Who owed Virginia local machinery-and-tools tax when idle recycling equipment was sold and returned to use midyear?

Plain-English summary

The purchaser became liable for machinery-and-tools tax when it returned previously idle equipment to service in July. Business A had qualified the equipment as idle under the notification test, then sold it to Business B and leased Business B the facility. Virginia law treated machinery returned to use as taxable in the same manner as if it had been operating on that year's tax day.

Because Business B owned the machinery when it returned to service, the Department said Business B owed the year's machinery-and-tools tax. As the taxpayer that placed the equipment back into service, Business B also had to notify the local assessing authority before the next unextended return date.

The equipment was certified recycling equipment, and the county ordinance offered a 50% exemption. But that ordinance allowed the exemption only as a subtraction from real-property tax on the property to which the equipment was attached.

That structure left neither party able to use it on the stated facts. Business A owned the real estate but not the recycling equipment. Business B owned the equipment but not the real estate, could not apply the exemption against its machinery-and-tools assessment, and would have a taxable leasehold only if Business A were exempt from real-property tax. The facts indicated Business A was not exempt.

What this means for you

• Previously idle machinery can become taxable for the whole tax year when it returns to service after tax day.
• Ownership at the time of return to use determines whose name generally carries the personal-property assessment.
• The taxpayer returning equipment to use must give the required notice to the local assessor.
• A certified-recycling exemption depends on the exact local ordinance; an exemption written only for real-property tax may not reduce machinery-and-tools tax.

Common questions

Q: Did the midyear return to service postpone tax until the next year?
A: No. The equipment was taxable as though it had been in use on that year's tax day.

Q: Was the seller liable after the buyer restarted the equipment?
A: No. The Department said the buyer, as owner of the machinery returned to use, was liable for the year's machinery-and-tools tax.

Q: Could the buyer use the county's recycling exemption against machinery-and-tools tax?
A: No. The ordinance applied the exemption only against real-property tax.

Q: Who has final responsibility for applying the county ordinance?
A: The ruling said interpretation, application, and administration remained the local assessing official's responsibility.

Citations and references

• Va. Code §§ 58.1-1100 et seq., 58.1-1101 A 2, 58.1-3015, 58.1-3200, 58.1-3281, 58.1-3507 A, D, and E, 58.1-3661 A and D, and 58.1-3983.1 J 2.
• Commonwealth v. Manzer, 207 Va. 996, 154 S.E.2d 185 (1967).
• Virginia Public Documents 04-28, 11-84, and 12-177.

Subject

Idle machinery and tools:certified recycling exemption.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-21

Original ruling text

February 20, 2013

Re: Request for Advisory Opinion

Machinery and Tools Tax
Dear *:

This is in response to your letter in which the * (the "County") requests an advisory opinion regarding idle machinery and tools and the certified recycling exemption.

The machinery and tools (M&T) 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.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.

FACTS

At the beginning of the tax year, Business A had machinery and tools that qualified as idle under the notification test at facilities located in the County. In April, Business A sold the idled equipment to, and leased the facilities to Business B. In July, Business B returned the idle machinery and tools to service. The equipment purchased by Business B is certified recycling equipment. The County's ordinance partially exempts certified recycling equipment from local taxation.

The County requests an opinion as to whether the idled equipment becomes subject to the M&T tax. If so, is Business A or Business B subject to M&T tax on the machinery and tools returned to use? The County also asks whether Business B can claim a certified recycling exemption from local tax. An opinion is also requested as to how the County's exemption for certified recycling equipment would be applied under these circumstances.

OPINION

Idle Equipment

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 . Included in the category of tangible property that is declared intangible and subject to state taxation only is "[c]apital 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)." See Va. Code § 58.1-1101 A2.

The machinery and tools, motor vehicles and delivery equipment of a manufacturing business are not defined as intangible personal property. Such property is to be taxed locally as tangible personal property. Virginia has established a separate classification of tangible personal property for machinery and tools used in manufacturing. Virginia Code § 58.1-3507 A provides:

Machinery and tools, except idle machinery and tools . . . used in a manufacturing . . . 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. [Emphasis Added.]

Virginia Code § 58.1-3507 D provides two tests for determining whether machinery and tools may be classified as idle. Under the statute, machinery and tools will be considered idle if:

1 The machinery and tools have been discontinued in use continuously for at least one year, prior to any tax day, such machinery and tools are not in use on the tax day, and no reasonable prospect exists that the machinery and tools will be returned to use during the tax year; or
2 On or after January 1, 2007, a taxpayer provides a written statement to the locality, on or before April 1, identifying the machinery and tools that a taxpayer intends to remove from service no later than the next tax day, the machinery and tools are not in use on the tax day, and no reasonable prospect exists that the machinery and tools will be returned to use during the next tax year.

The first test and second tests are referred to as the one-year test and the notification test respectively. See Public Document (P.D.) 11-84 (6/2/2011) and P.D. 12-177 (11/5/2012). Based on the facts, as stated, it appears that Business A had met the requirements of the notification test for the 2012 tax year.

When idle machinery and tools are returned to use, however, Va. Code § 58.1­ - 3507 E provides "such machinery and tools shall be subject to tax ... in the same manner as if such machinery and tools had been in use on the tax day of the year in which such return to use occurs [Emphasis added.]" Business B purchased the idled machinery from Business A and placed the previously idled machinery and tools back into service in July. Under these circumstances, idled machinery put back into service is subject to tax as of the tax day of the year that the machinery was put back into service. In addition, the taxpayer that placed the machinery and tools back into service is required to notify the local assessing authority "before the next return date without extension." See Va. Code § 58.1-3507 E .

After purchasing the equipment, Business B placed the idle machinery and tools back in service. Such equipment is subject to the M&T tax as of that year's tax day. Virginia Code § 58.1-3015 requires that personal property taxes generally should be assessed in the name of the owner of the personal property. It is the Department's opinion that Business B, as the owner of the machinery and tools used in manufacturing, would be liable for the M&T tax for the tax year even though the idled equipment was returned to use in July.

Recycling Exemption

Virginia Code § 58.1-3661 A segregates "certified recycling equipment, facilities, or devices" as a separate class of property. The governing body of any locality may exempt or partially exempt such property from local taxation by ordinance. As permitted pursuant to Va. Code § 58.1-3661 D, the County has an ordinance that exempts 50% of the tax imposed on certified recycling equipment. Under the ordinance, the exemption amount may be subtracted from tax due on real property on which the certified recycling equipment, facilities, or devices is attached.

The County asks whether Business A or Business B is entitled to the exemption. Although the Department is authorized to interpret local ordinances, it is not required to do so. See the Guidelines for Appealing Local Business Taxes, issued as P.D. 04-28 (6/25/2004). Even where the Department does offer its opinion with regard to a local ordinance, the interpretation, application and administration of a locality's ordinance remains the responsibility of the local assessing official.

In this scenario, Business B purchased equipment certified by the Department of Waste Management as integral to the recycling process from Business A. Because it owns the recycling equipment, Business B would be entitled to the exemption. Business B does not, however, own the real estate to which the equipment is attached.

Generally, the owner of real property is liable for real property tax. See Va. Code § 58.1-3281. Under Va. Code § 58.1-3200, however, a leasehold interest in real estate is subject to real property tax only when the owner is exempt from real property tax.

The County’s ordinance allows the exemption to be claimed only against real property tax. The Virginia Supreme Court has consistently ruled that exemptions from taxation are the exception rather that the rule and as such, they must be strictly construed. If there is any doubt as to whether an exemption applies, it must be resolved in favor of the taxing authority, and the burden is upon the taxpayer to show that it comes within the exemption. See Commonwealth v. Manzer , 207 Va. 996, 154 S.E.2d 185 (1967).

Business A, the owner of the real property, cannot claim the exemption because it does not own the certified recycling equipment. In addition, Business B would not be able to claim the exemption against its M&T tax assessment. Further, Business B would be able claim the exemption only if Business A were exempt from real property tax and Business B was subject to the tax on its leasehold interest. The facts provided appear to indicate that Business A is not exempt from real property tax. As such, it would appear that Business B could not claim the exemption.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5223854819.B