Was a retail tenant's storefront sign a real-property fixture rather than taxable business tangible personal property?

Subject

Lease terms showed that a storefront sign remained the tenant's personal property

Plain-English summary

Virginia upheld the city's classification of the storefront sign as taxable business tangible personal property. The retail tenant had attached the sign above its leased storefront and removed it after closing the store in February 2008.

Virginia's fixture analysis considered attachment to the realty, adaptation to the property's use, and especially the owner's intent to make the item a permanent addition. The taxpayer said it intended to stay in business and leave the sign in place, but that statement needed supporting evidence.

The lease supplied contrary evidence. It required landlord approval for signage, identified the signage as the tenant's property, and contemplated removal when the lease ended. Even if removal damaged the building and the tenant had to make repairs, the lease showed that the parties did not intend the sign to become a permanent part of the real estate.

What this means for you

• A physically attached sign is not automatically a real-property fixture for Virginia local tax purposes.
• Lease provisions about ownership and removal can outweigh a tenant's later statement that it intended permanent installation.
• The taxpayer bears the burden of proving a local BTPP assessment wrong on appeal.
• Fixtures and business tangible personal property are locally taxed and administered.

Common questions

Did attachment to the building make the sign real property?

No. Attachment was one factor, but the lease indicated that the tenant owned the sign and was expected to remove it.

Did possible damage from removal change the result?

No. The ruling said a repair obligation did not overcome lease terms showing that removal was contemplated.

What tax years were upheld?

The city's business tangible personal property treatment was upheld for 2007 and 2008.

Citations and references

• Va. Const. art. X, § 4.
• Va. Code §§ 58.1-3983.1(D), 58.1-3200 et seq., and 58.1-3500 et seq.
• Danville Holding Corp. v. Clement, 178 Va. 223, 16 S.E.2d 345 (1941).
• John Wesley Mullins v. L.E. Sturgill, 192 Va. 653, 66 S.E.2d 483 (1951).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-147

Original ruling text

October 8, 2009

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Business Tangible Personal Property Tax

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) taxes issued to the Taxpayer by the *** (the "City") for tax years 2007 and 2008.

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. 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 and public documents cited are available online at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.

FACT

The Taxpayer operated a retail store in a shopping center located in the City. The Taxpayer ceased operations in February 2008. Shortly thereafter, the Taxpayer removed a sign from above the entrance to the storefront it had been leasing.

The City audited the Taxpayer and reclassified the sign from real property to tangible personal property. In its final determination, the City concluded that because the sign was removed without damage to the realty, the sign was not permanently attached to the property. Therefore, the sign was subject to tangible personal property taxation.

The Taxpayer appeals the final local determination to the Tax Commissioner, contending that the Taxpayer intended to remain in business for many years, and the sign would have remained affixed to the building. In addition, the Taxpayer asserts that the removal of the sign did cause damage to the realty. The Taxpayer's intent was for the sign to be a leasehold improvement, and the sign should be subject to real estate tax.

ANALYSIS

Real property and all tangible personal property except the rolling stock of public service corporations and that which is declared intangible under the provisions of Va. Code § 58.1-1100 et seq. , is reserved for local taxation by Article X, § 4 of the Constitution of Virginia.

The method of taxation of real property is provided for under Va. Code § 58.1-3200 et seq. , whereas the taxation of tangible personal property is provided for under Va. Code § 58.1-3500 et seq . When an item of tangible personal property is determined to be a fixture, it is treated as real property for purposes of local taxation.

In Danville Holding Corp. v. Clement , 178 Va. 223, 232, 16 S.E.2d 345, 349 (1941), the Virginia Supreme Court set forth three general rules to tree used in determining whether an article of tangible personal property is a fixture and, thus, considered a part of the real estate for purposes of taxation, or remains personality subject to tangible personal property taxation. These rules are:

(1) Annexation of the chattel [property] to the realty, actual or constructive;

(2) its adaptation to the use or purpose to which that part of the realty to which it is connected is appropriated; and

(3) The intention of the owner of the chattel to make it a permanent addition to the freehold.

In order for these rules to apply, it is presumed that the property is annexed to the realty in some form. In this case, the sign was affixed to the storefront until the Taxpayer discontinued operations. In its decision, the Court also noted that the "intention of the party making the annexation is the paramount and controlling consideration."

The City determined that the property in dispute, was removed from the premises without significant damage to the realty. In its determination, the City did not respond to the Taxpayer's assertion that its intention of annexing the property in question was to make it a permanent part of the realty. The Taxpayer argues that it intended to stay in business perpetually and keep the sign as a permanent fixture to the building. However, such a declaration must be supported by evidence.

In John Wesley Mullins, et al. v L.E. Sturgill, et al; 192 Va. 653, 66 S.E. 2d 483 (1951), citing 22 Am. Jur., Fixtures, Sec. 6, p. 719, the Court noted that while the intention of the party making the annexation is made the controlling criterion by most of the authorities, and generally it is considered to be the chief test, it is snot always determinative.

[I]n cases of doubt it has a controlling influence and must be considered. However, in order that a chattel may be converted into a fixture, the intention to make it a permanent accession to the realty must affirmatively and plainly appear; if the matter is left in doubt and uncertainty, the legal qualities of the article are not changed, and it must be deemed a chattel. [Emphasis added.]

The actual intent of the parties, in this case, may be found in the language of the Taxpayer's lease of the storefront. Under the terms of the lease, the Taxpayer was not allowed to place a sign on the building without the landlord's approval. The lease clearly refers to any signage as property of the Taxpayer. It infers that the Taxpayer must remove the signage at the time of the termination of the lease. In other words, if the property is to be removed at the expiration or earlier termination of the lease, it is presumed that the parties did not intend for the property to become a fixture and, thus, it is not considered to be part of the real estate regardless of the Taxpayer's responsibility far repairing any damage to the landlord's building due to the removal of the signage.

DETERMINATION

It is my determination that, based on the specific facts of this case and the evidence provided, the Taxpayer has failed to demonstrate that the sign at issue was a fixture and, therefore, should be treated as real property for purposes of the BTPP tax. Accordingly, the final determination of the City reclassifying the sign as tangible personal property is upheld.

If you have any questions about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3213986430.B