I bought used restaurant equipment for less than what the city says it's worth for tax purposes -- shouldn't the price I actually paid control the value used to tax it?

Plain-English summary

A taxpayer purchased several franchise restaurant locations in a Virginia city, acquiring business tangible personal property (BTPP) -- restaurant equipment -- along with them. The taxpayer used the price it actually paid for that equipment as the "fair market value" for computing BTPP tax owed to the city. Under audit, the city instead determined fair market value using a percentage of the equipment's ORIGINAL cost (a higher figure than the purchase price) and assessed tax accordingly. The taxpayer appealed, contending the city's method overstated the equipment's true value.

Virginia's Constitution requires tangible personal property to be assessed at fair market value, and charges local commissioners of the revenue with that responsibility. For most business tangible personal property, Virginia Code § 58.1-3503 A 18 specifies that fair market value is to be determined by applying a percentage (or percentages) to the property's "original cost." Although the statute itself doesn't define "original cost," Department rulings and Attorney General opinions have consistently interpreted the term to mean the price paid by the FIRST purchaser from a manufacturer or dealer -- not the price paid by any later, subsequent purchaser (like the taxpayer here, who bought used equipment from the franchise's prior owner).

The Tax Commissioner held the city's valuation method -- applying a percentage to the original cost -- was exactly what Virginia Code § 58.1-3503 A 18 requires, and was therefore correct. In a BTPP valuation dispute, the assessment is presumed correct, and the burden falls on the taxpayer to show, by a clear preponderance of the evidence, that the property was assessed above its actual fair market value. Simply pointing to a lower purchase price wasn't enough to meet that burden here, since the statutory method is keyed to original cost rather than a subsequent buyer's purchase price. (The Commissioner noted that if a valuation method produces an assessment well above fair market value, a locality may use an alternative method under Va. Code § 58.1-3507 B -- but that alternative wasn't shown to apply on these facts.)

What this means for you

Businesses that acquire used equipment, fixtures, or other tangible personal property (e.g., buying an existing franchise or business)

Don't assume your purchase price is automatically the taxable value for BTPP purposes -- Virginia's default statutory method for most business tangible personal property values it using a percentage of the ORIGINAL cost (what the first purchaser paid a manufacturer or dealer), which will often be higher than what you paid for used property.

Taxpayers who believe a BTPP assessment based on original cost is too high

You bear the burden of proving the assessment exceeds fair market value by a clear preponderance of the evidence -- a lower purchase price alone is unlikely to be sufficient on its own, since it doesn't address the "original cost" figure the statute actually requires. Consider whether the assessment is so far above true fair market value that the locality should instead use the alternative valuation method under Va. Code § 58.1-3507 B.

Localities assessing BTPP tax

Applying a percentage-of-original-cost table to acquired used equipment (rather than the acquiring taxpayer's own purchase price) is consistent with Virginia Code § 58.1-3503 A 18 and has been repeatedly upheld -- but be prepared for a taxpayer to argue an alternative method should apply if the resulting figure is well above actual fair market value.

Common questions

Q: For business tangible personal property tax, is my value based on what I paid or on some other figure?
A: For most business tangible personal property, Virginia law requires valuation by a percentage of the property's ORIGINAL cost -- meaning what the very first purchaser paid a manufacturer or dealer -- not what you, as a later purchaser, actually paid for it.

Q: Who has to prove a BTPP assessment is wrong?
A: The taxpayer. A BTPP assessment is presumed correct, and the taxpayer must show by a clear preponderance of the evidence that it doesn't reflect fair market value.

Q: Is there any way around the original-cost valuation method if it produces an unfairly high assessment?
A: Potentially -- Virginia Code § 58.1-3507 B allows a locality to use an alternative valuation method if the prescribed method results in an assessment well above fair market value, though the taxpayer must make that showing.

Citations and references

• Tuckahoe Women's Club v. County of Richmond, 119 Va. 734, 101 S.E.2d 571 (1958) (defining fair market value as the price property will bring when offered by a willing, unobligated seller to a buyer under no immediate necessity to purchase)
• Public Document 05-129 (8/3/2005) (a locality may use an alternative valuation methodology under Va. Code § 58.1-3507 B if its prescribed method results in an assessment well above fair market value)
• 2009 Op. Va. Att'y Gen. 18; Public Document 12-27 (3/6/2012); P.D. 13-20 (2/15/2013); 2014 Op. Va. Att'y Gen. 20; and P.D. 16-171 (8/29/2016) (consistent interpretation that "original cost" under Va. Code § 58.1-3503 A 18 means the cost paid by the original purchaser from a manufacturer or dealer, not by subsequent purchasers)
• Tidewater Psychiatric Institute v. City of Virginia Beach, 256 Va. 136, 501 S.E.2d 761 (1998) (taxpayer must show by clear preponderance of the evidence that property is assessed above fair market value)

Subject

Valuation : Fair Market Value : Original Cost

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-107

Original ruling text

August 10, 2021

Re: Appeal of Final Local Determination

Taxpayer: *

Locality Assessing Tax: *

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 appeal assessments of business tangible personal property (BTPP) tax issued to the Taxpayer by *** (the “City”) for the 2017, 2018, and 2019 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 public documents cited are available online at www.tax.virginia.gov in Laws, Rules, and Decisions section of the Department’s website.

FACTS

The Taxpayer acquired items of BTPP when it purchased several franchise restaurant locations in the City. The Taxpayer used the purchase price of the property as the fair market value (FMV) for purposes of computing the BTPP tax due to the City. Under audit, the City determined the FMV by using a percentage of the original cost and issued assessments. The Taxpayer appealed to the City, contending that the assessed value did not reflect the true FMV. In its final determination, the City concluded that it had properly assessed the BTPP tax based on a percentage of the equipment’s original cost. The Taxpayer appealed to the Department, contending the City improperly estimated the FMV of the property.

ANALYSIS

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 . 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 FMV. 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 Virginia Code § 58.1-3507 B. See Public Document (P.D.) 05-129 (8/3/2005).

Virginia Code § 58.1-3503 A 18 specifies that for most items of tangible personal property that is used in a trade or business, FMV is to be ascertained either by a percentage or percentages of original cost. Although the General Assembly has provided no definition for the term “original cost,” it has consistently been interpreted to mean the cost paid by the original purchaser from a manufacturer or dealer and not the cost paid by subsequent purchasers. See 2009 Op. Va. Att’y Gen 18, P.D. 12-27 (3/6/2012), P.D. 13-20 (2/15/2013), 2014 Op. Va. Att’y Gen. 20, and P.D. 16-171 (8/29/2016).

DETERMINATION

Under Virginia Code § 58.1-3503 A 18, the BTPP sold to the Taxpayer is to be valued by using a percentage or percentages of original cost in order to determine FMV. 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 Virginia 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 contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3599-C

Related Documents

13-20

12-27

05-129