Could a hotel purchaser value acquired business property at its resale proceeds instead of the city's percentage-of-original-cost method?

Subject

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

Plain-English summary

A taxpayer bought a hotel, then sold or discarded most of its tangible assets. It reported 2014 business tangible personal property largely using the sale proceeds, while the city assessed a percentage of the property's original total cost.

Virginia upheld the city's method. For most property used in a trade or business, Va. Code § 58.1-3503 A 17 required valuation through a percentage or percentages of original cost. Original cost meant the capitalized price paid when an asset was first purchased new, not the amount paid by a later purchaser.

Local methods had to be uniform within a property category and reasonably expected to approximate fair market value. If a prescribed method produced a value well above fair market value, another authorized method could be used, but the taxpayer had to prove the local assessment incorrect by a clear preponderance of evidence.

The hotel buyer's later purchase allocation, federal reporting, and resale proceeds did not meet that burden. The city's valuation remained in place.

Citations and references

• Va. Code §§ 58.1-3983.1 B 4 and D 1, 58.1-3503 A 17, 58.1-3507 B, 58.1-3103, and 58.1-3109 6.
• Tidewater Psychiatric Institute v. City of Virginia Beach, 256 Va. 136, 501 S.E.2d 761 (1998), as cited in the ruling.
• P.D. 05-129, P.D. 12-27, and P.D. 13-20.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-171

Original ruling text

August 29, 2016

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 * (the “Taxpayer”) with the Department of Taxation. The Taxpayer appeals assessment of business tangible personal property (BTPP) tax issued to the Taxpayer by the *** (the “City”) for the 2014 tax year.

The BTPP tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 D 1 authorizes the Department to issue determinations on taxpayer appeals of BTPP tax assessments. On appeal, a local 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 public document 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 Taxpayer purchased a hotel located in the City. Shortly after the purchase, the Taxpayer either sold or discarded substantially all of the tangible assets. The Taxpayer filed a 2014 BTPP return reporting the assets based primarily on its sales price of the tangible property.

The City valued business tangible personal property at a percentage of the original total cost and issued an assessment. The Taxpayer appealed, contending the fair market value of the property sold should be the amount it realized on the sale. It further argued that the City's method of valuing business tangible personal property resulted in an assessment that exceeded fair market value.

The City issued a final determination denying the Taxpayer's appeal, indicating that the property was assessed using the uniform methodology as permitted by statute. The Taxpayer appeals the City's final local determination, asserting that the City's method of valuation does not reflect the actual fair market value of the business tangible personal property.

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).

Virginia Code § 58.1-3503 17 specifies that for most items of tangible personal property, fair market value is to be ascertained either by a percentage or percentages of original cost, or in the case of trucks and cars and certain other vehicles, by means of recognized pricing guides. Further, this statute stipulates:

Methods of valuing property may differ among the separate categories, so long as each method used is uniform within each category, is consistent with requirements of this section and may reasonably be expected to determine actual fair market value as determined by the commissioner of revenue or other assessing official . . .

Under the provisions of Va. Code § 58.1-3109 6, the local commissioner of the revenue is empowered with the authority to require records and other information necessary to make an accurate assessment of a person's tangible personal property. In the Taxpayer's case, the City relied upon schedules provided by the Taxpayer's accountant. Absent more concrete evidence, such documentation would generally be utilized by a locality for the purposes of determining the correct BTPP tax. It is incumbent upon the Taxpayer to prove to the satisfaction of the local taxing authority that it properly reported the value of its property on its BTPP returns. See Va. Code § 58.1-3983.1 B 4.

The City asserts that the value of the property it used to determine the BTPP tax was less than the prior owner's original cost. The Taxpayer contends that the sales price of the property was less than the City's valuation and that it used the same valuation it reported to the Internal Revenue Service. Regardless of whether the property was reported on a federal depreciation schedule, the valuation of a particular item of property is a factual matter for the City to determine. See Va. Code § 58.1-3983.1 B 4.

The Taxpayer further argues that it should not be held to the valuation reported by the previous owner. 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. The method of valuation to ascertain the fair market value of tangible personal property employed in a trade or business (other than items described in subdivisions 1 through 16 of Va. Code § 58.1-3503 A) is set forth in Va. Code § 58.1-3503 A 17.

All tangible personal property employed in a trade or business . . . shall be valued by means of a percentage or percentages of original cost . [Emphasis added.]

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 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 Op. Va. Att'y Gen (8-109), P.D. 12-27 (3/6/2012), P.D. 13-20 (2/15/2013) and Attorney General Opinion (6/26/2014).

DETERMINATION

Under Va. Code § 58.1-3503 A 17, the business tangible personal property sold by the Taxpayer is to be valued by using percentage or percentages of original cost in order to determine fair market value. The valuation method employed by the City 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 Va. Code § 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).

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/1-6345091724.B