Did an economic-obsolescence appraisal prove that a county's percentage-of-original-cost machinery valuation exceeded fair market value?

Subject

Under-supported appraisal did not defeat machinery valuations

Plain-English summary

Virginia upheld the county's machinery-and-tools valuations because the county used a statutory method and the manufacturer's appraisal did not prove a fair-market-value overassessment. The county valued machinery as percentages of original total capitalized cost.

The manufacturer relied mainly on economic obsolescence and an inutility formula tied to unused capacity. The county found that the appraisal did not adequately explain the external causes, market position, business history, capacity calculation, or other assumptions supporting that reduction.

Virginia found that the county had considered the appraisal and clearly explained its rejection. The manufacturer therefore did not overcome the assessments' presumption of correctness, and abatement for 2009 through 2012 was denied.

What this means for you

• A locality must consider a bona fide independent appraisal but does not have to accept it.
• Economic-obsolescence adjustments need specific market evidence and well-supported capacity calculations.
• Uniformity and fair market value are considered together, with strong weight given to a uniformly applied statutory method.
• The taxpayer bears the burden of proving the statutory method produced more than fair market value.

Citations and references

• Va. Code §§ 58.1-3983.1, 58.1-3103, and 58.1-3507 B; Virginia Constitution art. X, §§ 1, 2, and 4.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-147

Original ruling text

August 26, 2014

Re: Appeal of Final Local Determination

Taxpayer: *

Locality Assessing Tax: *

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 the assessments of Machinery and Tools (M&T) tax issued to the Taxpayer by the *** (the "County") for the 2009 through 2012 tax years.

The M&T 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, the machinery and tools tax assessment is deemed prima facie correct, i.e. , the local assessment will stand unless the taxpayer proves 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 on­line in the Laws, Rules and Decisions section of the Department's web site, located at www.tax.virginia.gov .

FACTS

The Taxpayer operates a manufacturing facility in the County. In assessing the M&T tax, the County values machinery and tools as a percentage of original total capitalized cost. The Taxpayer contends that the County's method of valuing machinery and tools resulted in assessments that exceeded fair market value for the 2009 through 2012 tax years. The Taxpayer filed an appeal with the County and an appraisal to support its position that the value of the machinery and tools should be lower.

The County issued a final determination denying the Taxpayer's appeal, indicating the appraisal did not justify the departure from uniform methodology employed by the County. The Taxpayer appeals the County's final local determination, asserting that the County's method of valuation does not reflect the actual fair market value of the machinery and tools.

ANALYSIS

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). 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 Public Document (P. D.) 05-129 (8/3/2005).

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 § 58.1­3507 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. In valuing machinery and tools, the commissioner of the revenue shall, upon written request of the taxpayer, consider any bona fide, independent appraisal presented by the taxpayer [Emphasis added.]

The County asserts that it uniformly applies the percentage of original total capitalized cost methodology in its valuation of machinery and tools used in manufacturing. The Taxpayer contends that the preference for uniformity in assessing the value of tangible personal property cannot eclipse other evidence of fair market value. 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 asserts its independent appraisal shows the fair market value of its machinery and tools is less that the fair market value as determined by the County's methodology primarily due to the equipment's economic obsolescence. It argues the facility was unable to operate at its full operating capacity due to current economic constraints. The appraisal quantified this inability to operate at capacity through the usage of an "inutility" formula.

Economic obsolescence, also referred to as external obsolescence, is the loss in the value of property that results from external influences. Various external factors affect potential economic returns, thus having a direct impact on the market value of tangible property. A number of methods, including utilization, are used to quantify economic obsolescence. See P.D. 12-212 (12/31/2012).

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. 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 this case, the County concluded that the appraisal relied heavily on economic obsolescence in valuing the machinery and tools with little support or analysis for that reliance. It further states that the appraisal did not explain the external factors that caused the economic obsolescence, the marketplace of the Taxpayer, the facility's niche in that market, or the facility's business model and operating history. The County further determined that the appraisal did not adequately explain how the facility's capacity was ascertained for purposes of the computing the inutility percentage.

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. The valuation method employed by the County in this case is consistent with the statutory requirements.

In the matter of property valuation, the burden of proof lies with the Taxpayer to rebut the presumption of correctness. See § 58.1-3983.1 B 4. In order to do so, the Taxpayer must show by clear preponderance of evidence that the property is assessed at more than fair market value. See Tidewater Psychiatric Institute v. the City of Virginia Beach , 256 Va. 136, 501 S.E.2d 761 (1998).

Based on the facts presented in this case, the County considered the appraisal's primary rationale and raised valid issues concerning the applicability of economic obsolescence. Unlike other cases previously considered by the Department, e.g. , P.D. 05-129 and P.D. 12-145 (8/30/2012), the County performed due diligence by thoroughly evaluating the appraisal and clearly setting forth its reasoning in its final local determination. Accordingly, I find the Taxpayer has not met its burden of proving the statutory method of valuing the machinery and tools yielded a result inconsistent with fair market value and see no reason to reverse the determination of the County. As such, the Taxpayer's request for the abatement of the M&T tax assessments for the 2009 through 2012 tax years is denied.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5548390008.B