Could a county tax all machinery at a plant that continued limited operation briefly after its announced shutdown?

Plain-English summary

Virginia would not uphold the county's assessment of every machine at the plant without another asset-by-asset review. The manufacturer had announced a December 31, 2009 shutdown, but some operations continued briefly into January 2010. That conflict raised doubts about whether the company's March 2010 notice properly identified all equipment being removed from service.

Virginia law offered two routes to idle status: a three-part one-year nonuse test or a timely written notice identifying machinery that would be removed from service before the next tax day. The Department agreed that inaccurate shutdown information could invalidate the notice route for unspecified assets.

But the brief continuation of operations did not prove every machine remained active. The Department found that some or most equipment likely had been idle for more than a year by January 1, 2011, so the county's full assessment could not stand on the existing record.

The case was remanded. The county could request records identifying which machines still operated in January 2010 and which satisfied all three parts of the one-year test. If the taxpayer failed to provide satisfactory documentation, the county could adjust or uphold the assessment based on the available information.

What this means for you

• A plant-wide shutdown notice should specifically and accurately identify machinery being removed from service.
• Limited continued operation does not necessarily keep every asset from qualifying as idle.
• Asset-level operating records are critical when claiming the one-year idle-machinery classification.
• A Tax Commissioner remand is not a final tax reduction; the locality must reconsider the assessment.

Common questions

Q: Did the Department finally declare all equipment idle?
A: No. It remanded the case to determine which assets met the one-year test.

Q: Was the shutdown notice unquestionably valid?
A: No. The later evidence raised questions because the plant had continued partial operation after the stated shutdown date.

Q: Could the county still uphold the assessment?
A: Yes, if the taxpayer failed to provide satisfactory records or the available evidence supported the assessment.

Citations and references

• Va. Code §§ 58.1-3109 6, 58.1-3507 D, and 58.1-3983.1 B 4.
• Virginia Public Documents 08-1, 12-177, and 13-96.

Subject

Taxpayer has shown that it intended to shut down its operations by the taxable year.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-96

Original ruling text

June 11, 2013

Re: Taxpayer: *

Locality: *

Machinery and Tools Tax

Dear *:

You request a reconsideration of Public Document (P.D.) 12-177 (11/5/2012), in which the Department determined that certain machinery and tools owned by * (the "Taxpayer") located in the *** (the "County") were idle for the 2011 taxable year.

The following determination is based on the facts on the facts presented to the Department summarized below. The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Decisions and Rulings section of the Department's web site.

FACTS

In P.D. 12-177, the Department held that the Taxpayer provided sufficient documentation to demonstrate that the equipment at issue was idle for one year prior to the 2011 tax year for purposes of the machinery and tools (M&T) tax. The case, however, was remanded back to the County in order for it to request documentation and reconsider its decision. The County seeks a redetermination, contending the Department based its decision on erroneous facts.

ANALYSIS

The Department has reviewed the facts submitted for evaluation with the appeal resulting in P.D. 12-177 with the additional information provided with the County's request for redeterminations. A correlation of applicable facts is as follows:

In late 2009, the Taxpayer announced that it would cease operations at its manufacturing plant in the County as of December 31, 2009.

In March 2010, the Taxpayer notified the County that the manufacturing plant ceased production as of December 31, 2009. The County issued an assessment based on the value of all of the machinery and tools at the manufacturing plant and the Taxpayer paid the assessment.

In April 2011, with filing of its M&T tax return, the Taxpayer notified the County that the manufacturing plant ceased production as of December 31, 2009 and requested the County consider the assets obsolete for M&T tax purposes. Around the same time, the County became aware that at least a portion of the manufacturing plant had continued operating into January 2011. The County issued an assessment based on the value of all of the machinery and tools at the manufacturing plant.

In February 2012, the Taxpayer filed an amended M&T tax return listing machinery and tools it claimed were still in operation in 2010. The County issued an assessment based on the revised value and the Taxpayer paid the assessment.

In March 2012, a telephone conversation occurred between the County and the Taxpayer. According to the County, the Taxpayer again requested that the assessment be reduced because only one machine was in operation. The County declined to reduce the assessment further.

In April 2012, the Taxpayer filed an appeal with the County. In the appeal, the Taxpayer asserts that only one manufacturing line was still operating in 2010. The Taxpayer included a list of assets that were in operation and an affidavit attesting to the assets that remained in operation.

In May 2012, the County issued a final determination upholding its assessment for the 2011 tax year.

In August 2012, the Taxpayer filed an appeal with the Department resulting in the issuance of P.D. 12-177 .

The County asserts the Taxpayer should be subject to M&T tax on all of its machinery and tools for 2011 because it failed to properly notify the County that its assets were idle and the plant continued to operate in 2010.

As stated in P.D. 12-177, Va. 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 County contends that the Taxpayer failed to meet the notification test for the 2011 tax year because its correspondence in March 2010 included inaccurate information. Specifically, the Taxpayer stated that the plant was closed by December 31, 2009, when, in actuality, the plant was still, at least, partially operating in January 2010.

According to the Guidelines for the Local Taxation of Idle Machinery and Tools, issued as Public Document (P.D.) 08-1 (1/1/2008), notification must include the following information:

Taxpayer's legal name and any trade name;

Taxpayer's contact information, including address and phone number;

Taxpayer's federal employer identification number;

Specific identification of the machinery and tools that will be withdrawn from service before tax day of the next tax year;

A statement that the machinery and tools will be withdrawn from service prior to tax day of the next tax year and that there is no reasonable prospect of them being returned to use during the next tax year; and

Location of the idle machinery and tools.

When a manufacturer, otherwise properly, notifies a locality that it has or will be ceasing its operations, it is assumed that all of the machinery and tools at the location will become idle at that date. If it is determined that some of the machinery was operating after that date, the notification becomes invalid because the manufacturer failed to specifically identify the machinery and tools that will be withdrawn from service before the tax day of the next tax year.

Regardless of whether proper notification was given, machinery and tools may meet the one year test if all three prongs are met. The County contends that the Taxpayer has failed to show that any of its machinery and tools was idle by December 2009 because it was still in operation in January 2010. The County points to conflicting statements and information provided by the Taxpayer. The Taxpayer claimed all of its assets were idle when it filed its 2011 M&T tax return. In the February 2012 amended filing, the County claims the Taxpayer only sought adjustments for assets that were either transferred or disposed. According to the County, subsequent claims for refund were based on varying statements by the Taxpayer that only a limited amount of machinery was operating in January 2010.

Under the provisions of Va. Code § 58.1-3109 6, the local taxing authority is empowered with the authority to require records and other information necessary to make an accurate assessment of a taxpayer's tangible personal property. It is incumbent upon a taxpayer to prove to the satisfaction of the local taxing authority that it properly reported the value of its property on its M&T tax returns. See Va. Code § 58.1- 3983.1 B 4.

DETERMINATION

In P.D. 12-177, the Department concluded that the documentation was sufficient to show that the Taxpayer met both the one year test and the notification test for all the machinery it asserted was no longer in operation after December 31, 2009. The additional information and documentation raises questions as to whether the Taxpayer's letter of March 2010 met all of the standards of the notification test.

However, the Taxpayer has clearly shown that it intended to shut down its operations by December 31, 2009. Both the Taxpayer and the County agree that manufacturing operations did, in fact, cease in early January 2010. Given the short time the Taxpayer remained open in 2010, the Department finds it doubtful that the Taxpayer operated at full capacity in 2010. Accordingly, some if not most of the machinery and tools at the plant would have been idle for more than a year by January 1, 2011. As such, the Department cannot agree that the County's assessment for the 2011 tax year is correct.

As such, I am remanding this case back to the County in order to reconsider its determination. If additional information is required to ascertain which assets were still in operation in January 2010 and which assets met all three prongs of the one year test as of January 1, 2011, it must request documentation and permit the Taxpayer adequate time to provide such documentation. If the Taxpayer fails to provide documentation satisfactory to the County, the 2011 assessment should be adjusted based on the information provided, including upholding its assessment in its entirety.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5286175231.B