Could a video post-production company remove bundled application software from computer value and reclassify specialized equipment for local property tax?

Subject

Bundled software could be separated with proof, but equipment classifications stood

Plain-English summary

Virginia upheld the county's denial of a business tangible personal property tax refund to a video post-production company. The company argued that some reported computer value included application software and that specialized video equipment should be classified as programmable computers or peripherals.

Virginia rejected the county's view that application software could be separated from hardware only when independent and separately billed. The statute classified application software as intangible property and did not impose those extra conditions. Even so, the taxpayer still had to prove that the software was application software and clearly calculate the software portion of a bundled purchase price.

For the specialized equipment, the county had examined and researched each item before classifying it as computer equipment, peripherals, or furniture, fixtures, and other equipment. The taxpayer did not provide evidence showing those factual classifications were wrong. The county's determination therefore remained in place and no refund was due.

What this means for you

• Application software can be intangible for Virginia local property-tax purposes even when bundled with hardware.
• Bundling does not eliminate the need to prove the software's type and allocate a supportable portion of the purchase price.
• Systems or operating software is different from application software designed to perform specific jobs.
• Whether evolving digital equipment qualifies as programmable computer equipment or a peripheral is a factual classification issue.
• A taxpayer challenging a local classification needs item-level evidence that the local determination is incorrect.

Common questions

Did bundled application software have to be separately billed?

No. Virginia found no such condition in the statute.

Was all software treated as intangible?

No. The ruling distinguished application software from systems or basic operational software.

Why were the equipment reclassifications upheld?

The county conducted item-by-item research, and the taxpayer did not prove its factual conclusions wrong.

Did Virginia have jurisdiction over the appeal?

Yes. The county's refund denial constituted an assessment for the administrative appeal process, and its final determination advised the taxpayer of the Tax Commissioner appeal right.

Citations and references

• Va. Code §§ 58.1-3983.1, 58.1-3980, 58.1-3984, 58.1-1101(A)(8), and 58.1-3506(A)(27).
• City of Richmond v. Confrere Club of Richmond, Virginia, Inc., 239 Va. 77, 387 S.E.2d 471 (1990).
• Commonwealth ex rel. Moore v. P. Lorillard Co., Inc., 129 Va. 74, 105 S.E. 683 (1921).
• 1983 Attorney General Opinion dated September 8, 1983.
• Virginia Public Document 04-28.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-103

Original ruling text

June 18, 2010

Re: Appeal of Final Local Determination

Locality: *

Taxpayer: *

Business Tangible Personal Property Tax

Dear *:

This final state determination is issued upon the application for correction filed on behalf of * (the "Taxpayer") with the Department of Taxation. You appeal a denial of a request for refund of certain business tangible personal property (BTPP) taxes made by the Taxpayer to *** (the "County") for tax years 2002 through 2004.

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, i.e. , 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 on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.

FACTS

The Taxpayer engages in video post production, which is the editing of images and sound using digitized information for television. The Taxpayer filed amended returns for the 2002 through 2004 tax years contending that the value of some computer equipment was overstated because it included the cost of application software.

The County accepted some of the Taxpayer's adjustments, but also reclassified items from computer hardware and peripherals to furniture, fixtures and other equipment. Although the County's adjustments to the classification of some of the equipment increased the overall assessed value of the Taxpayer's BTPP, it did not make any adjustments to the BTPP tax liability reported on the original returns.

The Taxpayer appeals the County's final determination and has provided additional schedules. The County contends that the Tax Commissioner lacks jurisdiction to respond to the Taxpayer's appeal for the 2002 and 2003 tax years because the Taxpayer failed to timely file its amended returns for the 2002 and 2003 years.

ANALYSIS

Jurisdiction

Virginia Code § 58.1-3980 provides that any person aggrieved by an assessment of local taxes:

may, within three years from the last day of the tax year for which such assessment is made, or within one year from the date of the assessment, whichever is later, apply to the commissioner of the revenue or such other official who made the assessment for a correction thereof.

Under this procedure, if the taxpayer disagrees in whole or in part with the local assessing officer's determination, the taxpayer may then take its grievance to the circuit court under the provisions of Va. Code § 58.1-3984.

Virginia Code § 58.1-3983.1 B 1 provides that any person assessed with a:

local business tax as defined in this section may appeal such assessment within one year from the last day of the tax year for which such assessment is made, or within one year from the date of such assessment, whichever is later, to the commissioner of the revenue or other assessing official. [Emphasis added.]

Under this provision, if the Taxpayer's appeal is denied in part or whole by the local assessing official, the taxpayer may, within 90 days, appeal the assessment to the Tax Commissioner.

The administrative appeals process involving the Tax Commissioner is separate and distinct from the general appeals process afforded to taxpayers with local tax grievances under Va. Code § 58.1-3980. The procedures for the process are clearly defined in the statute.

The Taxpayer filed its 2002 amended return on December 31, 2005 and it filed its 2003 amended return on December 29, 2006. Both the amended returns were filed more than one year from the last day of the tax year. The County asserts that the Taxpayer is barred from pursuing an administrative appeal under Va. Code § 58.1-3983.1.

Under § 1.4 of the Guidelines for Appealing Local Business Taxes, issued as Public Document (P.D.) 04-28 (6/25/2004), an "assessment" is defined as "a determination as to the proper rate of tax, the measure to which the tax rate is applied, and ultimately the amount of tax, including additional or omitted tax, that is due." When a taxpayer files an amended local business tax return, the local taxing authority must make a determination as to the proper amount of the tax. If the locality denies the refund, it has made a determination as to the proper amount of tax, even if the assessment on that locality's books is not changed. Consequently, the denial of a refund by a local taxing authority would constitute an assessment for purposes of filing an appeal under Va. Code § 58.1-3983.1.

In this case, when the County denied the refund request under Va. Code § 58.1­3980, the Taxpayer became eligible to file an appeal with the County under Va. Code § 58.1-3983.1. However, when the County issued its final determination, it advised the Taxpayer that it could file an appeal with the Tax Commissioner. Consequently, the Department considers the County to have issued its final determination under both Va. Code §§ 58.1-3980 and 58.1-3983.1 concurrently. Thus, the Taxpayer became eligible to file an appeal to the Tax Commissioner under Va. Code § 58.1-3983.1.

Software

Article X, § 4 of the Virginia Constitution provides that all tangible personal property shall be segregated for local taxation in such a manner as the General Assembly provides by law. Virginia Code § 58.1-1101 A 8 classifies certain property that is tangible in fact as intangible and segregates that property for state taxation only. Intangible property consists of, in part::

Computer application software . . . defined as computer instructions, in any form, which are designed to be read by a computer and to enable to perform specific operations with data or information stored by the computer . . .

The Taxpayer states that in its original return it reported the cost of software along with the computer hardware because the vendor bundles all the hardware and software together and charges a single price. It contends that it should be able to classify that portion of the cost associated with the software in accordance with Va. Code § 58.1-1101 A 8.

The County argues that the software component of a product should not be separated from the hardware unless the software is independent of the hardware operating system and separately billed or at least described in a manner to make an objective finding of its value of the purchase price. The County further argues that exemptions are to be strictly construed, and the intent of the General Assembly was to create an exemption for separately identified software.

Virginia Code § 58.1-1101 A 8 is not an exemption, but a classification of property. The Virginia Supreme Court has been reluctant to supply words to a statute, especially words that result in payment of a tax. In City of Richmond v. Confrere Club of Richmond, Virginia, Inc. , 239 Va. 77, 387 S.E.2d 471 (1990), the Virginia Supreme Court concluded that "when a statute is clear and unambiguous, its plain meaning must be accepted without resort to extrinsic evidence or to the rules of construction." Additionally, tax statutes are generally strictly construed most strongly in favor of the taxpayer, and are not be extended by implication beyond the plain meaning of the language used. See Commonwealth Ex Rel. Moore v. P. Lorillard Co., Inc. , 129 Va. 74, 105 S.E. 683 (1921).

The classification of software as intangible property is limited to "application software." Application software is computer software designed to do specific jobs such as bookkeeping, billing and statistical analysis. See 1983 Att'y Gen. Opinion 9/8/1983. Unlike application software, systems software or basic operational software consists of computer instructions, in any form, which control the hardware and allow it to compile, assemble, interpret and process application software. Ibid .

The statute does not require that application software is to be segregated only if it is independent of computer hardware or separately billed. The determination regarding whether software is application software and whether the cost of application software bundled with computer hardware can be calculated is a matter of fact to be determined by the locality. A taxpayer must provide sufficient documentation to a locality to show software is application software and to clearly delineate application software cost from computer hardware cost.

Programmable Computer Equipment and Peripherals

Virginia Code § 58.1-3506 A 27 establishes a separate classification for "[p]rogrammable computer equipment and peripherals employed in a trade or business". The Taxpayer asserts that equipment the County classified as furniture, fixtures, and other equipment are actually computers because it uses software to operate. It also avers that equipment the County classified as furniture, fixtures, and other equipment is actually computer peripherals because this equipment inputs digital information to computers or downloads digital information from computers.

The County contends that the term "programmable computer" should be interpreted narrowly. It argues that if any device that uses substantial computing power to operate is classified as a programmable computer, then many devices, such as a programmable thermostat, would fall within the definition of programmable computer. The County states that the classification of computers has traditionally been limited to free standing devices that can provide computing power for a wide variety of potential applications, and programmable devices with a specific purpose should remain classified as business equipment.

The terms "programmable computer equipment" and "peripherals" are not defined for purposes of BTPP tax. Changes in technology since the introduction of computers as a separate class of property means that the types of tangible personal property that could be considered programmable computer equipment and computer peripherals are constantly changing. The County conducted a thorough examination and extensive research on every piece of equipment at issue before reclassifying items as computer equipment and peripherals or furniture, fixtures, and other equipment. The Taxpayer has not provided any evidence to prove this factual determination made by the local commissioner of the revenue was erroneous.

DETERMINATION

Given the facts presented in this case, I find no basis to reverse the decision of the County. Accordingly, it is my conclusion that the determination issued by the County stands and the Taxpayer is not due a refund.

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

Sincerely,

Linda Foster

Deputy Tax Commissioner

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