Did claims of age, inefficiency, technological obsolescence, and low resale proceeds prove that a county overvalued manufacturing machinery?

Subject

Manufacturer did not prove county machinery valuation exceeded fair market value

Plain-English summary

Virginia upheld the county's 2008 machinery-and-tools assessment because the manufacturer did not prove that the valuation exceeded fair market value. The county used a statutory method based on percentages of original cost. The taxpayer pointed to old, inefficient equipment, declining product demand, technological obsolescence, and resale proceeds below assessed values.

The Commissioner explained that rules permitting technological-obsolescence treatment for ordinary business tangible personal property did not govern manufacturing machinery and tools. Va. Code § 58.1-3507 provided the separate classification and prescribed valuation methods.

Property still could not be valued above fair market value, but the local assessment was presumed correct. Unlike a prior case supported by an independent appraisal, this taxpayer supplied only assertions and no clear valuation evidence. The county's final determination therefore stood.

What this means for you

• A manufacturer's machinery and tools followed their own statutory valuation rules.
• Age, inefficiency, and claimed technological obsolescence did not themselves prove overvaluation.
• A taxpayer challenging the statutory method bore the burden to show a value above fair market value.
• Independent appraisal or similarly concrete evidence could be important in overcoming the presumption of correctness.

Common questions

Did Virginia say machinery may be assessed above fair market value?

No. It said all tangible personal property remained subject to the fair-market-value ceiling.

Why was the appeal denied?

The manufacturer offered no appraisal or clear evidence showing that the county's valuation exceeded fair market value.

Citations and references

• Va. Code §§ 58.1-3503, 58.1-3507(B), 58.1-3983.1, and 58.1-3984.
• Tuckahoe Women's Club v. County of Richmond, 119 Va. 734, 101 S.E.2d 571 (1958).
• P.D. 04-16 and 05-129.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-70

Original ruling text

May 15, 2009

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Machinery and Tools 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 an assessment of Machinery and Tools (M&T) tax issued to the Taxpayer by *** (the "County") for the 2008 tax year.

The M&T tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue determinations on taxpayer appeals of M&T tax assessments. On appeal, an M&T tax assessment is deemed prima facie correct. That is, 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 in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov.

FACTS

The Taxpayer has operated a manufacturing facility in the County for more than 30 years. Much of the equipment in the facility is more than 15 years old and lacks the efficiency of newer machinery. In addition, demand for the product manufactured at the facility is declining as a more efficient product gradually takes over the market.

For purposes of the M&T tax, the County assesses the value of machinery and tools using a valuation method based on a percentage of original cost for the property. Using this methodology, the County determined the assessed value of the Taxpayer's machinery and tools was higher than the Taxpayer's valuation. For the 2008 tax year, the Taxpayer used an alternative method in determining the value of its machinery and tools. The County revised the assessment using its statutory method of valuation. The Taxpayer appealed to the County, which upheld the assessment in its final determination.

The Taxpayer appeals the County's final local determination, asserting that the County's method of valuation does not reflect the actual fair market value of the machinery and tools. It contends that some of the equipment is up to 42 years old and either significantly reduced in value or technologically obsolete. The Taxpayer asserts that newer equipment is significantly more productive, and the proceeds from selling the older equipment was less than the County's assessed values and ignores the constitutional principle of fair market value.

ANALYSIS

Taxation of Property

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.

The Taxpayer contends that Board of Supervisors v. Telecommunications Industries, Inc. 246 Va. 472, 436 S.E.2d 442 (1993) provides that "technological obsolescence" must be considered when determining fair market value for purposes of the M&T tax. Telecommunications Industries, Inc. , however, addressed the valuation of business tangible personal property, not machinery and tools. Virginia Code § 58.1-3503 authorizes localities to factor in technological obsolescence in their valuation of tangible personal property of businesses that are not manufacturers. There is nothing in the statute that permits a taxpayer who is a manufacturer to factor in "technological obsolescence" when valuing machinery and tools.

Virginia Code § 58.1-3507 B provides that the machinery and tools of a manufacturer shall be valued by means of depreciated cost or a percentage or percentages of original total capitalized cost, excluding capitalized interest. All tangible personal property of manufacturers that is not used directly in the manufacturing process or indirectly in the making of equipment used in the process is classified as intangible and subject only to taxation by the state. See Va. Code § 58.1-1101 B.

Public Document (P.D.) 04-16 (05/14/2004) addresses a similar situation. In that case, the taxpayer contended that technological obsolescence of the machinery and tools had to be considered in the valuation of its property in order to achieve fair market value, and that the provisions of Va. Code § 58.1-3503 be used in the valuation of its machinery and tools. This position was firmly rejected in P.D. 04-16, which affirmed that the principles of Va. Code § 58.1-3503 B do not apply to machinery and tools used in manufacturing. Instead, Virginia Code § 58.1-3507 provides for a separate classification for machinery and tools used in manufacturing, and the methods of valuation for such property are specifically prescribed in that section.

In all cases, tangible personal property may not be valued at above fair market value. 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 P. D. 05-129 (08/03/2005).

In contesting valuations of tangible personal property, the taxpayer bears the burden of proof to demonstrate that property has been assessed at greater than fair market value. See Va. Code § 58.1-3984. Unlike the situation presented in P.D. 05-129, where the taxpayer offered an outside appraisal made by an independent firm to support its position, the Taxpayer in this case has produced no evidence supporting its method of valuation other than the assertions that similar equipment sold for less than the County's assessed value and that the equipment is not as efficient as newer equipment.

DETERMINATION

Absent clear evidence that the constitutional principle of fair market value was violated by the County's valuation methodology, it is my determination that the final local determination made by the Commissioner of the Revenue is correct. The Taxpayer's request for an abatement of the 2008 M&T tax assessment is denied.

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

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3082785582.B