Are gas boilers that generate steam used as a heat and energy source throughout a chemical plant subject to the local machinery and tools tax?

Plain-English summary

Most tangible business property is taxed locally. Virginia carves out property 'used in manufacturing,' which the Constitution and Va. Code Sec. 58.1-1101 A 2 declare intangible (so it's subject to state taxation only) -- except a manufacturer's machinery and tools, which Va. Code Sec. 58.1-3507 makes a separate class of tangible property subject to local M&T tax. So the key question is whether a given item is 'machinery and tools' actually used in manufacturing.

The taxpayer manufactures resins and chemicals and built gas boilers that generate steam. The steam is piped throughout the facility and used to: drive turbines that turn equipment; lower pressure in other equipment; and feed heat exchangers and processing. The boilers are not located in any processing area.

The Commissioner explained the governing test from the Virginia Supreme Court:

• 'Machinery and tools' means machinery used in the actual process of manufacturing -- machinery necessary to, and used in connection with the operation of machinery actually and directly used in, the manufacturing process (City of Winchester v. American Woodmark, 250 Va. 451 (1995)).
• Property merely 'essential to the overall operations' isn't M&T unless it is actually and directly used in the process where materials are transformed, or is connected with the operation of machinery that is (The Daily Press, Inc. v. County of Newport News, 265 Va. 304 (2003)).
• A piece of machinery does not itself have to transform the product; equipment that never touches the product can still be 'used directly' (P.D. 04-39). And equipment that provides power/energy to the manufacturing machinery can qualify (P.D. 11-110, pollution-control equipment whose captured waste powered the plant).

Applying that, because the boilers appear to generate the energy that makes the manufacturing processes possible, the Department's opinion is that they should be classified as taxable M&T. The fact that the taxpayer could instead buy energy from a third party is not determinative -- the question is how the equipment the taxpayer owns and operates is used in its manufacturing.

Important limit. Whether specific equipment is M&T is a matter of fact (P.D. 14-22), and that determination is the prerogative of the local taxing authority. The Commissioner recommended the taxpayer contact the local official to set up a review of its operations.

What this means for you

Manufacturers with on-site utilities (boilers, generators, cogeneration)

Equipment that supplies steam, power, or heat to your manufacturing machinery can be taxable local machinery and tools -- even if it sits outside the production area and never touches the product. What matters is that it is actually and directly used in, or connected to the operation of machinery used in, the manufacturing process.

'We could have bought it from a utility' isn't the test

The analysis looks at how your owned-and-operated equipment functions in your process, not at hypothetical alternatives.

The locality has the last word

An advisory opinion frames the legal standard, but classification is fact-specific and belongs to the local commissioner of the revenue/assessor. Expect (and request) a local review of the actual equipment and its use.

Common questions

Why are manufacturing machinery and tools taxed locally when other manufacturing property isn't? Because Virginia declares manufacturing property intangible (state tax only) but carves out machinery and tools as a separate class subject to local tax (Va. Code Secs. 58.1-1101 A 2, 58.1-3507).

Do the boilers have to transform the resin to be M&T? No. Machinery that powers the process, or is connected to machinery directly used in it, can be M&T even if it never touches or transforms the product (P.D. 04-39, 11-110).

Is this opinion binding on the locality? It's advisory guidance on the legal standard; the actual taxability determination is a factual matter reserved to the local taxing authority (P.D. 14-22).

Citations and references

• Va. Code Sec. 58.1-1101 A 2 -- manufacturing property declared intangible (state tax only).
• Va. Code Sec. 58.1-3507 -- machinery and tools used in manufacturing are a separate, locally taxable class.
• Va. Code Sec. 58.1-3983.1 -- Department may issue advisory opinions on local business tax matters.
• City of Winchester v. American Woodmark, 250 Va. 451 (1995) and The Daily Press, Inc. v. County of Newport News, 265 Va. 304 (2003) -- the 'used in manufacturing' standard.
• P.D. 04-39, 11-110, 14-22 -- equipment need not transform the product; energy/power equipment can qualify; taxability is a matter of fact.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-109

Original ruling text

June 23, 2020

Re: Request for Advisory Opinion

Machinery and Tools Tax

Dear *:

This is in response to your letter in which you request an advisory opinion regarding whether certain boilers that generate steam at a facility operated by your client (the “Taxpayer”) are subject to 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 manufactures resins and chemicals at its facility. The Taxpayer has begun using steam from gas boilers that it constructed at the plant site. The steam is used as a heat and energy source for: (1) turbines that drive and turn the equipment; (2) equipment that lowers pressure in other equipment; and (3) heat exchangers and as a heat source for processing. The Taxpayer has different chemical processing areas that use the steam as an energy source, but the boilers are not located in any of the processing areas. The steam is distributed throughout the facility through a piping system.

OPINION

Taxation of Machinery and Tools

All tangible personal property, unless declared intangible under the provisions of Virginia Code § 58.1-1100 et seq., is reserved for local taxation by Article X, § 4 of the Constitution of Virginia . Included in the category of tangible property that is declared intangible and subject to state taxation only is “[c]apital which is personal property, tangible in fact, used in manufacturing (including, but not limited to, furniture, fixtures, office equipment and computer equipment used in corporate headquarters).” See Virginia Code § 58.1-1101 A 2.

The machinery and tools, motor vehicles and delivery equipment of a manufacturing business are not defined as intangible personal property. Such property is to be taxed locally as tangible personal property. Virginia has elected to create a separate classification of tangible personal property for machinery and tools used in manufacturing. Virginia Code § 58.1-3507 A provides:

Machinery and tools . . . used in a manufacturing . . . business shall be listed and are hereby segregated as a class of tangible personal property separate from all other classes of property and shall be subject to local taxation only.

“Used” in Manufacturing

In City of Winchester v. American Woodmark , 250 Va. 451, 458, 464 S. E.2d 148, 152 (1995), the Virginia Supreme Court (the “Court”) stated, “Since 1950, the Tax Commissioner has opined that the phrase ‘machinery and tools’ contained in Virginia Code § 58.1-1101 A 2 and its precursors means machinery used in the actual process of manufacturing.” The Court also cited previous opinions of the Attorney General in deriving the meaning of “used in manufacturing:”

The Attorney General has consistently opined that ‘machinery and tools’ used in a particular manufacturing business are the machinery and tools which are necessary in the particular manufacturing business and which are used in connection with the operation of machinery which is actually and directly used in the manufacturing process. Id., citing 1985-1986 Att'y. Gen. Ann. Rep. 316 at 317; see also 1987-1988 Att'y. Gen. Ann. Rep. 590. Id.

In The Daily Press, Inc. v. County of Newport News , 265 Va. 304, 576 S. E. 2nd 430 (2003), the Court amplified the principles set forth in American Woodmark :

The principle gleaned from American Woodmark can be simply stated: personal property that may be essential to the overall operations of a manufacturing business is not ‘machinery and tools’ subject to local taxation unless the property is actually and directly used in the manufacturing process where new materials are transformed into a substantially different product or the property is connected with the operation of machinery actually and directly used in the manufacturing process. 265 Va. 304, 311.

This language does not imply that each piece of machinery or tool used directly in the manufacturing process must be directly connected to the complete transformation of a material into something substantially different in character. In Public Document (P.D.) 04-¬39 (8/02/2004), the Department found equipment and tools that did not directly transform or even touch the product being produced could be used directly in the manufacturing process. The question, therefore, is not whether a particular piece of machinery transforms a product, but whether such machinery or tool is used directly in a manufacturing process.

In P.D. 11-110 (6/17/2011), a manufacturer used certain pollution control equipment located on the roof of its facility to remove fumes. It was specifically used to control particulates, volatile organic compounds and carbon monoxide emissions. The Department noted that the business was permitted to use the waste materials captured by the pollution control equipment to provide power and heat for the manufacturing plant. The Department stated that if the particulates and emissions were used to provide power to the manufacturing machinery, the pollution control equipment could be classified as machinery and tools.

In this case, it appears that the boilers at issue provide energy that is used in the Taxpayer’s manufacturing processes. It appears that such processes are made possible by the energy generated by the boilers. If that is the case, then it is the Department’s opinion that the boilers should be classified as taxable machinery and tools. The fact that the Taxpayer could purchase energy from a third party is not determinative of the outcome. The question is how the equipment the Taxpayer itself owns and operates at its facility is used in the manufacturing process.

A determination as to whether particular equipment is subject to the M&T tax is, however, a matter of fact. See P.D. 14-22 (2/26/2014). As such, a thorough examination of a taxpayer’s operations, including the machinery at issue and how it is specifically used in the operations must be conducted before such a determination can be made. Such examinations remain the prerogative of the local taxing authority. Therefore, I recommend the Taxpayer contact the appropriate official in order to set up a review of its business activities within the local jurisdiction.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3376.M

Related Documents

04-39

11-110

14-22