What does Virginia Ruling of the Tax Commissioner P.D. 09-22 conclude about Aircraft is tangible personal property; extraction of natural gas (mining)?

Subject

Affiliate-owned aircraft remained taxable business tangible personal property

Plain-English summary

Virginia concluded that the county could impose business tangible personal property tax on an aircraft owned by a natural-gas company's affiliate. Natural-gas extraction counted as mining for the cited property-tax classification, but the aircraft was used to transport employees rather than mined materials and was unlikely to qualify as mining machinery and tools.

The decisive ownership issue also defeated the claimed intangible-property treatment. The aircraft belonged to a separate LLC affiliate that performed no mining. Its disregarded federal and state income-tax status, lack of an FEIN, absence of payroll, and the operating company's payment of all expenses did not change the legal owner for local property tax.

Virginia said the owner must list and pay tax on the property. Because the affiliate owned the aircraft and was not itself engaged in mining, the mining-business classification did not extend to the aircraft.

What this means for you

• Local property-tax classification follows legal ownership, not merely consolidated economics or income-tax disregarded status.
• An affiliate must independently satisfy an activity-based classification or exemption.
• Employee transportation was distinguished from equipment used to transport extracted materials.
• BTPP is locally administered, so situs, local classification, valuation, and filing rules also matter.

Common questions

Did Virginia treat natural-gas extraction as mining?

Yes, based on the authorities cited in the opinion.

Was the airplane mining machinery and tools?

No. It transported employees and never transported natural gas.

Did disregarded-entity status merge the affiliate with the taxpayer for BTPP?

No. Virginia treated legal ownership as controlling.

Citations and references

• Va. Const. art. X, § 4.
• Va. Code §§ 58.1-3983.1(J)(2), 58.1-1101(A)(2), 58.1-3507(A), 58.1-3518, and 58.1-3015.
• P.D. 07-191.
• George M. Warren v. Clinchfield Coal Corp., 166 Va. 524, 186 S.E. 20 (1936).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-22

Original ruling text

February 6, 2009

Re: Request for Advisory Opinion

Business Tangible Personal Property Tax

Dear *:

This is in response to your letter in which you request an advisory opinion as to whether an aircraft owned by a wholly owned affiliate of * (the "Taxpayer") and used in the Taxpayer's oil and gas excavation business, is intangible property for purposes of local property taxation.

The business tangible personal property (BTPP) 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.

While addressing the questions raised in your letter, this response is intended to provide advisory guidance only, and does not constitute a formal or binding ruling. The Code of Virginia sections 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, located in * (the "County"), is in the business of natural gas exploration and extraction. The Taxpayer wholly owns *** (the "Affiliate"), a limited liability company (LLC). The Affiliate owns an aircraft used by the Taxpayer's employees to fly to areas in which the Taxpayer owns natural gas wells and other business locations. The Affiliate has no other property and has no payroll or other expenses. All of the aircraft's operational and maintenance expenses are paid by the Taxpayer. The aircraft is never used to transport natural gas. The aircraft is housed in a hanger located at an airport in the County. The Taxpayer raises three questions concerning the application of the BTPP tax to the aircraft.

OPINION

Question 1

Is natural gas exploration and extraction considered mining for purposes of the BTPP tax?

Article X, § 4 of the Virginia Constitution provides that all tangible personal property shall be segregated for local taxation in such a manner as the General Assembly provides by law. Virginia Code § 58.1-1101 A 2 classifies certain property that is tangible in fact as intangible and segregates that property for state taxation only. Intangible property consists of, in part::

Capital 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), mining , water well drilling, radio or television broadcasting, dairy, dry cleaning or laundry businesses. Machinery and tools, motor vehicles and delivery equipment of such businesses shall not be defined as intangible personal property for purposes of this chapter and shall be taxed locally as tangible personal property according to the applicable provisions of law relative to such property . . . . [Emphasis added.]

Further, the machinery and tools, motor vehicles and delivery equipment of a mining business are not defined as intangible personal property. Such property is to be taxed locally as tangible personal property. To this end, Virginia Code § 58.1-3507(A) provides:

Machinery and tools . . . used in a . . . mining.... 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.

The term "mining" is not defined under any Virginia statute. Black's Law Dictionary 1016 (8th ed. 2004) defines "mining" as "[t]he process of extracting ore or mineral from the ground; the working of a mine... [t]his term also encompasses oil and gas drilling." In George M. Warren, et al. V. Clinchfield Coal Corporation , 166 Va. 524, 186 S.E. 20 (1936), the Virginia Supreme Court held that the term "mineral" includes all petroleum, oil, and gas. Based on these authorities, I conclude that the extraction of natural gas would be included in the term "mining" for the purposes of Va. Code § 58.1-1101 A 2.

Question 2

If the Taxpayer is engaged in a mining business, would the aircraft as described in this ruling be considered intangible personal property?

As stated above, machinery and tools, motor vehicles and delivery equipment of a mining business are subject to the M&T tax under Va. Code § 58.1-3507. The question is whether the aircraft, as used by the Taxpayer, is subject to the M&T tax.

According to the Taxpayer, the aircraft is used to transport its employees to and from the Taxpayer's various facilities and other business locations. Unless an aircraft owned by a mining company is used to transport any of the materials that were mined, I find it highly unlikely that it could be classified as property subject to the M&T Tax. In this case, the airplane would not be considered to be machinery and tools subject to local taxation.

Question 3

Does the Affiliate's ownership of the aircraft affect the aircraft's classification for BTPP purposes?

In Public Document (P.D.) 07-191 (11/21/07), the Tax Commissioner concluded that the exemption provided for manufacturers in Va. Code § 58.1-1101 A 2 does not extend to separate legal entities that perform no manufacturing activities. The same analysis would apply to affiliates of mining businesses.

The Taxpayer contends that its situation can be distinguished from that in P.D. 07-191. The subsidiaries in that ruling were separately incorporated, had their own FEIN numbers for federal income tax purposes, and actually performed business functions including administrative and management services.

To contrast this, the Taxpayer avers that the Affiliate has never held itself out as a separate business, all BTPP taxes previously assessed have been paid for by the Taxpayer, the Affiliate performs no business activities, does not have an FEIN and, as an LLC, is a disregarded entity for purposes of federal and state income tax. According to the information provided, the aircraft is flown and maintained by Taxpayer employees and it bears all aircraft expenses. As such, the aircraft should be deemed intangible property not subject to the BTPP tax as provided in Va. Code § 58.1-1101 A 2.

I cannot agree with the Taxpayer's position. The statute clearly imposes the tax on the owner of the property. The fact that an entity is disregarded for federal and state income tax purposes, performs no business activities, and has no FEIN has no bearing as to whether it is the owner of property subject to local taxation.

The controlling factor in Virginia property taxation is who is the legal owner of the property identified for taxation. Under Va. Code § 58.1-3518, all taxpayers "owning any of the property subject to taxation" are required to file personal property tax returns. Further, Va. Code § 58.1-3015 provides in pertinent part that "[i]f the property belongs to a corporation or firm, it shall be listed by and taxed to the corporation or firm." A "firm" is the "title under which one or more persons conduct business jointly." See Black's Law Dictionary 666 (8th ed. 2004). The Affiliate was formed to serve a business purpose of holding an aircraft used by the Taxpayer. Even if the Affiliate conducts no business activities, it is conducting business jointly with the Taxpayer. Based on these statutes, it is the entity that owns the property that is required to make a report of the value to the local taxing authority, and is ultimately liable for the tax. See Commonwealth et al. v. Henry L. Schmelz , 114 Va. 364, 76 S. E. 905 (1913) and Commonwealth of Virginia and the County of Rockbridge v. Southeastern Iron Corporation , 142 Va. 107, 128 S.E. 528 (1925).

In this case, the aircraft is tangible personal property subject to taxation in the County. The Affiliate, not the Taxpayer, is the owner of the aircraft. Further, the Affiliate is a legal entity under Virginia law. Because the Affiliate is not engaged in mining, the airplane would not be exempt under Va. Code § 58.1-1101 A 2. Accordingly, the County may impose the BTPP tax on the aircraft.

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

Sincerely,

Janie E. Bowen

Tax Commissioner

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