For Virginia machinery-and-tools tax, whose cost is the 'original total capitalized cost' after used equipment is purchased?

Plain-English summary

Virginia said “original total capitalized cost” means the cost capitalized by the owner that first purchased an asset new—not the lower amount paid by a later buyer. The manufacturer had acquired a facility and its machinery from a prior owner. Because the county valued machinery and tools using a percentage of original total capitalized cost, the parties asked which owner's cost controlled.

The Department read “original cost” as the asset's historical new-purchase cost. It therefore agreed with the county that the first owner's capitalized cost, rather than the taxpayer's later purchase price, was the statutory starting point.

The manufacturer also had an independent appraisal from the time of its purchase. Virginia law required the locality to consider a bona fide independent appraisal when the taxpayer requested that consideration in writing. But consideration did not require acceptance: the locality could keep its existing method if that method reasonably approximated fair market value.

If the locality accepted an appraisal as the fair-market-value measure, the ruling referred to P.D. 07-2's method of revising original total capitalized cost by dividing the accepted appraised value by the applicable depreciation percentage.

What this means for you

• Buying used machinery at a discount does not make the later purchase price its statutory “original” cost.
• Preserve records that can establish the first owner's capitalized new-asset cost.
• Submit a bona fide independent appraisal in writing if you want the locality to consider it.
• An appraisal can challenge a valuation that is well above fair market value, but the locality is not automatically required to adopt it.

Common questions

Q: Did the taxpayer's used-equipment purchase price control?
A: No. The ruling used the cost capitalized by the owner that first bought the machinery new.

Q: Must a county accept an independent appraisal?
A: No. It must consider a bona fide appraisal submitted in writing, but may reject it if the county's method reasonably approximates fair market value.

Q: What if the county accepts the appraisal?
A: The ruling said the original total capitalized cost should be revised to reflect the appraised fair market value using the depreciation-rate method described in P.D. 07-2.

Citations and references

• Va. Const. art. X, §§ 1, 2, and 4.
• Va. Code §§ 58.1-3103, 58.1-3507 B, and 58.1-3983.1 J 2.
• Tuckahoe Women's Club v. County of Richmond, 119 Va. 734, 101 S.E.2d 571 (1958).
• Samson v. Board of Supervisors, 257 Va. 589, 514 S.E.2d 345 (1999).
• R. Cross v. Newport News, 217 Va. 202, 228, S.E.2d 442 (1993).
• Virginia Public Documents 05-129, 07-2, 07-103, and 12-27; Op. Va. Att'y Gen. 8-109.

Subject

Fair market valuation of machinery and tools

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-20

Original ruling text

February 15, 2013

Re: Request for Advisory Opinion Machinery and Tools Tax

Dear *:

This is in response to your letter in which both the * (the "County") and *** (the "Taxpayer) request an advisory opinion regarding the valuation of machinery and tools owned by Taxpayer in the County for purposes of the machinery and tools tax.

The machinery and tools (M&T) tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 J 2 authorizes the Department to issue advisory opinions on local business tax matters. The following opinion has been issued subject to the facts presented to the Department summarized below. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.

FACTS

The Taxpayer operates a manufacturing facility in the County. The County values machinery and tools as a percentage of original total capitalized cost. The Taxpayer and the County have jointly requested that the Department define "original total capitalized cost" and provide an analysis of the relationship between "original total capitalized cost" and fair market value.

OPINION

Original Total Capitalized Cost

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.

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). If the valuation methodology employed by a locality results in an assessment well above fair market value, the locality may use another methodology prescribed in Va. Code § 58.1-3507 B. See P. D. 05-129 (8/03/2005).

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 Taxpayer and the County have offered competing views of the definition of “original total capitalized cost.” The County contends that original total capitalized cost means the cost of the machinery and tools paid by the owner who first purchased the property as capitalized. The Taxpayer argues that original total capitalized cost means the cost when it purchased the facility from the previous owner.

The General Assembly has not provided a definition for the term "original total capitalized cost" within the context of Va. Code § 58.1-3507 B. Absent a statutory definition, the plain and ordinary meaning of the term is controlling. See Samson v. Board of Supervisors , 257 Va. 589, 514 S.E.2d 345 (1999). Original cost means "[a]n asset's net price; the original cost of an asset. Also termed historical cost, original cost." Black's Law Dictionary 371 (Eighth Edition 2004). Based on this reasoning, the original total capitalized cost refers to the original price of an asset purchased new. Thus, the original total capitalized cost is the cost of the tangible property paid by the owner who first purchased the property as capitalized, not the costs paid by any subsequent purchasers. See Public Document (P.D.) 12-27 (3/6/2012) and Op. Va. Att'y Gen (8-109).

In this case, the Taxpayer purchased the facility including the machinery and tools from a previous owner. The purchase price of machinery and tools was less than the price paid by the owner who first purchased the assets. In accordance with P.D. 12­ - 27 and Op. Va. Att'y Gen (8-109), the original total capitalized cost would be the purchase price of the owner that first purchased the machinery and tools, not the Taxpayer's cost.

Appraisals

Virginia Code § 58.1-3507 B does require a local taxing authority to consider any bona fide, independent appraisal presented by the taxpayer when valuing machinery and tools when requested in writing by a taxpayer. The Taxpayer had commissioned an independent appraisal valuing its machinery and tools at the time of their purchase. It contends that the appraisal supports the use of book value for valuing its machinery and tools.

While the statute requires a local taxing authority to consider any bona fide, independent appraisal, such locality is not obligated to accept an appraisal when it determines its method reasonably approximates fair market value. See P.D. 05-129 and P.D. 07-103 (6/27/2007). When considering an appraisal, a locality must consider whether the method employed to determine the fair market value of machinery and tools results in manifest error. If such is the case, the local assessing officer has the authority to employ one of the other methods to better approximate fair market value. See R. Cross v. Newport News , 217 Va. 202, 228, S.E.2d 442 (1993).

In P.D. 07-2 (1/10/2007), the Department addressed the revaluing of machinery and tools when a locality agrees to an independent appraisal value submitted by a taxpayer. Because an appraisal is an approximation of fair market value, the original total capitalized cost of an asset must be revised to reflect the appraised fair market value. This is done by dividing the appraised value by the depreciation rate or percentage for the tax year in which the appraisal was accepted. See Table 4 in P.D. 07-2 for additional guidance.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5223854785.B