Were a motel's through-the-wall heating and cooling units fixtures taxed as real estate or business tangible personal property?

Subject

Real vs. Tangible Property; Motel heating and cooling units

Plain-English summary

The Tax Commissioner sent the classification issue back to the city. The city had treated each motel room's through-the-wall heating and cooling unit as taxable business tangible personal property because it could be removed and replaced easily. Virginia said removability alone was not the full fixture test.

The city had to consider three factors from Danville Holding: how the units were annexed to the building, how they were adapted to the property's use, and—most importantly—the owner's intent to make them permanent. The taxpayer said the bolted units were the rooms' only heating and cooling source, had 10-to-15-year useful lives, and were intended to remain until replacement at the end of those lives.

The Department rejected the separate double-tax argument because the city's real-estate valuation included a per-room personal-property reduction larger than the BTPP value. But it required the city to redo the fixture analysis and correct the assessments if the evidence showed the units were real-property fixtures.

What this means for you

• Equipment can be a real-property fixture even if it can be removed without damaging the building or equipment.
• Adaptation to the building's use and the owner's intended permanence can outweigh easy removability.
• The taxpayer bears the burden of supplying evidence in a local BTPP appeal.
• A remand is not a final ruling that the equipment is either realty or tangible personal property.

Common questions

Did Virginia decide that the motel units were fixtures?

No. It required the city to reconsider the evidence using the complete three-factor test.

Were the units taxed twice?

The Department found they were not, based on the city's reduction to the motel's real-estate value for personal property.

Citations and references

• Va. Const. art. X, § 4.
• Va. Code §§ 58.1-3983.1(D) and 58.1-1100 et seq.
• Danville Holding Corp. v. Clement, 178 Va. 223, 16 S.E.2d 345 (1941).
• Transcontinental Gas & Pipe Co. v. Prince William County, 210 Va. 550 (1970).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-232

Original ruling text

September 29, 2010

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 your firm on behalf of * (the "Taxpayer") with the Department of Taxation. You appeal the *** (the "City") Business Tangible Personal Property (BTPP) tax assessment for the 2005 through 2009 tax years.

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 as 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 operates a motel in the City. Under audit, the City determined that individual room "through-the-wall" heating and cooling units were considered to be tangible personal property and issued BTPP assessments for tax years at issue.

The Taxpayer filed an appeal with the City, contending the units are real property and they were also included in the City's real property tax assessment. In its final decision, the City affirmed its conclusion that the heating and cooling units were subject to BTPP tax on the basis that they could easily be removed and replaced. The City also stated that provision was made in the real estate assessment to remove the value of the units from the real estate assessment. The Taxpayer appeals to the Tax Commissioner, asserting that the units were structural components of the building and that the City double taxed the units as both realty and BTPP.

ANALYSIS

Real vs. Tangible Property

Article X, § 4 of the Constitution of Virginia, segregates all real property for local taxation. All tangible personal property, unless declared intangible under the provisions of Va. Code § 58.1-1100 et seq. , is also reserved for local taxation by Article X, § 4 of the Constitution of Virginia.

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 be 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 personal subject to tangible personal property taxation. The three tests are: (1) the 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 parties, i.e. , the intention of the owner of the chattel to make it a permanent addition to the freehold.

(1) Annexation to the Realty: In order to meet this test, the annexation of the chattel must be actual or constructive. In Danville Holding , the Court concluded "the method or extent of the annexation carries little weight, except insofar as they relate to the nature of the article, the use to which it is applied and other attending circumstances as indicating the intention of the party making the annexation." In other words, so long as chattel is attached to a building to carry out the purpose for which such building was erected and to increase its value for occupation or use, such chattel may become part of the realty even if it may be removed without injury to itself or the building.

(2) Adaptation to use or purpose of the property or realty: Adaptation of chattel to the use of real property to which it is annexed is entitled to great weight. If the attached property is essential to the purposes for which the building is used or occupied, it would generally be considered a fixture even if its annexation to such building is such that it may be severed without injury to either the chattel or the building. The Taxpayer asserts that the units are the sole source of necessary cooling and heating for the guest rooms, and as such, are essential to the building's use as a lodging facility.

(3) The intention of the parties: The Court has emphasized the intention of the party making the annexation is the chief test to be considered in determining whether the chattel has been converted into a fixture. Transcontinental Gas and Pipe Company v. Prince William County , 210 Va. 550, 555 (1970), citing Danville Holding . Although the intention does not need to be expressed in words, it should be able to be inferred from the nature of the property annexed, the purpose for which it was annexed, the relationship of the party making the annexation, and the structure and mode of annexation.

The City reclassified the units as BTPP because they could easily be removed. Based on its final determination, the City does not appear to have considered the adoption of the units or the intention of the owner of the property.

The Taxpayer has indicated that the units have a useful life of 10 to 15 years, were bolted to the building, were essential to the fulfillment of its business goal of operating the building as a motel facility, and were only intended to be removed at the end of their useful lives.

Property Assessed as Both Real Property and BTPP

The Taxpayer asserts that the heating and cooling units were included in the City's assessments for both BTPP and real estate tax purposes. The City contends that the units were not double taxed. The City's real estate assessor uses the income capitalization approach to assess the real estate value of motels. The motel property is assessed as a whole. Then, the City allowed a per room reduction for personal property in assessing the real estate for the Taxpayer's motel. The per room reduction allowed by the City in assessing the real estate far exceeds the per room assessed value of BTPP under the City's audit for each of the tax years at issue.

DETERMINATION

Based on the information provided, it is my opinion that the air conditioning units were not double taxed. However, the City erred in limiting its analysis as to whether the heating and cooling units were fixtures to their condition of annexation to the building. Accordingly, I am remanding this matter to the City in order to reevaluate the units in accordance with the rules set forth in Danville Holding .

The Taxpayer has the burden of producing evidence regarding the classification of its heating and air conditioning units for property tax purposes. It should work with the City to determine the appropriate evidence necessary for the City to appropriately classify the units. In the event that the City determines, based on the evidence provided by the Taxpayer and the rules as set forth herein, that the units were incorrectly classified as tangible personal property, the City must reclassify the property and correct the related assessments.

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

Sincerely,

Linda D. Foster

Deputy Tax Commissioner

AR/1-4033977371.o