Were cable television converter boxes locally taxable as business tangible personal property in Virginia?

Plain-English summary

The Tax Commissioner held that the cable converter boxes were intangible property exempt from local Business Tangible Personal Property tax. The taxpayer owned the boxes and its affiliated cable provider issued them to customers so the customers could decode incoming signals and view cable programming.

Virginia Code § 58.1-1101(A)(2)(a) classified tangible-in-fact property used in cable television businesses as intangible, while preserving local taxation for listed categories such as machines and tools, vehicles, trunk and feeder cables, studio equipment, antennae, and office furniture and equipment. The Commissioner found that the converters were used in the cable business because customers could not view cable television without them.

The ruling also examined the 1983 and 1984 amendments. Converter boxes had initially appeared in the locally taxable list, but the 1984 legislation removed tuners and converters. Virginia Tax Bulletin 84-7 and the legislative impact statement said that the amendment classified them as intangible property. The Commissioner rejected the county's position that the boxes remained taxable as "machines."

The case was remanded to the county with instructions to issue refunds for the 2008 through 2010 tax years.

What this means for you

• The ruling turned on the specific cable-business classification in Va. Code § 58.1-1101(A)(2)(a), not a general exemption for all electronic equipment.
• Functional use mattered: the boxes decoded signals needed to receive cable television.
• The Department treated the 1984 deletion of tuners and converters from the locally taxable list as deliberate.
• BTPP tax is imposed and administered locally, even though the Tax Commissioner decided this state-level appeal.

Common questions

Q: Did renting the boxes to customers keep them outside the cable business?
A: No. The Commissioner found them used in the cable television business because they enabled customers to decode and view programming.

Q: Were the boxes taxable as machinery?
A: No. The ruling treated the 1984 amendment and contemporaneous Department guidance as classifying tuners and converters as intangible property.

Q: What relief was ordered?
A: County refunds of the BTPP tax paid for 2008 through 2010.

Citations and references

• Va. Code §§ 58.1-3983.1(D) and 58.1-1101(A)(2)(a).
• Virginia Tax Bulletin 84-7 (June 11, 1984).
• Virginia Public Documents 12-162 and 12-163 (October 16, 2012).

Subject

Affiliated of cable television; Provides converters intangible property exempt from BTPP tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-199

Original ruling text

December 6, 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 Laws, Rules, and Decisions 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 July 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 not used in the cable television business and 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.

Used in Business

In its final determination, the County found that the converters were not used by the Taxpayer in the cable business because the Taxpayer merely rented converters to cable customers. The County also argues that the customers did not use the converters as part of the cable television business, but rather they were used as part of their personal home entertainment systems. The Taxpayer asserts that the converters were used in cable television businesses because the converters decode incoming video signals that allow customers to view cable televisions.

In Lawrence Carr, Jr. v. W. H. Forst, Tax Commissioner of the Commonwealth of Virginia , 249 Va. 66, 453 S,E.2d 274 (1995), the Virginia Supreme Court stated that if a statute is clear and unambiguous, a court must accept its plain meaning and not resort to extrinsic evidence or rules of construction. Virginia Code § 58.1-1101 A 2a classifies tangible property "used in cable businesses" as intangible. [Emphasis added.] Converters decode incoming video signals that allow customers to view programming. Without such converters, cable television customers would be unable to view cable television. As such, pursuant to the plain meaning of Va. Code § 58.1-1101 A 2a, the converters are "used in cable television businesses."

Machinery

The Taxpayer 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 cites the decision in Comcast of Chesterfield County, Inc. v. Board of Supervisors for Chesterfield County , Law No. CL07-1003 (1/11/2008), which held that converters are machinery and, therefore, would 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.

The Taxpayer contends that the legislative history of Va. Code § 58.1-1101 A establishes that converters are properly classified as intangible property. The County counters that the there is no need to address the legislative history of Va. Code § 58.1­1101 A because converters fit within the plain meaning of machinery as defined in the dictionary.

A review of the legislative history does show whether converters are subject to 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 § 58.1-1101) 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.

Further, the Department recently addressed this issue in Public Documents (P.D.) 12-162 and 12-163 (10/16/2012). In those determinations, the Department recognized the longstanding policy as announced at the time the 1984 legislation was passed and presumed that the General Assembly had knowledge of the Department's interpretation based on the Legislative Impact Statement and Tax Bulletin 84-7. A lack of corrective amendments by the General Assembly 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

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