Did three appraisals and an aborted asset sale prove a county's 2008-2009 machinery-and-tools values exceeded fair market value?

Subject

Manufacturer failed to disprove county machinery-and-tools valuations

Plain-English summary

Virginia declined to overturn a county's machinery-and-tools assessments because the manufacturer did not prove that the county's values were wrong. The county uniformly valued manufacturing machinery at percentages of capitalized cost, a method authorized by the cited statute.

The taxpayer supplied two appraisals after bankruptcy and reorganization, but they valued the whole company rather than machinery and tools alone. A proposed October 2008 asset sale did not close, so it was not an actual sales price deserving substantial weight. The taxpayer later submitted a third independent appraisal limited to machinery and tools. The county considered it but concluded its existing valuation remained acceptable.

Virginia explained that local assessments aim to combine uniform treatment with fair market value. A county must consider a bona fide independent appraisal submitted in writing, but consideration does not require accepting it. On the facts presented, the county had reviewed the appraisals and the taxpayer had not overcome the assessment's presumption of correctness.

Refunds for 2008 and 2009 were denied. The taxpayer could still seek circuit-court review of the county's decision under the cited provisions.

What this means for you

• Machinery-and-tools tax is imposed and administered locally.
• A valuation challenge should isolate the taxable machinery and tools rather than value the enterprise as a whole.
• An uncompleted sale may carry less weight than an actual arm's-length sale.
• Local consideration of an appraisal does not guarantee adoption of its value.
• The taxpayer bears the burden of proving the local assessment incorrect.

Common questions

Why were the first two appraisals rejected?

They valued the entire company, not only the machinery and tools subject to the tax.

Did the county ignore the third appraisal?

No. It considered the equipment-only appraisal but retained its valuation.

Were refunds granted?

No. Virginia declined to reverse the county.

Citations and references

• Va. Const. art. X, §§ 1, 2, and 4.
• Va. Code §§ 58.1-1100 et seq., 58.1-3103, 58.1-3507(B), 58.1-3983.1, and 58.1-3984.
• Tuckahoe Women's Club v. County of Richmond, 119 Va. 734, 101 S.E.2d 571 (1958).
• Fairfax County v. Telecommunications Industries, Inc., 246 Va. 472, 436 S.E.2d 442 (1993).
• Skyline Swannanoa v. Nelson County, 186 Va. 878 (1947).
• R. Cross Inc. v. City of Newport News, 217 Va. 202 (1976).
• American Viscose Corp. v. City of Roanoke, 205 Va. 192, 135 S.E.2d 795 (1964).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-74

Original ruling text

May 18, 2010

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Machinery and Tools 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 machinery and tools tax issued to the Taxpayer by *** (the "County") for the 2008 and 2009 tax years.

The machinery and tools tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue determinations on taxpayer appeals of machinery and tools tax assessments. On appeal, a machinery and tools tax assessment is deemed prima facie correct, i.e. , the local assessment will stand unless the taxpayer prove, 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 in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov.

FACTS

The County values machinery and tools by valuing the equipment at a percentage of the capitalized cost. The Taxpayer manufactures tangible personal property at a manufacturing facility located in the County.

The Taxpayer timely filed a machinery and tools tax return for the 2008 tax year and paid the tax. In early 2009, the Taxpayer provided to the County two different appraisals that valued the Taxpayer's machinery and tools at a lower value than the assessed value. The first appraisal was performed when the Taxpayer emerged from bankruptcy. The second appraisal was performed during the course of the Taxpayer's subsequent reorganization. It also provided evidence that the machinery and tools were negotiated for a sale that did not close in October 2008. The Taxpayer was sold in a stock sale in May 2009.

In May 2009, the Taxpayer filed an administrative appeal requesting a refund for the 2008 and 2009 tax years. In its appeal, the Taxpayer argued that the County's valuation method valued the Taxpayer's machinery and tools in excess of their fair market value. The County denied the Taxpayer's request to reduce the value of its machinery and tools in its July 2009 determination letter.

Subsequent to the County's determination, the Taxpayer proffered a third appraisal to the County that valued its machinery and tools at a lower value than the County's valuation method. The County considered the third appraisal, but did not adjust the value for the Taxpayer's machinery and tools. The Taxpayer now appeals the County's final local determination to the Tax Commissioner.

ANALYSIS

Taxation of Machinery and Tools

All tangible personal property, unless 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 . Article X, §§ 1 and 2 of the Constitution of Virginia provide that all property, unless specifically exempted within the provisions of the Constitution , shall be taxed at a uniform rate among classes, and that "all assessments of real estate and tangible personal property shall be at their fair market value to be ascertained as prescribed by general law." This provision of the Constitution contains the presumption that the General Assembly's prescribed valuation method will both standardize valuation practices across all the local governments in the Commonwealth and result in something approximating fair market value. Virginia Code § 58.1-3103 specifically charges local commissioners with the responsibility of assessing property at fair market value.

As part of his duties each commissioner of the revenue shall ascertain and assess, at fair market value, all subjects of taxation in his county or city on the first day of January in each year, except as otherwise provided by law. [Emphasis added.]

Fair market value is generally defined as the price a property will bring when offered by one who desires, but is under no obligation, to sell it, and the buyer has no immediate necessity to purchase it. See Tuckahoe Women's Club v. County of Richmond , 119 Va. 734, 101 S.E.2d 571 (1958).

In attempting to achieve property valuations that reasonably approximate fair market value, the General Assembly has statutorily prescribed different methodologies for use in the valuation of different classifications of property. For purposes of business tangible personal property taxation, the machinery and tools of manufacturers are separate from the general classification of tangible personal property. The method of valuation to ascertain the fair market value of machinery and tools used in a manufacturing business is set forth in Va. Code § 58.1-3507 B.

Machinery and tools segregated for local taxation . . . shall be valued by means of depreciated cost or a percentage or percentages of original total capitalized cost excluding capitalized interest. [Emphasis added.]

The County uniformly applies the percentage of the original cost methodology in its valuation of machinery and tools used in manufacturing.

The Taxpayer contends that preference for uniformity in assessing the value of tangible personal property cannot eclipse other evidence of fair market value. See Fairfax County v. Telecommunications Industries, Inc. , 246 Va. 472, 436 S.E.2d 442 (1993). The Virginia Supreme Court has consistently held that the constitutional requirements of uniformity and fair market value should be construed together, with the preference given to uniformity. This does not diminish the importance of fair market value, however. See Skyline Swannanoa v. Nelson County 186 Va. 878 (1947); quoted with approval, R. Cross Inc. v. City of Newport News 217 Va. 202 (1976).

The Taxpayer also avers that evidence of a property's actual sales price must be accorded substantial weight in the determination of fair market value. See American Viscose Corp. v. City of Roanoke , 205 Va. 192, 135 S.E.2d 795 (1964). This case addressed the actual sale of real property , not machinery and tools. In the instant case, the aborted asset sale in October 2008 should not be given substantial weight because it involved a potential sale of machinery and tools and no actual sale occurred.

Appraisals

Virginia Code § 58.1-3507 B requires a commissioner of revenue to consider any bona fide, independent appraisal presented by the taxpayer when valuing machinery and tools when requested in writing by the taxpayer. The Taxpayer originally submitted two appraisals valuing its assets. The County rejected these appraisals because they valued the entire company, not just the Taxpayer's machinery and tools. The Taxpayer submitted a third independent appraisal that limited its valuation only to the Taxpayer's machinery and tools. The County reviewed this appraisal but found its method of valuation was acceptable and did not adjust the assessments.

DETERMINATION

Virginia Code § 58.1-3507 B gives the County the option to choose among three specific methods of valuation of tangible property to best meet the constitutional requirement of fair market value. These methods do not preclude the County from considering an independent appraisal or other evidence of fair market value in an appeal of a machinery and tool tax assessment to demonstrate that the property was assessed above its fair market value.

It is my understanding that the County considered all of the independent appraisals offered by the Taxpayer and rejected them for a variety of reasons. Given the facts presented in this case, I find that the Taxpayer has not met its burden of proving the local assessment is incorrect, and I see no reason to reverse the decision of the County. Accordingly, I decline to grant the Taxpayer's request for refunds of machinery and tools taxes paid for the 2008 and 2009 tax years.

The Taxpayer may appeal the County's decision to the appropriate circuit court for review pursuant to Va. Code §§ 58.1-3983.1 G and 58.1-3984. Neither the Tax Commissioner nor the Department can be made party to such an appeal merely because the Tax Commissioner has ruled on the issue.

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

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3915313976.B