Did four 15-ton refrigeration units installed at a warehouse become real-property fixtures or remain business tangible personal property?

Subject

Leased warehouse space including the refrigerated space to a tenant on a seasonal basis.

Plain-English summary

Virginia remanded the refrigeration-unit classification and did not finally decide whether the units were real property or taxable business tangible personal property. The warehouse included more than 10,000 square feet of refrigerated space leased seasonally. Four ceiling-mounted units, each weighing 15 tons, were installed through an opening cut in the roof.

Virginia applied three fixture factors from Danville Holding: annexation to the realty, adaptation to the real property's use, and the property owner's intent to make a permanent addition. Owner intent was the paramount consideration.

The city had treated the units as personal property based on the tenant's production use and asserted removability. Virginia said the tenant's intent was not the correct focus; the warehouse owner's intent controlled. But the owner had not submitted objective evidence about the installation process, building adaptation, or heating function it claimed.

The city had to reconsider the issue under the three fixture tests after the owner provided evidence within 45 days, then determine any adjustments for 2005 and 2006.

What this means for you

• Equipment serving a tenant's business is not automatically business personal property of the building owner.
• Document physical attachment, removal effects, building design, functional adaptation, and intended useful life.
• For owner-installed property, the owner's intent—not the tenant's use—is central to fixture analysis.
• A remand for additional evidence is not a final real-property classification.

Common questions

Did the roof opening and crane installation prove fixture status?

Not by themselves. Virginia said objective evidence was still needed.

Why was the city's analysis wrong?

It relied on the tenant's production use instead of evaluating the warehouse owner's intent and all three fixture tests.

Citations and references

• Va. Code § 58.1-3983.1(D)(1).
• Va. Code §§ 58.1-1100 et seq., 58.1-3200 et seq., and 58.1-3500 et seq.
• Virginia Constitution art. X, § 4.
• Danville Holding Corp. v. Clement, 178 Va. 223, 16 S.E.2d 345 (1941).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-2

Original ruling text

January 5, 2011

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Business Tangible Personal Property (BTPP) Tax

Dear *:

This final state determination is issued upon the application for correction filed by * (the "Taxpayer") with the Department of Taxation. The Taxpayer appeals a final local determination by the *** (the "City") denying the Taxpayer's request to classify certain tangible personal property as realty for BTPP tax purposes. I apologize for the delay in the Department's response.

The BTPP tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 D 1 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 on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.virginia.gov.

FACTS

The Taxpayer owned a warehouse in the City that included refrigerated space. The Taxpayer leased a portion of the warehouse including the refrigerated space to a tenant on a seasonal basis. The tenant required a refrigerated area in order to keep its product at a cooled temperature.

The refrigerated space is divided into three rooms capped by four ceiling­-mounted refrigeration units, each weighing fifteen tons. In 2005, the Taxpayer installed new refrigeration units. Installation of the refrigeration units required cutting a hole in the building's roof and using a crane to hoist the units atop the refrigerated area.

The City adjusted the Taxpayer's 2004 through 2006 BTPP tax returns to include the refrigeration units as tangible personal property and issued assessments. The Taxpayer appealed the assessments to the City. In its final determination, the City upheld the assessments on the basis that the tenant used the equipment in a production process. The Taxpayer appeals the City's determination to the Tax Commissioner, contending that significant alterations were made to the building when the units were installed. Furthermore, the Taxpayer asserts that its intention is for the units to remain in place and in use until their useful life expires.

ANALYSIS

Real property and all tangible personal property except the rolling stock of public service corporations and that which is 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 .

The method of taxation of real property is provided under Va. Code § 58.1-3200 et seq. , whereas the taxation of tangible personal property is provided under Va. Code § 58.1-3500 et seq. On those occasions when an item of tangible personal property is determined to be a fixture, it is treated as real property for purposes of local taxation. Fixtures are presumed to be annexed to the realty in some form.

In Danville Holding Corp. v. Clement , 178 Va. 223, 232, 16 S.E.2d 345, 349 (1941), the Virginia Supreme Court set forth three general rules to be used in determining whether an article of tangible personal property is a fixture, and thus considered a part of the real estate for purposes of taxation, or remains personal property subject to taxation as BTPP. The three tests are: (1) the annexation of the chattel (property) to the realty, actual or constructive; (2) its adaptation to the use or purpose to which that part of the realty to which it is connected is appropriated; and (3) the intention of the parties, i.e. , the intention of the owner of the chattel to make it a permanent addition to the freehold.

In order for the rules to apply, it is presumed that the property is annexed to the realty in some form. In its decision, the Supreme Court noted that the "intention of the party making the annexation is the paramount and controlling consideration."

Annexation

The City concluded that the refrigeration units could be removed without damage to the property or the units themselves and, therefore, they remained tangible personal property. The Taxpayer stated that the new refrigeration units merely replaced existing units that were included in the purchase price of the building. The Taxpayer further indicated the process of installing the new units was a complicated process that involved removing a section of the roof of the building in order to have the 15 ton units placed properly. The Taxpayer has, however, provided no objective evidence concerning the installation process.

Adaptation

The City stated that the refrigeration units were used to refrigerate an area used by the tenant, and were not used to provide climate control for the building. The Taxpayer argues that the heat removed by the refrigeration units was exhausted into the nonrefrigerated area and was the only source of heat for the area of the building leased by the tenant. Again, the Taxpayer has provided no objective evidence to support these assertions.

In considering the adaptation of the refrigeration units, consideration must be given to the purpose of the refrigerated space. Such space usually includes insulated floors, walls, and ceilings, moisture barriers and seals, and specialized entranceways. In this case, the Taxpayer states that the 90,000 square foot building contained more than 10,000 square feet of space designed to be refrigerated. No question has been raised as to whether this space was a part of the realty. If it was, the refrigeration units could be considered to be essential to the overall functionality of the building.

Intention of the parties

The City asserts that under the lease agreement, the intention of the parties is to allow the tenant to use the refrigerated space in its business. Based on this analysis, the City concluded that the refrigeration units were used as equipment in a business process and, therefore, subject to BTPP tax. The Taxpayer simply argues that it replaced existing units that had been on the building.

Under this test, an owner of real property usually places permanent improvements upon such property in order to enhance its usefulness and market value. Thus, when an owner of realty annexes chattels to such realty, a doubt as to his intention to annex them permanently will in most cases be resolved in favor of such intent. See Danville Holding at 232 and 233. Thus, the City erred when it based its determination on the tenant's intent on using the equipment and may only consider the Taxpayer's intentions for affixing the refrigeration units to the building.

DETERMINATION

After careful review of the information presented on appeal, I find that the Taxpayer has failed to provide objective evidence concerning the annexation of the refrigeration units or their adaptation to the building's purpose. Further, the City erred in determining the units were tangible personal property based on the tenant's use in a production process. As such, I am remanding this matter to the City in order that it may evaluate the Taxpayer's evidence concerning annexation and adaptation of the refrigeration units and consider the Taxpayer's intent for installing the units, consistent with the tests enunciated in the Danville Holding case.

The Taxpayer must provide the City with evidence as indicated above within 45 days of the date of this determination. The City must then review the evidence and determine what adjustments, if any, are warranted for the 2005 through 2006 tax years. If you have any questions concerning this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-3829616959.o