What does Virginia Ruling of the Tax Commissioner P.D. 20-183 conclude about Tangible: Administration - Jurisdiction, Statute of Limitations for Refunds Classification of Property: General v. Manufacturing - Food Service?

Plain-English summary

This ruling is an appeal by a producer of ready-to-serve airline meals over its Business Tangible Personal Property (BTPP) tax classification and refund claims with a Virginia county for the 2012 through 2016 tax years. The Taxpayer had filed its BTPP returns as a "business service" but later argued it should have been classified as a "manufacturer," a classification that carries different (state-only) tax treatment for machinery and tools rather than local taxation of all its business tangible property. The Commissioner addressed three separate issues: jurisdiction/procedure, the statute of limitations on refunds, and the manufacturing classification itself.

On jurisdiction, the case had already bounced between the county and the Department once before: in an earlier ruling (P.D. 19-62), the Department found it lacked jurisdiction because the county's determination letter wasn't properly signed by the chief assessing officer, so the case was sent back to the county. Because the county then did not issue a proper final local determination within a year, the Taxpayer was entitled under Va. Code § 58.1-3983.1 B 6 to treat its appeal as denied and bring it to the Department, which is what created this second appeal.

On the statute of limitations, the Commissioner held that the refund request for the 2012 tax year was filed in November 2016 -- more than three years after the close of that tax year -- so it fell outside the refund window set by Va. Code § 58.1-3990. Because the county itself had no jurisdiction to refund a time-barred year, the Department likewise had no jurisdiction to hear an appeal of that denial. The 2012 tax year refund claim was therefore rejected on procedural grounds, without ever reaching the merits.

On the manufacturing classification for the 2013-2016 tax years, the Commissioner explained that Virginia's sales-tax definition of "manufacturer" does not control BTPP classification -- the relevant test instead comes from Virginia Supreme Court case law (three elements: raw material, a transformative process, and a resulting product substantially different in character from the original). Applying that test, the Commissioner found the Taxpayer's description of its process (cutting and marinating raw meats and produce, cooking with industrial ovens and mixers, chilling, and packaging into individual airline meals) was consistent with manufacturing, but the county's competing description (portioning already-prepared bulk foods into individual servings) was not. Because neither side had provided clear, objective evidence resolving which description was accurate, the Commissioner did not decide the classification question outright -- instead the case was remanded to the county to re-evaluate the facts under the correct legal standard and issue a new final determination.

What this means for you

Business owners in food preparation or processing

If your business's classification for local Business Tangible Personal Property tax purposes turns on whether your activity counts as "manufacturing," know that the test used is the Virginia Supreme Court's three-part test (raw material, transformative process, substantially different product) -- not the sales-and-use-tax definition of manufacturer, and not how other states or SIC/NAICS codes classify you (those are only "instructive," not determinative). Be ready to document your process in detail, since the Commissioner here found the outcome genuinely factually contested and sent it back for more evidence rather than ruling either way.

Taxpayers considering a BTPP refund claim

Refund requests to a locality are subject to a hard three-year limitations period under Va. Code § 58.1-3990, measured from the last day of the tax year assessed. File promptly -- this ruling shows a locality (and the Department on appeal) has no jurisdiction to grant or even consider a refund once that window closes, regardless of the merits of the underlying classification dispute.

Accountants and tax professionals handling local tax appeals

This ruling illustrates the multi-step appeal path for BTPP disputes: a properly signed final local determination is a jurisdictional prerequisite (see P.D. 19-62), a locality's failure to issue one within a year lets the taxpayer treat the claim as denied and appeal to the Department under § 58.1-3983.1 B 6, and from there a further appeal can go to the Department again or to circuit court under §§ 58.1-3980/58.1-3984. Note that the Department's remand did not resolve the manufacturing question -- it directed the county to gather better evidence, so the case remained open after this ruling.

Common questions

Q: Did the Taxpayer get its 2012 refund?
A: No. The Commissioner held the 2012 refund request was filed outside the three-year statute of limitations in Va. Code § 58.1-3990, so neither the county nor the Department had jurisdiction to grant it.

Q: Did the Commissioner decide whether the Taxpayer was a "manufacturer" for 2013-2016?
A: No, not finally. The Commissioner found the Taxpayer's described process was consistent with manufacturing but the county's description was not, and since neither side had provided clear, objective evidence, the case was remanded to the county to re-evaluate the facts and issue a new final determination.

Q: Why does it matter whether the Taxpayer is a "manufacturer"?
A: Under Va. Code § 58.1-3507 A, machinery and tools used in manufacturing are segregated into their own local tax class, and manufacturing capital is treated as intangible property (state-taxed only) under § 58.1-1101 A 2. Business tangible property of a "business service," by contrast, is fully subject to local BTPP tax. The classification determines how much of the Taxpayer's property the county can tax locally.

Q: What happens next after a remand like this?
A: The county must re-evaluate the facts, request further documentation if needed, and issue a new final determination. If the Taxpayer disagrees with that new determination, it can appeal again to the Department under § 58.1-3983.1 or to circuit court under § 58.1-3980.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-3983.1 (Department appeal jurisdiction over local BTPP determinations, including the one-year "deemed denied" rule in subsection B 6)
• Va. Code § 58.1-3980 (application to circuit court for correction of assessment)
• Va. Code § 58.1-3984 (appeal of local determination to circuit court)
• Va. Code § 58.1-3990 (three-year limitations period on local refund requests)
• Va. Code § 58.1-1100 et seq. and § 58.1-1101 A 2 (intangible property; manufacturing capital)
• Va. Code § 58.1-3507 A (machinery and tools of manufacturers segregated as local property class)
• Va. Const. art. X, § 4 (tangible personal property reserved for local taxation)
• 23 VAC 10-210-920 B 1 (sales-and-use-tax manufacturer definition, held not controlling for BTPP)

Case law cited in the ruling:

• County of Chesterfield v. BBC Brown Boveri, 238 Va. 64, 380 S.E.2d 890 (1989) (three-element manufacturing test)
• Commonwealth v. Meyer, 180 Va. 466, 23 S.E.2d 353 (1942) (curing of hams/bacon is manufacturing)
• Prentice v. City of Richmond, 197 Va. 724, 90 S.E.2d 839 (1956) (slaughtering/cleaning poultry is not manufacturing)

Related public documents referenced: P.D. 19-62 (6/17/2019); P.D. 19-111 (9/27/2019); P.D. 13-63 (5/10/2013); P.D. 06-79 (8/23/2006); P.D. 04-28 (6/25/2004)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-183

Original ruling text

November 10, 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. You appeal the denial of refunds of Business Tangible Personal Property (BTPP) tax paid by the Taxpayer to *** (the “County”) for the 2012 through 2016 tax years. I apologize for the delay in responding to your request.

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 at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.

FACTS

The Taxpayer is a producer of ready to serve meals for airliners. It filed its BTPP tax returns classifying itself as business service. The Taxpayer subsequently filed refund claims pursuant to Virginia Code § 58.1-3980 with the County for the 2012 through 2016 tax years, contending it should have been classified as a manufacturer for purposes of the BTPP tax. The County denied the Taxpayer’s classification request. The Taxpayer appealed the County’s response contending that all of the business tangible property located in the County was exempt from BTPP taxation because it was a manufacturer.

ANALYSIS

Jurisdiction

In its letter issued in December 2018, the County denied the refund request for the 2012 tax year on the basis that it was outside the statute of limitations and further denied the refund request for the 2013 through 2016 tax years, concluding that the Taxpayer was a business service. The County instructed the Taxpayer that any additional appeals were to be filed with a circuit court pursuant to Virginia Code § 58.1-3984. The Taxpayer appealed the County’s determination to the Department pursuant to Virginia Code § 58.1-3983.1.

In Public Document (P.D.) 19-62 (6/17/2019), the Department determined that it lacked jurisdiction to address the Taxpayer’s appeal because the local determination was not signed by the chief assessing officer or a person designated by the chief assessing officer to issue final local determinations. As such, the case was remanded back to the County in order for it to issue a final local determination as required by the Guidelines for Appealing Local Business Taxes in P.D. 04-28 (6/25/2004). The Taxpayer was instructed that it may then appeal the final local determination to the County pursuant to either Virginia Code §§ 58.1-3980 or 58.1-3983.1.

Virginia Code § 58.1-3983.1 B 6 provides that any taxpayer whose administrative appeal to the a local assessing official has been pending for more than one year without a final local determination, may elect to treat the application as denied and, with at least 30 days’ notice, appeal to the Department. Because a final local determination was not issued by the County within a year of the filing of the local appeal, the Taxpayer elected to treat the application as denied and filed an appeal with the Department.

2012 Tax Year

The Taxpayer requested a refund from the County in November 2016, for the 2012 through 2016 tax years. 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 2012 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 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 it would qualify as an industrial manufacturer under Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B 1. This regulation defines a manufacturer for purposes of Virginia’s sales and use tax. Local property taxes have their own characteristics, separate and distinct from the retail sales and use tax. See P.D. 13-63 (5/10/2013). As such, the sales tax definition of manufacture does not apply in BTPP cases.

The Taxpayer asserts that it is a manufacturer under both the SIC and NAICS codes. The Standard Industrial Classification (SIC) system was replaced by the North American Industrial Classification System (NAICS), although the NAICS was not published until 1998. The NAICS code is used in determining a Taxpayer's business for income tax and sales and use tax purposes. While not the determinative factor to be used in classification for local tax purposes, it is instructive. See P.D. 06-79 (8/23/2006).

The Taxpayer argues that other states have classified it as a manufacturer for tax purposes. The way that other states classify its taxpayers for purposes of state and local taxation may be informative, but reflects the unique law of their respective states and is not applicable to Virginia.

In this case, the Taxpayer contends that it meets the definition of manufacturer as provided by BBC Brown Boveri because it takes raw meats, vegetables, fruits and other foodstuffs and transforms them through a cooking process into separate meals. The County asserts that the Taxpayer merely portions bulk processed foods into individual meals.

In Prentice v. City of Richmond , 197 Va. 724, 90 S.E.2d 839 (1956), the Virginia Supreme Court held that that the slaughtering, picking and cleaning of poultry does not constitute manufacturing because there is no change or transformation of the live poultry into an article or product of substantially different character. However, the curing of hams and bacon was held to be manufacturing because “[t]he color ... is changed; its texture is changed; its taste is changed; putrefaction is prevented, and it may be kept wholesome for an indefinite time.” See Commonwealth v. Meyer , 180 Va. 466, 473, 23 S.E.2d 353, 356 (1942). In 1993 Op. Atty Gen. Va 231, the Attorney General determined that the removal of shells, cooking and packaging of frozen seafood is manufacturing for local tax purposes.

The Taxpayer states that it has three separate kitchens for the preparation of airliner meals which include one for Halal and kosher meals as well as one for customers with food allergies. The Taxpayer describes a process in which raw produce and meats are cut up to prepare for cooking. Marinades and seasonings are prepared and applied to raw meats. Industrial ovens are used to bake raw meats and steam real vegetables. Large industrial mixers are used to cream and mash potatoes. Burners and grill are used to grill chicken, beef, fish and vegetables. Stocks for soups, stews and sauces are made from strained vegetables. After cooking, the food is place in blast coolers to chill. It is then arranged by hand into individual meal containers. Servings of individual foods are measured on a food scale and place in the container. The individual meals are wrapped in foil and then loaded onto trays which are then packed into airplanes steward service carts for delivery to the airlines.

The County made a site visit to the Taxpayer in order to observe its meal preparation procedures. It described one kitchen in which individual servings of salads, snack trays, and cold cut sandwiches. In another kitchen, hot meals were heated and blanched then blast chilled and stored. The foods it observed in the refrigerated rooms were various cooked foods such as mashed potatoes, soups, cooked grains and breaded chicken. It also observed foods prepackaged entrees and desserts.

DETERMINATION

I find that the description of the process used in making individual meals for airlines that was provided by the Taxpayer is consistent with manufacturing because it involved the transformation of raw foodstuff into a product of different character. I also find however, the description of the process of producing individual meals for airlines as presented by the County is not consistent with manufacturing because prepared foods are merely portioned into individual meals. Because neither the Taxpayer nor the County has provided clear and objective evidence as to the facts in this case for the tax years at issue, I am remanding this case to the County to re-evaluate its findings in light of the above analysis.

The Taxpayer must work with the County to provide any further relevant information the County may request. Failure of the Taxpayer to provide sufficient documentation to support its position will result in the assessment being upheld. Likewise, the County must thoroughly review and address any and all information the Taxpayer is able to provide. If the County finds the manufacturing portion of the business is substantial, it must classify the Taxpayer as a manufacturer. Upon the conclusion of its review, the County must issue a new final determination. Once the County has issued its final determination, the Taxpayer may file an appeal with the Department pursuant to Virginia Code § 58.1-3983.1 or to the appropriate circuit court pursuant to Virginia Code § 58.1-3980 if it disagrees with any of the County’s conclusions.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3338

Related Documents

19-62

19-111

13-63

06-79

04-28