When a taxpayer's refund claim spans several tax years, how far back can a Virginia locality go, and is a fuel-blending business a manufacturer or a processor for machinery and tools tax purposes?

Subject

Jurisdiction : Statute of Limitations for Refunds Tangible : Machinery & Tools - Manufacturer, Processor

Plain-English summary

This ruling addresses two separate issues raised when a petroleum storage and processing company appealed a locality's denial of a business tangible personal property (BTPP) tax refund: how far back a refund claim can reach, and how the company's fuel-blending activity should be classified for local tax purposes.

The taxpayer operated a petroleum storage and blending facility where conventional, reformulated, and premium blendstock and ultra-low-sulfur diesel arrived by pipeline and truck. These base fuels were blended with ethanol (mandated by the EPA), butane, detergents, lubricity agents, static dissipaters, and red dye required by federal and Virginia law, plus proprietary additives required by customers. The taxpayer had filed its BTPP returns for 2015 through 2019 as a "business service provider," but in December 2019 it sent the City a refund claim for all five years, arguing it was actually a manufacturer and its property should instead be taxed under the separate, generally lower machinery and tools classification. The City inspected the facility and denied the refund, concluding the blending was "processing," not "manufacturing."

On jurisdiction, the Tax Commissioner explained that Virginia Code § 58.1-3980 lets a taxpayer apply for correction of a local assessment "within three years from the last day of the tax year for which such assessment is made, or within one year from the date of the assessment, whichever is later." Separately, Virginia Code § 58.1-3990 bars a locality from issuing a refund for a request made more than three years after the last day of the assessed tax year. Because the refund request was made in December 2019, the 2015 tax year fell outside that three-year window, so the City had no authority to refund it and the Department correspondingly had no jurisdiction to hear an appeal of that year. The ruling also confirmed that a locality's denial of a refund claim counts as an "assessment" that can be appealed under Virginia Code § 58.1-3983.1, even where the locality's books don't otherwise change.

On the manufacturing-versus-processing question, the Commissioner applied the Supreme Court of Virginia's three-part test from County of Chesterfield v. BBC Brown Boveri: manufacturing requires (1) an original raw material, (2) a process that changes it, and (3) a resulting product that is different in character from the original. Because the blended motor fuel remained motor fuel before and after blending -- not a product of "substantially different character" -- the Commissioner agreed with the City that the activity was not manufacturing. However, applying the less restrictive processing standard from Palace Laundry, Inc. v. Chesterfield County (treatment that renders a product more marketable or useful), the Commissioner found the taxpayer was a processor: EPA regulations (40 CFR § 80.161(a) and § 80.1105) require certain additives before gasoline can legally be sold to consumers, so blending in the additives made the fuel more marketable and usable.

The Commissioner ruled that the 2015 refund claim was time-barred and could not be granted, but for the 2016 through 2019 tax years the taxpayer's blending equipment qualified for the machinery and tools tax classification as a processor, while the rest of its property remained subject to the standard BTPP tax rate. The case was remanded to the City to recalculate the taxpayer's liability and issue the appropriate refund for those years.

What this means for you

For manufacturers and processors seeking reclassification

If your business believes its equipment should be taxed under Virginia's machinery and tools classification rather than the general business tangible personal property rate, the "processor" standard is meaningfully easier to meet than the "manufacturer" standard. You do not need to show the finished product is substantially different in character from the raw material -- only that your processing makes the product more marketable or useful than it otherwise would be. Regulatory requirements that force certain treatments (as with the EPA additive mandates here) can support a processor finding even when the finished product looks essentially the same as the input.

For businesses filing refund claims with a locality

Refund claims for local taxes like BTPP are subject to a hard three-year cutoff measured from the last day of the tax year being refunded, under Virginia Code § 58.1-3990. Waiting to bundle multiple years into a single claim risks losing the earliest years entirely -- as happened here with the 2015 tax year -- regardless of the merits of the underlying classification argument. File refund claims for each tax year as soon as the classification issue is identified rather than waiting to aggregate years.

For local tax administrators

A locality's denial of a refund request is itself treated as an "assessment" that a taxpayer may appeal under Virginia Code § 58.1-3983.1, even if the locality does not formally amend its own books. Localities retain discretion to either deny a refund request outright or issue a formal final determination, but either path can lead to an appeal to the Department, and the Department's jurisdiction over that appeal is still constrained by the same three-year refund limitations period that binds the locality.

Common questions

Q: How long does a taxpayer have to seek a refund of an overpaid local business tax in Virginia?
A: Under Virginia Code § 58.1-3990, a locality cannot issue a refund for a request made more than three years after the last day of the tax year being assessed. A related three-year (or one-year-from-assessment, if later) window under Virginia Code § 58.1-3980 governs applications for correction of an assessment.

Q: Does the Department of Taxation have jurisdiction to hear an appeal for a tax year that is outside the refund limitations period?
A: No. The ruling states that "the Department does not have jurisdiction to address an appeal in which a locality lacks jurisdiction," so a time-barred refund year cannot be revived through an appeal to the state.

Q: What test does Virginia use to decide whether an activity is "manufacturing" for local tax purposes?
A: The three-part test from County of Chesterfield v. BBC Brown Boveri: (1) original/raw material, (2) a process that changes the material, and (3) a resulting product that is different in character from the original material.

Q: Is the standard for being a "processor" the same as being a "manufacturer"?
A: No. Processing qualification, as described in Palace Laundry, Inc. v. Chesterfield County, only requires that the treatment make the product more marketable or useful -- a lower bar than manufacturing's requirement of a substantial change in character.

Q: Why was the fuel blender found to be a processor but not a manufacturer?
A: The blended fuel was still motor fuel before and after blending, so it wasn't substantially different in character (no manufacturing). But because federal EPA rules require the additives before the fuel can legally be sold, the blending made the fuel more marketable and useful, satisfying the processing standard.

Citations and references

• Virginia Code § 58.1-3983.1 (Department authority to determine appeals of local business tax assessments; appeal deadlines)
• Virginia Code § 58.1-3980 (application for correction of local tax assessment; three-year/one-year limitations period)
• Virginia Code § 58.1-3984 (correction of assessment via circuit court)
• Virginia Code § 58.1-3990 (three-year limit on local refunds)
• Virginia Code § 58.1-1100 et seq. and § 58.1-1101 A 2 (intangible personal property; manufacturing capital)
• Virginia Code § 58.1-3507 A (machinery and tools tax classification for manufacturing and processing businesses)
• Article X § 4 of the Constitution of Virginia (local taxation of tangible personal property)
• 40 CFR § 80.161(a) and 40 CFR § 80.1105 (EPA gasoline additive and renewable fuel standard requirements)
• County of Chesterfield v. BBC Brown Boveri, 238 Va. 64, 380 S.E.2d 890 (1989) (three-part manufacturing test)
• Commonwealth v. Meyer, 180 Va. 466, 23 S.E.2d 353 (1942) (locality where transformation occurs)
• Palace Laundry, Inc. v. Chesterfield County, 276 Va. 494, 666 S.E.2d 371 (2008) (processor standard)
• Coca-Cola Bottling Company of Roanoke, Inc. v. County of Botetourt, 259 Va. 559 (2000)
• P.D. 04-28 (6/25/2004), P.D. 10-103 (6/18/2010), P.D. 11-124 (7/1/2011), P.D. 15-105 (5/12/2015), P.D. 19-111 (9/27/2019), P.D. 10-34 (4/8/2010), P.D. 97-427 (10/24/1997), P.D. 18-133 (6/29/2018) (related Department rulings)
• 1995 Op. Atty. Gen. Va. 257 (manufacturing standard applied to milk processing)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-134

Original ruling text

August 11, 2020

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 the denial of a refund of business tangible personal property (BTPP) tax paid to *** (the “City”) for the 2015 through 2019 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 tax 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 operated a petroleum storage and processing business in the City during the tax years at issue. Conventional blendstock, reformulated blendstock blending, Premium blendstock, and ultra-low-sulfur diesel were shipped via pipeline and truck to the Taxpayer’s facility. Blendstock was blended with ethanol, an oxygenate pursuant to an Environment Protection Agency (EPA) mandate, and butane, detergents, lubricity agents, static dissipaters and red dye that are required by federal and Virginia law. In addition, certain proprietary additives required by the Taxpayer’s customers were blended into the base fuels. The various additives are combined with the base fuels in order to reduce pollutants and boost engine performance.

The Taxpayer filed BTPP returns with the City for the taxable years at issue classifying itself as a business service provider. In December 2019, the Taxpayer sent a refund claim to the City for the 2015 through 2019 tax years contending it was a manufacturer for purposes of the BTPP tax. The City inspected the facility, but denied the refund. The Taxpayer asserted that additives mixed with motor fuel at the facility constitutes processing and its property should be classified as machinery and tools. The City issued a final determination concluding that that the Taxpayer’s mixing of the base fuels with the additives is processing, not manufacturing. The Taxpayer has filed an appeal with the Department, contending that the blending of the base fuels with the additives is manufacturing.

ANALYSIS

Jurisdiction

Under § 1.4 of the Guidelines for Appealing Local Business Taxes, issued as Public Document (P.D.) 04-28 (6/25/2004), an “assessment” is defined as “a determination as to the proper rate of tax, the measure to which the tax rate is applied, and ultimately the amount of tax, including additional or omitted tax, that is due.” When a taxpayer files an amended local business tax return, the local taxing authority must make a determination as to the proper amount of the tax. If the locality denies the refund, it has made a determination as to the proper amount of tax, even if the assessment on that locality's books is not changed. Consequently, the denial of a refund by a local taxing authority would constitute an assessment for purposes of filing an appeal under Virginia Code § 58.1-3983.1. See P.D. 10-103 (6/18/2010).

Virginia Code § 58.1-3980 provides that any person aggrieved by an assessment of local taxes “may, within three years from the last day of the tax year for which such assessment is made, or within one year from the date of the assessment, whichever is later, apply to the commissioner of the revenue or such other official who made the assessment for a correction thereof.” Under this procedure, if the taxpayer disagrees in whole or in part with the local assessing officer’s determination, the taxpayer may then seek correction with the circuit court under the provisions of Virginia Code § 58.1-3984.

Virginia Code § 58.1-3983.1 B 1 provides that any person assessed with a “local business tax ... may appeal such assessment within one year from the last day of the tax year for which such assessment is made, or within one year from the date of such assessment, whichever is later, to the commissioner of the revenue or other assessing official.” Under this provision, if the taxpayer’s appeal is denied in part or completely by the local assessing official, the taxpayer may, within 90 days, appeal the assessment to the Department.

When responding to requests for refunds of local taxes, local taxing officials have the discretion to simply deny the request or issue a final determination. When a final determination is not issued by a locality, a taxpayer may file an appeal within the statutory time prescribed with the locality as provided under Virginia Code § 58.1-3983.1 B 1. Alternatively, if the locality issues a final determination, the taxpayer may proceed to file an appeal with the Department. See P.D. 11-124 (7/1/2011) and P.D. 15-105 (5/12/2015).

In this case, the Taxpayer requested a refund from the City in December 2019, for the 2015 through 2019 tax years. The City denied the Taxpayer’s request and issued a final determination under Virginia Code § 58.1-3983.1. Pursuant to Virginia Code § 58.1-3990, a locality cannot issue a refund for requests made more than three years after the last day of the tax year so assessed. As such the refund request for the 2015 tax year is outside the limitations period. The Department does not have jurisdiction to address an appeal in which a locality lacks jurisdiction. See P.D. 19-111 (9/27/2019).

Manufacturing

All tangible personal property, unless declared intangible under the provisions of Virginia 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 Virginia Code § 58.1-1101 A 2.

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 elected to create a separate classification of tangible personal property for machinery and tools used in manufacturing. Virginia Code § 58.1-3507 A also provides:

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.

The definition of a “manufacturer” is not in the Code of Virginia . However, the Supreme Court of Virginia (“the Court”) has developed a test involving three essential elements in determining whether a manufacturing activity is being undertaken. These elements are: (1) original material, referred to as raw material; (2) a process whereby the original material is changed; and (3) a resulting product, which by reason of being subject to such processing, is different from the original material. County of Chesterfield v. BBC Brown Boveri , 238 Va. 64, 380 S.E.2d 890 (1989). For local tax purposes, a manufacturer is one engaged in a processing activity, whereby the original materials are transformed into a product that is substantially different in character from the original materials. It does not matter whether the transformation is a step in getting the product ready for market or it is a complete process. What matters for purposes of local taxation is whether the transformation of the material takes place in the locality. See Commonwealth v. Meyer , 180 Va. 466, 23 S.E.2d 353 (1942).

The Taxpayer contends that the blending of the base fuels with the additives is manufacturing because the fuel cannot legally or practically be used without the blending process. The City asserts that the blending process is not manufacturing because the product is motor fuel when it arrives on site and motor fuel when it leaves.

In Coca-Cola Bottling Company of Roanoke, Inc. v. County of Botetourt , 259 Va. 559 (2000) and P.D. 18-133 (6/29/2018), soft drink producers are referred to as manufacturers for purposes of the BTPP tax. As such, the Taxpayer argues, because the production of soft drinks is the mixing of concentrates with water and sweeteners, then the blending of base fuels with additives must also be manufacturing. Neither case, however, analyzed whether the process of producing soft-drinks in fact was manufacturing. Further, the Taxpayer has not provided any documentation or evidence that the production of soft drinks is merely the mixing of concentrates with water and sweeteners.

The Court’s three-part test in Brown Boveri for determining whether a manufacturing activity is being undertaken for purposes of the BTPP tax also applies to the Business, Professional and Occupational License (BPOL) tax. See P.D. 10-34 (4/8/2010). As such, administrative determinations addressing whether a taxpayer is a manufacturer for BPOL tax purposes should apply to the BTPP tax. In P.D. 97-427 (10/24/1997), the Department determined that the dyeing of finished fabric goods is not manufacturing for purposes of the BPOL tax because there was no transformation of new material into a finished good of substantially different character even though the dyeing process may involve the precise and complex use of chemicals and dyes. The Attorney General has opined that “neither the pasteurization, homogenization, butterfat adjustment or vitamin fortification of milk, nor the addition of sugar and flavorings to milk constitutes manufacturing [for purposes of the BPOL tax]” because “the processing does not transform the milk into a product of substantially different character.” See 1995 Op. Atty. Gen. Va. 257.

The key in both P.D. 97-427 and the Attorney General’s opinion is that there needed to be a transformation into an item of “substantially different character”. In the Taxpayer’s case, although the ethanol and other additives may restrict pollutants and boost engine performance and are required by federal and state law, the base fuel and the motor fuel produced after the blending process are not of a substantially different character.

Processing

Alternatively, the Taxpayer asks that it be classified as a processor for purposes of tangible personal property taxation. As such, its machinery and tools would be subject to the machinery and tools tax under the provisions of Virginia Code § 58.1 3507 A. This section provides:

Machinery and tools ... used in a ... processing or reprocessing . . . 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. The rate of tax imposed by a county, city or town on such machinery and tools shall not exceed the rate imposed upon the general class of tangible personal property. [Emphasis added.]

The Court has determined qualifying characteristics of processors to be far less restrictive than those applied to manufacturers. In Palace Laundry, Inc. v. Chesterfield County , 276 Va. 494, 666 S.E.2d 371 (2008), the Court held that in order to be a processing business, a company’s product must undergo a treatment rendering it more marketable or useful.

Pursuant to 40 CFR § 80.161(a), all gasoline sold or transferred to the ultimate consumer must contain certain certified detergent additives. The detergent requirements apply to all gasoline, with the exception of that used in research and testing, whether intended for on-highway or non-road use, including conventional, oxygenated, reformulated, and leaded gasolines. In addition, the EPA mandates that renewable fuels, including ethanol, replace a percentage of fossil fuel present in a fuel mixture in accordance with an annual renewable fuel standard. See 40 CFR § 80.1105. As such, gasoline cannot be sold to consumers without the additives that were added to the base fuels at the Taxpayer’s definite place of business located in the City.

The Court held in Palace Laundry that a launderer of linens was not a processor because the cleaning treatments did not make the linens more marketable or useful than when they were new. In the Taxpayer’s case, however, the blending of ethanol and other additives with the base fuels renders the motor fuels more marketable and useful because the fuels could not be legally sold without the additives.

DETERMINATION

The Taxpayer’s appeal to the City, with regard to the 2015 tax year, is outside of the limitations period allowed under Virginia Code § 58.1-3980. As such, the Department does not have jurisdiction to address the Taxpayer’s appeal for the 2015 tax year and no refund can be granted.

With regard to the 2016 through 2019 tax years, which were eligible for appeal under Virginia Code § 58.1-3983.1, I find that the Taxpayer was a processor subject to the machinery and tools tax on equipment used in processing. All of the other Taxpayer’s property, however, not used in processing was subject to the BTPP tax at the appropriate business tangible property rate. I am remanding this case to the City in order to adjust the Taxpayer’s liability and issue the appropriate refund in accordance with this determination.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3341.B

Related Documents

97-427

04-28

10-34

10-103

11-124

15-105

18-133

19-111