Were cable-television converter boxes taxable as local business tangible personal property for 2008 through 2010?

Plain-English summary

The cable converter boxes were intangible property exempt from the county's business tangible personal property tax. Customers needed the taxpayer-owned set-top boxes to receive service. The taxpayer had originally reported them as tangible property, then sought refunds for 2008 through 2010; the county instead classified them as taxable machinery.

Virginia's 1983 statute had expressly listed cable tuners and converters among property subject to local tax. The General Assembly removed those words in 1984. Virginia Tax Bulletin 84-7 and the Department's legislative impact statement explained that the amendment reclassified tuners and converters as intangible personal property.

Two Virginia circuit courts had reached conflicting results on converter taxation. The Commissioner followed the Department's longstanding interpretation, noting that the General Assembly had not corrected it. The case was returned to the county with instructions to issue refunds for the three tax years.

Common questions

Q: Did calling the boxes “machines” make them locally taxable?
A: No. The ruling treated the 1984 removal of tuners and converters from the taxable list as a deliberate reclassification.

Q: Were Virginia courts unanimous on the issue?
A: No. The ruling described conflicting circuit-court decisions and followed the Department's longstanding policy.

Q: What relief did the taxpayer receive?
A: The Commissioner remanded the matter for refunds of BTPP tax paid for 2008 through 2010.

Citations and references

• Virginia Constitution, Article X, § 4.
• Va. Code §§ 58.1-3983.1(D) and 58.1-1101(A)(2a).
• Virginia Tax Bulletin 84-7 (June 11, 1984).
• Chapter 692, 1984 Acts of Assembly.

Subject

Affiliate of a cable television provider; Converters are intangible property exempt from BTPP tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-162

Original ruling text

October 16, 2012

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 request a refund of Business Tangible Personal Property (BTPP) tax paid to the *** (the "County") for certain property owned by the Taxpayer for the 2008 through 2010 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 summarized below. The Code of Virginia sections and tax bulletin cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website.

FACTS

The Taxpayer is affiliated with a cable television provider. In order to receive the cable service, customers must have a converter, also known as a set top box. The converters are owned by the Taxpayer and are issued to cable customers by the cable television provider.

The Taxpayer classified the converters as tangible personal property on the 2008 through 2010 BTPP returns filed with the County. In June 2011, it filed a request for the refund of BTPP paid on the converters for the tax years at issue, contending the boxes were intangible property exempt from the BTPP tax. In its final determination, the County determined that the converters were machinery subject to tax. The Taxpayer has filed an appeal with the Tax Commissioner, contending the converters are intangible property not subject to the local taxation.

ANALYSIS

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 2a classifies certain property that is tangible in fact as intangible and segregates that property for state taxation only. Intangible property consists of, in part:

Personal property, tangible in fact, used in cable television businesses. Machines and tools, motor vehicles, delivery equipment, trunk and feeder cables, studio equipment, antennae and office furniture and equipment of such businesses shall not be defined as intangible personal property for purposes of this chapter and shall be taxed locally as tangible personal property according to the applicable provisions of law relative to such property.

The Taxpayer contends that the legislative history of Va. Code § 58.1-1101 A establishes that converters are properly classified as intangible property and cites Arlington Cable Partners v. County of Arlington, Virginia , Law No. 26719 (3/20/1987), in which the Circuit Court of the County of Arlington held that converters are not subject to the BTPP tax.

The County counters that the converters fit within the definition of "machines" used in cable television businesses, citing a decision by the Circuit Court of the County of Chesterfield. The decision in Comcast of Chesterfield County, Inc. v. Board of Supervisors for Chesterfield County , Law No. CL07-1003 (1/11/2008) held that converters are machinery and would, therefore, be subject to BTPP tax by a locality. As a result, Virginia courts are split on the issue as to whether cable converters are subject to local property taxation.

In 1983, the General Assembly added cable television companies to the list of businesses whose property was tangible in fact, but deemed to be intangible and set apart for state taxation. Virginia Code § 58-405 2 (the predecessor to Va. Code § 58.1­1101) stated the following was defined as intangible property:

Personal property, tangible in fact, used in manufacturing, mining, radio or television broadcasting, cable television, dairy, dry cleaning or laundry businesses, except machinery and tools, motor vehicles and delivery equipment of such businesses and the trunk and feeder cables, studio equipment, tuners, converters, antennae and office furniture and equipment of cable businesses. [Emphasis added.]

Based on this language, cable television tuners and converter boxes were considered tangible personal property subject to local taxation.

In its next session, the General Assembly again amended Va. Code § 58-405 2 (which was also recodified as Va. Code § 58.1-1101). In Chapter 692, 1984 Acts of Assembly , Va. Code § 58-405 was amended to provide a separate subsection for cable television businesses [ Va. Code § 58-405 2(a)] as follows:

Personal property, tangible in fact, used in cable television businesses, except machines and tools, motor vehicles and delivery equipment of such businesses, trunk and feeder cables, studio equipment, antennae and office furniture and equipment of such businesses.

The reference to tuners and converters was removed from the list of property subject to local taxation. The County argues that the term "machines" in the statute includes the tuners and converters and, therefore, they are subject to local taxation. I do not agree.

Following the 1984 General Assembly session, the Department issued Virginia Tax Bulletin (VTB) 84-7 (6/11/1984). In that document, the Department explained:

H.B. 827, enacted by the 1984 Session of the General Assembly, separately states and redefines the personal property, tangible in fact, of cable television businesses which constitutes intangible personal property. As redefined, intangible personal property includes, for cable television businesses only , all personal property, tangible in fact, except machines and tools, motor vehicles, and delivery equipment, trunk and feeder cables, studio equipment, antennae and office furniture and equipment.

The new definition removes any property of cable television businesses from the "machinery and tools" category for local taxation. Tuner and converters used in the cable television business, previously subject to local taxation, have been defined as intangible personal property by this amendment. [Emphasis in original.]

The Tax Bulletin is consistent with the Legislative Impact Statement prepared by the Department, which stated, "The bill also redefines tuners and converters used in cable television businesses as intangible personal property." House Bill 827, 1984 Legislative Impact Statement (02/23/84).

Based on these documents, the converter boxes are intangible personal property not subject to local taxation under Va. Code § 58.1-1101 A 2a.

Notwithstanding the decision of the Circuit Court of the County of Chesterfield in Comcast of Chesterfield County, Inc. v. Board of Supervisors for Chesterfield County , I must recognize the longstanding policy as announced by the Department at the time the 1984 legislation was passed. It is presumed that the General Assembly had knowledge of the Department's interpretation based on the Legislative Impact Statement and Tax Bulletin 84-7, but it has not made any corrective amendments. This evinces legislative acquiescence in the Department's interpretation.

DETERMINATION

Based on information provided, I find that the converters were intangible property exempt from BTPP tax under Va. Code § 58.1-1101 A 2a. As such, I am remanding the case back to the County to issue refunds for the 2008 through 2010 tax years in accordance with this determination. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4876014016.B