Did exterior light-box signs installed by a tenant become real-property fixtures rather than property subject to Virginia local BTPP tax?

Subject

Tenant's light-box signs remained taxable business property

Plain-English summary

Virginia upheld the county's decision to tax the dental practice's entire exterior light-box signage as business tangible personal property. The practice leased its office, attached light boxes with acrylic business-name facings to the building, originally reported them as BTPP, and later amended its returns to remove them.

Virginia uses three fixture factors: attachment to the realty, adaptation to the building's use, and the owner's intention to make a permanent addition. Intent is the controlling consideration in a doubtful case, and a chattel remains personal property unless permanent intent affirmatively and plainly appears.

The boxes were attached and helped customers locate the business, but they were not essential to operating a dental practice. More importantly, the lease treated the installations as signage and allowed the landlord to require removal when the lease ended. A later landlord statement saying the boxes were not signage conflicted with the lease specifications, creating doubt about permanent intent.

Because the taxpayer did not overcome the presumption that the local assessment was correct, the entire signage remained taxable BTPP. The Department did not split the acrylic facings from the boxes, especially where the original invoice combined their cost.

What this means for you

• Physical attachment alone does not make tenant-installed property a real-estate fixture.
• Lease removal clauses and signage specifications are strong evidence of nonpermanent intent.
• Keep separate invoices if different components may have different property-tax treatment.
• In a Virginia BTPP appeal, the taxpayer bears the burden of showing the local assessment is wrong.

Citations and references

• Va. Const. art. X, § 4.
• Va. Code §§ 58.1-3200 et seq., 58.1-3500 et seq., and 58.1-3983.1 D 1.
• Danville Holding Corp. v. Clement and Mullins v. Sturgill.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-90

Original ruling text

June 12, 2014

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Business Tangible Personal Property 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. The Taxpayer appeals a final local determination by *** (the "County") upholding the classification of the Taxpayer's signs as tangible personal property subject to the business tangible personal property (BTPP) tax for the 2012 and 2013 tax years.

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 assessments. On appeal, a local 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 Laws, Rules and Decisions section of the Department's web site, located at www.tax.virginia.gov .

FACTS

The Taxpayer, a dental practice, leased office space in the County during the tax years at issue. In 2011, the Taxpayer purchased signage for its office space. When the signs were installed, they were attached to the building outside the office. The signage consisted of light boxes with acrylic facings that displayed the name of the business.

On its original 2012 and 2013 BTPP tax returns, the Taxpayer included the light boxes among the property subject to BTPP tax. Subsequently, the Taxpayer filed amended returns to exclude these items.

The County reviewed the amended returns and issued a final local determination, concluding that the light boxes were subject to the BTPP tax because the Taxpayer's lease agreement required the Taxpayer to remove its signs upon termination of the lease.

The Taxpayer filed an appeal with the Tax Commissioner. The Taxpayer concedes that the acrylic facings were subject to the BTPP tax because they were signage that had to be removed when the lease expired. The Taxpayer contends, however, that otherwise the light box installations were not signage. As such, they were not subject to the BTPP tax because they would remain as the property of the landlord when the lease expired.

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, 16 S.E.2d 345 (1941), the Virginia Supreme Court (the "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. See Id. at 232, 16 S.E.2d at 349.

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 Court noted that the "intention of the party making the annexation is the paramount and controlling consideration." Id.

Annexation

Annexation of chattel must be actual or constructive. In Danville Holding , the Court concluded "the method or extent of the annexation carries little weight, except insofar as they relate to the nature of the article, the use to which it is applied and other attending circumstances as indicating the intention of the party making the annexation." Id . In other words, so long as chattel is attached to a building to carry out the purpose for which such building was erected and to increase its value for occupation or use, such chattel may become part of the realty even if it may be removed without injury to itself or the building. The documentation provided shows that the light boxes were attached to the building.

Adaptation

If attached property is essential to the purposes for which the building (or realty) is used or occupied, it would generally be considered a fixture even if its annexation to such building is such that it may be severed without injury to either the chattel or the building.

In this case, the light boxes were not essential to the purpose for which that part of the building was used, i.e. , the Taxpayer's dental practice. Nevertheless, the light boxes were to some extent adapted to the use of that part of the realty that served as commercial space for tenants because the light boxes displayed the name of the business that occupied the space. They also served the practical purpose of making the business easier for customers to find.

Intention

The Court has emphasized the intention of the party making the annexation is the chief test to be considered in determining whether the chattel has been converted into a fixture. Although the intention does not need to be expressed in words, it should be able to be inferred from the nature of the property annexed, the purpose for which it was annexed, the relationship of the party making the annexation, and the structure and mode of annexation. The Court has also stated:

This test — the intention of the party making the annexation — is made the controlling criterion by most of the authorities, and generally it is considered the chief test. It is not always determinative, but in cases of doubt it has a controlling influence and must be considered. However, in order that a chattel may be converted into a fixture, the intention to make it a permanent accession to the realty must affirmatively and plainly appear; if the matter is left in doubt and uncertainty, the legal qualities of the article are not changed, and it must be deemed a chattel. [Emphasis added.]

Mullins v. Sturgill , 192 Va. 653, 659, 66 S.E.2d 483, 487 (1951) (quoting 22 Am. Jur. Fixtures § 6 (1936)). In addition, if property is to be removed at the expiration or earlier termination of a lease, it is presumed that the parties did not intend for the property to become a fixture. See P.D. 09-147 (10/8/2009).

The Taxpayer concedes that the acrylic facings were subject to the BTPP tax because they were signage that must be removed. The Taxpayer contends, however, that otherwise the light boxes were not signage and, as a result, would remain in place as the property of the landlord. The County's position is that because the light box installations are considered signage subject to removal at the termination of the lease, they are not fixtures and thus remain subject to the BTPP tax. The County also notes that when the Taxpayer filed its local appeal, it did not argue that the facings should be treated differently from the rest of the light boxes for purposes of local property taxation. In addition, the County points out that the cost of the facings were included in the cost of the light boxes on the original invoice, so it would be difficult to determine what costs were associated specifically with the facings for purposes of computing the BTPP tax.

The Department's review has revealed conflicting statements and documents. The lease agreement required the Taxpayer to remove its signs at the landlord's discretion at the termination of the lease. The landlord issued a statement, dated after the final local determination, that the sign boxes were not signage. Under the signage specifications of the lease agreement, however, two sign types were listed: "main ID signage" and "under canopy directional signage." Both types of signage appeared to require the kinds of light boxes at issue in this case. As such, it appears that the light boxes would be considered signage pursuant to the lease agreement. The lease agreement, therefore, appears to contradict the statement by the landlord. In the Department's opinion, this raises doubts as to the parties' intention concerning whether the light boxes were permanently installed into the real property.

DETERMINATION

Because permanent accession to the realty does not plainly and affirmatively appear, the Accordingly, the final determination of the County classifying the entirety of the signage as tangible personal property is upheld.

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/1-5633088076.M