When my manufacturer buys used equipment at a bankruptcy sale, do I report 'original cost' for Virginia machinery and tools tax based on what I paid, or what the original owner paid?

Plain-English summary

The Hanover County Commissioner of the Revenue was working through a fact pattern that comes up regularly when local manufacturers buy used equipment at bankruptcy sales. Hanover assesses machinery and tools tax using the statutory percentage-of-original-cost method. A local manufacturer in 2012 picked up machinery and tools in a bankruptcy sale at a deeply discounted price. For tax purposes, was "original cost" the bargain price the local manufacturer paid at the bankruptcy auction, or the original price the bankrupt company had paid years earlier when the equipment was new?

The AG concluded "original cost" means the first purchaser's cost, not the current owner's purchase price.

Statutory analysis. Section 58.1-3503(A)(17) says certain trade or business tangible personal property "shall be valued by means of a percentage or percentages of original cost" (emphasis added). Section 58.1-3507(B) says machinery and tools "shall be valued by means of depreciated cost or a percentage or percentages of original total capitalized cost excluding capitalized interest" (emphasis added). The General Assembly did not define either term, but the word "original" carries ordinary-meaning weight: it refers to the original cost, not a subsequent purchaser's cost.

A prior AG opinion that was never disturbed. A 2009 AG opinion had already concluded that "original cost" in § 58.1-3503(A)(17) means "the cost paid by the original, or first, purchaser of such personal property[,]" not the current owner's price. The General Assembly had not amended the statute since 2009. Under Beck v. Shelton and Browning-Ferris, the legislature is presumed to know the AG's interpretation, and its failure to make corrective amendments evinces legislative acquiescence. The AG affirmed the 2009 conclusion.

The drafting distinction within § 58.1-3503(A). Subsections 4, 5, 10, 11, 12, 13, 15, and 17 use the term "original cost." Subsection 16 uses the term "original cost to the taxpayer." That drafting distinction is meaningful (Halifax Corp. v. Wachovia Bank). When the General Assembly wanted to make "original cost" mean "cost to the current taxpayer," it added the "to the taxpayer" qualifier. Without that qualifier, "original cost" means the first purchaser's cost.

Virginia Department of Taxation private letter rulings. The Tax Commissioner had ruled in PD 12-27 (March 2012) that "original cost" means the cost paid by the owner who first purchased the property, even when a subsequent owner bought the equipment at a bankruptcy sale. PD 13-20 (February 2013) defined "original total capitalized cost" similarly: "the purchase price of the owner that first purchased the machinery and tools, not the Taxpayer's cost." The Tax Commissioner's interpretations are entitled to "great weight" (Commonwealth v. Appalachian Electric Power Co.).

The fair-market-value question. The opinion acknowledged in a footnote that this construction can produce a fair market value significantly higher than what the current owner paid in a forced sale. That is not a constitutional problem under Article X, § 2's fair-market-value requirement, because "[t]he fair market value of an asset generally might exceed the purchase price paid for that asset at bankruptcy or similar foreclosure sale" (City of Martinsville v. Commonwealth Blvd. Assocs.). Fair market value contemplates a willing, non-obligated seller and a non-obligated buyer (American Viscose Corp. v. Roanoke), neither of which describes a bankruptcy sale.

Currency note

This opinion was issued in 2014. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The tangible personal property valuation framework (§§ 58.1-3503, 58.1-3507) remains in place but has been amended in detail since 2014. The Virginia Department of Taxation continues to issue private letter rulings on specific scenarios; the cited PD 12-27 and PD 13-20 remain available on the policy library. The legislative-acquiescence reasoning depends on the absence of amendments overruling the AG interpretation; as of any present-day return, the local commissioner of revenue or counsel should verify that no intervening amendment has shifted the meaning.

Common questions

Why does Virginia use original cost rather than what I paid?
The General Assembly chose original cost as the depreciation baseline for two reasons: it produces a uniform valuation for the same equipment regardless of who happens to own it, and it tracks fair market value more closely than transient transaction prices like bankruptcy sales.

How do I find out what the original purchaser paid?
Through invoices, purchase records, or asset-listing schedules that traveled with the equipment from the original purchase. In some bankruptcy sales, the receiver or trustee will provide cost data. If original cost cannot be ascertained, the Tax Commissioner and local commissioners use other valuation methods, including book value, comparable sales, or appraisals.

What is the difference between § 58.1-3503(A)(17) and § 58.1-3507(B)?
Section 58.1-3503(A)(17) is the general rule for trade and business tangible personal property: "percentage or percentages of original cost." Section 58.1-3507 covers the separate machinery and tools class, with § 58.1-3507(B) giving the valuation methods: "depreciated cost or a percentage or percentages of original total capitalized cost excluding capitalized interest." Despite the different phrasing, both refer to the first purchaser's cost.

Does "original cost" include freight, installation, or sales tax?
The opinion did not address what goes into "original cost." The Tax Commissioner has ruled on specific components of cost in various PDs; the local commissioner of revenue can also provide guidance.

What if I significantly upgraded the equipment after purchase?
The opinion did not address upgrades. As a general matter, capitalized improvements are added to the basis. The Tax Commissioner's PDs and the local commissioner's policies typically address how upgrades are handled.

Can I appeal an assessment I think is too high?
Yes. Virginia provides administrative appeals to the local commissioner of revenue, then to the Tax Commissioner under § 58.1-3983.1, and then to a circuit court correction action under § 58.1-3984. A taxpayer claiming that the assessment exceeds fair market value can introduce appraisal or sales evidence.

Does this same rule apply to all tangible personal property tax?
The opinion specifically addresses § 58.1-3503(A)(17) and § 58.1-3507(B). The drafting analysis (subsection 16's "original cost to the taxpayer" vs. other subsections' "original cost") suggests the same rule applies to other subsections that use bare "original cost." Specific subsections (especially subsection 16) use different language.

What if the original purchaser bought used equipment too?
The opinion is framed around "original cost paid by the original purchaser of the property from the manufacturer or dealer," implying the chain starts with the first new-equipment sale. If the equipment was originally sold as used by the manufacturer/dealer (rare but possible), the analysis may shift. The opinion did not address that variant.

Background and statutory framework

• Va. Const. art. X, § 1: taxes shall be uniform within the same class.
• Va. Const. art. X, § 2: real estate and tangible personal property assessed at fair market value as prescribed by law.
• Va. Const. art. X, § 4: tangible personal property subject to local taxation only, as prescribed by the General Assembly.
• Va. Code § 58.1-3503(A)(17): tangible personal property used in trade or business, valued by percentage of original cost.
• Va. Code § 58.1-3503(A)(16): contrast: uses "original cost to the taxpayer."
• Va. Code § 58.1-3507(A): machinery and tools as a separate class.
• Va. Code § 58.1-3507(B): machinery and tools valued by depreciated cost or percentage of original total capitalized cost (excluding capitalized interest).
• Va. Tax Comm'r Priv. Ltr. Rul. PD 12-27 (March 16, 2012): bankruptcy-sale buyer; "original cost" is the first purchaser's cost.
• Va. Tax Comm'r Priv. Ltr. Rul. PD 13-20 (February 15, 2013): "original total capitalized cost" is the first purchaser's price.

The interpretive moves:

• Ordinary meaning of "original" points to the first purchase.
• Sister subsection 16 uses the qualifier "to the taxpayer" when current-owner cost is intended; subsection 17's omission is meaningful.
• Legislative acquiescence in the 2009 AG interpretation supports the conclusion.
• The Tax Commissioner's parallel rulings are entitled to great weight.
• Fair market value can exceed forced-sale price; the Virginia Constitution is not violated.

Citations

• Va. Const. art. X, §§ 1, 2, 4
• Va. Code § 58.1-3503(A)
• Va. Code § 58.1-3503(A)(17)
• Va. Code § 58.1-3507(A)
• Va. Code § 58.1-3507(B)
• City of Va. Beach v. Bd. of Supvrs., 246 Va. 233, 435 S.E.2d 382 (1993)
• Beck v. Shelton, 267 Va. 482, 593 S.E.2d 195 (2004)
• Browning-Ferris, Inc. v. Commonwealth, 225 Va. 157, 300 S.E.2d 603 (1983)
• Halifax Corp. v. Wachovia Bank, 268 Va. 641, 604 S.E.2d 403 (2004)
• Commonwealth v. Appalachian Electric Power Co., 193 Va. 37, 68 S.E.2d 122 (1951)
• City of Martinsville v. Commonwealth Blvd. Assocs., LLC, 268 Va. 697, 604 S.E.2d 69 (2004)
• American Viscose Corp. v. Roanoke, 205 Va. 192, 135 S.E.2d 795 (1964)
• 2009 Op. Va. Att'y Gen. 177
• Va. Tax Comm'r Priv. Ltr. Rul. PD 12-27 (Mar. 16, 2012)
• Va. Tax Comm'r Priv. Ltr. Rul. PD 13-20 (Feb. 15, 2013)

Source

• Landing page: https://www.oag.state.va.us/annual-reports-opinions/official-opinions
• Original PDF: https://www.oag.state.va.us/files/Opinions/2014/14-018_Harris.pdf

Original opinion text

COMMONWEALTH of VIRGINIA
Office of the Attorney General
Mark R. Herring
Attorney General

June 26, 2014

900 East Main Street
Richmond, Virginia 23219
804-786-2071
FAX 804-786-1991
Virginia Relay Services
800-828-1120
7-1-1

The Honorable T. Scott Harris
Hanover County Commissioner of the Revenue
Post Office Box 129
Hanover, Virginia 23069

Dear Commissioner Harris:

I am responding to your request for an official advisory Opinion in accordance with § 2.2-505 of the Code of Virginia.

Issue Presented

You ask, for purposes of the valuation of property for the taxation of tangible personal property and the taxation of machinery and tools, whether the terms "original cost" as used in § 58.1-3503(A)(17) and "original total capitalized cost" as used in § 58.1-3507(B) of the Code of Virginia mean the cost paid by the original purchaser of the property from the manufacturer, or the current owner's purchase price.

Response

It is my opinion that the terms "original cost" as used in § 58.1-3503(A)(17) and "original total capitalized cost" as used in § 58.1-3507(B) mean the original cost paid by the original purchaser of the property from the manufacturer or dealer and not the price paid by the current owner.

Background

You advise that, for decades, the Hanover County Commissioner of Revenue has assessed a tax on machinery and tools located within the County by valuing the property at a percentage (10%) of the original cost paid by the original purchaser of the asset being taxed. A local manufacturer purchased machinery and tools, indisputably subject to this tax, in a bankruptcy sale in 2012. The question has arisen whether the "original total capitalized cost" of these assets, used to determine their fair market value for tax purposes, means the purchase price paid by the current owner, which in this case is the amount that the local manufacturer paid when it purchased the assets in a bankruptcy sale, or the price of the tools paid by the original purchaser of the property.

Applicable Law and Discussion

The Constitution of Virginia requires that "all taxes shall be uniform upon the same class of subjects"[1] and all assessments of tangible personal property "shall be at their fair market value, to be ascertained as prescribed by law."[2] Tangible personal property is segregated for and made subject to local taxation only, "and shall be assessed for local taxation in such manner and at such times as the General Assembly may prescribe by general law."[3]

In determining the value of tangible personal property, the General Assembly has provided that such property, when used in a trade or business, unless otherwise specified, "shall be valued by means of a percentage or percentages of original cost."[4] Machinery and tools are further segregated as a separate class of tangible personal property,[5] and the General Assembly has prescribed that such property "shall be valued by means of depreciated cost or a percentage or percentages of original total capitalized cost excluding capitalized interest."[6]

Although the General Assembly has provided no definition for the terms "original cost" and "original total capitalized cost," the statutes establishing the method of valuation clearly refer simply to the "original" cost of the property. They do not use any language referencing the purchase price of the taxpayer.

As a 2009 Opinion that similarly addresses the meaning of "original cost" in § 58.1-3503(A)(17) states, "words in a statute are to be construed according to their ordinary meaning, given the context in which they are used."[7] That Opinion concluded that the term "original cost" means "the acquisition cost of property from manufacturer or dealer, i.e., original cost paid by original purchaser of such property from manufacturer or dealer."[8] Because the General Assembly has not amended this language since this Opinion was issued,[9] I affirm its conclusion that "original cost" means the "the cost paid by the original, or first, purchaser of such personal property[,]"[10] and not the purchase price paid by a subsequent owner paying the tax.

I similarly must conclude that the plain meaning of "original total capitalized cost" refers to the cost of the product when new. Reading the numerous subsections of § 58.1-3503(A) as a whole further clarifies the proper interpretation of the terms "original cost" and "original total capitalized cost." There is a notable distinction between the term "original cost," used in subsections 4, 5, 10, 11, 12, 13, 15, and 17, and the term "original cost to the taxpayer," used in subsection 16.[11] Had the General Assembly intended the term "original cost" or "original total capitalized cost" standing alone to mean the cost to the taxpayer/current owner of the assets, there would be no need to make such distinction elsewhere in the Code.[12]

Because "the practical construction given to a statute by public officials charged with its enforcement is entitled to great weight by the courts and in doubtful cases will be regarded as decisive[,]"[13] it is significant that these conclusions are further supported by rulings of the Commissioner of the Department of Taxation. In a situation analogous to the circumstances leading to your inquiry, in which a company purchased assets at a bankruptcy sale and claimed their purchase price at the bankruptcy sale was the "original cost," the Tax Commissioner determined that a city's interpretation of original cost as the cost paid by the owner who first purchased the property was consistent with statutory requirements.[14] In a subsequent opinion, the Tax Commissioner defined the term "original total capitalized cost" as "the purchase price of the owner that first purchased the machinery and tools, not the Taxpayer's cost."[15]

Conclusion

Accordingly, it is my opinion that the terms "original cost" as used in § 58.1-3503(A)(17) and "original total capitalized cost" as used in § 58.1-3507(B) mean the original cost paid by the original purchaser of the property from the manufacturer or dealer.[16]

With kindest regards, I am

Very truly yours,

Mark R. Herring
Attorney General

[1] VA. CONST. art. X, § 1.

[2] VA. CONST. art. X, § 2.

[3] VA. CONST. art. X, § 4.

[4] VA. CODE ANN. § 58.1-3503(A)(17) (2013) (emphasis added).

[5] Section 58.1-3507(A) (2013).

[6] Section 58.1-3507(B) (emphasis added).

[7] Id. (quoting City of Va. Beach v. Bd. of Supvrs., 246 Va. 233, 236, 435 S.E.2d 382, 384 (1993)).

[8] 2009 Op. Va. Att'y Gen. 177, 178.

[9] "The legislature is presumed to have had knowledge of the Attorney General's interpretation of the statutes, and its failure to make corrective amendments evinces legislative acquiescence in the Attorney General's view." Beck v. Shelton, 267 Va. 482, 492, 593 S.E.2d 195, 200 (2004) (quoting Browning-Ferris, Inc. v. Commonwealth, 225 Va. 157, 161-62, 300 S.E.2d 603, 605-06 (1983)).

[10] 2009 Op. Va. Att'y Gen. at 178.

[11] Section 58.1-3503(A) (emphasis added).

[12] When the legislature omits language from one statute that it has included in another, courts may not construe the former statute to include that language, as doing so would ignore "an unambiguous manifestation of a contrary intention" of the legislature. See Halifax Corp. v. Wachovia Bank, 268 Va. 641, 654, 604 S.E.2d 403, 408 (2004).

[13] Commonwealth v. Appalachian Electric Power Co., 193 Va. 37, 45-46, 68 S.E.2d 122, 127 (1951).

[14] See Va. Tax Comm'r Priv. Ltr. Rul., Pub. Doc. 12-27 (Mar. 16, 2012), available at http://www.policylibrary.tax.virginia.gov/OTP/policy.nsf.

[15] See Va. Tax Comm'r Priv. Ltr. Rul., Pub. Doc. 13-20 (Feb. 15, 2013), available at http://www.policylibrary.tax.virginia.gov/OTP/policy.nsf.

[16] I am mindful that this construction can lead the fair market value of property for purposes of the machinery and tools tax or the personal property tax to be significantly more than what the current owner/taxpayer paid for the property, as is evidenced by the bankruptcy sale at issue in your request. The fair market value of an asset generally might exceed the purchase price paid for that asset at bankruptcy or similar foreclosure sale. See City of Martinsville v. Commonwealth Blvd. Assocs., LLC, 268 Va. 697, 604 S.E.2d 69 (2004). This does not, however, necessarily lead to taxation based upon more than fair market value in violation of Article X, § 2 of the Constitution of Virginia. As the Supreme Court of Virginia has stated, "The fair market value of property, as that term is here used means the price which it will bring when it is offered for sale by one who desires, but is not obliged, to sell it, and is bought by one who is under no necessity of having it." American Viscose Corp. v. Roanoke, 205 Va. 192, 194, 135 S.E.2d 795, 797 (1964) (citing § 169 of the 1902 Constitution of Virginia, the predecessor to Art. X, § 2 of the 1971 Constitution). Thus, this construction of §§ 58.1-3503(A) and 58.1-3507(B) is in accord with the constitutional requirements of uniformity and fair market value.