxation, Va. Code § 58.1-3617 states:

Notwithstanding § 58.1-3609, only property of such association or denomination used exclusively for charitable, religious or educational purposes shall be so exempt from taxation. [Emphasis added.]

In the present case, the property in question was used by the Taxpayer for private business purposes in addition to the religious activities of the Church. This is evidenced by the depreciation deductions for the musical equipment reported in determining the Band's business income.

Exemptions Strictly Construed

Article X, § 6 (7)(f) of the Constitution of Virginia states that exemptions of property from taxation as authorized under Article 6 must be strictly construed. This provision has been consistently enforced in Virginia Supreme Court decisions. See, for example, Department of Taxation v. Wellmore Coal Corp . 228 Va. 149, 320 S.E.2d 509 (1984). Furthermore, it has been held that a; determination of property tax exemption based on use is question of fact and, therefore, is reserved for the local commissioner of the revenue or other appropriate taxing official. Op. A'tty Gen . 02-088 (11/19/2002).

DETERMINATION

The Taxpayer used the musical equipment at issue in the conduct of a business and deducted resulting expenses on his federal income tax return. Therefore, the equipment was not used exclusively for religious purposes, as required by statute, and is subject to the BTPP tax. It is my determination, therefore, that the local commissioner of the revenue was correct in assessing the Taxpayer BTPP tax on the property used in his business. The assessment is upheld, and the Taxpayer must remit taxes owing and due with penalties and interest to the City.

If you have any questions regarding this determination, you may call * Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-957766974H