The county estimated my business tangible property and merchant's capital tax using a PRIOR owner's sales and inventory numbers, and its final determination didn't clearly explain how it calculated my bill -- do I have to accept that?

Plain-English summary

A county assessed a business for business tangible personal property (BTPP) tax and merchant's capital tax for the 2020 and 2021 tax years after the business failed to file complete returns. The business appealed to the county, but the county's final determination upheld the assessment simply because the business hadn't shown the assessment was wrong. The business then appealed to the Department, arguing the county had overestimated its tax liability by using the sales and inventory figures of a PRIOR owner of the business rather than its own current, smaller operations.

This ruling explains an important structural point about Virginia local business taxes: merchant's capital (inventory held for resale) and business tangible personal property (other business equipment) are two SEPARATE classes of property, each reserved for local taxation. A locality is barred from imposing BOTH a BPOL license tax and a merchant's capital tax on the same merchant, but merchant's capital and BTPP are different enough that a locality CAN impose both a merchant's capital tax and a BTPP tax on the same taxpayer. Virginia law also lets a locality that doesn't get a complete tax return assess the taxpayer using the best information available -- which is what the county did here, relying on the business's own information plus a site visit.

The real problem in this case wasn't the county's authority to estimate -- it was HOW the county explained its estimate. Virginia Code § 58.1-3983.1(B)(5) requires a locality's final determination to lay out the facts and arguments behind its decision in enough detail that the taxpayer can understand why the assessment came out the way it did. The county's determination here just said the assessment was based on "information obtained from you and the site visit," without spelling out what information was used or how the numbers were calculated. At the same time, the business's own appeal didn't provide the Department enough information to independently verify its claim that the county's figures were inflated. With neither side's record complete enough for a real decision, Virginia remanded the case back to the county: the business gets 30 days (or another agreed timeframe) to submit additional information, and regardless of whether it does, the county must issue a REVISED final determination that actually explains the facts and reasoning behind its assessment -- including addressing any new information the business submits. If the business still disagrees after that, it gets a fresh 90 days to appeal to the Department again, and its appeal must lay out its own facts, issues, and legal authorities.

What this means for you

Businesses that didn't file a complete local tax return and got an estimated assessment

A locality can lawfully estimate your tax using the best information available, including a prior owner's data and a site visit, when your own return is incomplete. But that doesn't mean any explanation will do -- the locality still has to clearly explain what information it used and how it calculated your assessment.

Businesses appealing a local determination that just says "based on information we gathered"

Push back if a locality's final determination doesn't actually explain its reasoning in enough detail for you to understand and challenge the specific numbers. Virginia law requires that level of detail, and a vague explanation can get the case sent back for a proper one.

Businesses that pay both merchant's capital tax and business tangible personal property tax to the same locality

That's legally permitted -- merchant's capital (resale inventory) and business tangible personal property (other business equipment) are treated as separate classes of property, so a locality imposing both isn't double-taxing the same class, even though it can't combine merchant's capital tax with a BPOL license tax on the same merchant.

Common questions

Q: Can a locality tax both my resale inventory (merchant's capital) and my other business equipment (BTPP)?
A: Yes. They're legally separate classes of property, so a locality can impose both a merchant's capital tax and a BTPP tax on the same business -- the only pairing barred by statute is combining a merchant's capital tax with a BPOL license tax.

Q: What has to be in a locality's final determination on a local tax appeal?
A: Virginia Code § 58.1-3983.1(B)(5) requires the determination to set forth the facts and arguments supporting the decision in enough detail to inform the taxpayer why the assessment was issued for the amount in question -- a bare reference to unspecified "information obtained" isn't enough.

Q: What happens if neither the taxpayer nor the locality has given the Department enough to decide the appeal?
A: The Department can remand the case back to the locality, direct the taxpayer to submit any additional information within a set window, and require the locality to issue a fuller, properly-explained determination before the appeal process continues.

Citations and references

• Va. Code § 58.1-3500 (defines tangible personal property, expressly excluding merchants' capital)
• Va. Code § 58.1-3503 (general classification/valuation methodology for tangible personal property categories)
• Va. Code § 58.1-3509, § 58.1-3510 (merchants' capital is separately segregated for local taxation; includes resale inventory)
• Va. Code § 58.1-3704 (a locality may impose either a BPOL license tax or a merchants' capital tax on a merchant, not both)
• Va. Code § 58.1-3518, § 58.1-3519 (return filing requirement; best-information-available assessment authority when a taxpayer fails to file)
• Va. Code § 58.1-3983.1(B)(5) (a locality's final determination must set forth the facts and arguments supporting its decision)
• P.D. 17-15 (3/10/2017) (a locality may impose both merchant's capital tax and BTPP tax as separate classes of property)
• P.D. 04-28 (6/25/2004) (Department's Guidelines for Appealing Local Business Taxes)
• 2006 Op. Va. Att'y Gen. 06-036 (defining "inventory" for merchants' capital purposes) and 1985-86 Op. Va. Att'y Gen. 289 (merchants' capital and tangible personal property are separate classes)

Subject

Tangible Property : Business and Merchant's Capital Administration: Jurisdiction - Complete Appeals, Final Local Determination Requirements

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-148

Original ruling text

November 23, 2021

Re: Appeal of Final Local Determination

Taxpayer: *

Locality Assessing Tax: *

Business Tangible Personal Property Tax and Merchant’s Capital 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 an assessment of business tangible personal property (BTPP) tax and merchant’s capital tax issued to the Taxpayer by *** (the “County”) for the 2020 and 2021 tax years.

The BTPP tax and merchant’s capital tax are imposed and administered by local officials. Virginia Code § 58.1-3983.1 D authorizes the Department to issue determinations on taxpayer appeals of BTPP tax and merchant’s capital 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 online at www.tax.virginia.gov in Laws, Rules, and Decisions section of the Department’s website.

FACTS

The County issued assessments of BTPP tax and merchant’s capital tax for the 2020 and 2021 tax years because the Taxpayer failed to file complete BTPP and merchant’s capital tax returns. The Taxpayer filed an appeal with the County. The County’s final local determination upheld the assessment because the Taxpayer did not provide information indicating that the assessment was incorrect. The Taxpayer appealed to the Department, contending that the County overestimated the tax liability based the amount of sales and inventory of a previous owner.

ANALYSIS

Business Tangible Personal Property

Virginia Code § 58.1-3500 defines tangible personal property as “all personal property not otherwise classified by (i) § 58.1-1100 as intangible personal property, (ii) § 58.1-3510 as merchants’ capital, or (iii) § 58.1-3510.4 as short-term rental property. Such tangible personal property is hereby segregated for and made subject to local taxation only pursuant to Article X, Section 4 of the Constitution of Virginia .”

Virginia Code § 58.1-3503 provides for the general classification of tangible personal property. Under this section, certain tangible personal property is classified for valuation purposes by separate categories that are not, however, to be considered separate classes for rate purposes. Virginia Code § 58.1-3503(B) notes that the methods of valuing property may differ among the separate categories, so long as each method used is uniform within each category. Included among the 20 enumerated categories is all tangible personal property employed in a trade or business, except such property for which a more specific categorization in the statute applies.

Merchant’s Capital

The capital of merchants is also segregated for local taxation only. See Virginia Code § 58.1-3509. Merchants’ capital, as defined in Virginia Code § 58.1-3510, includes inventory for sale as merchandise. The Attorney General has opined that inventory is goods and materials kept on hand by a commercial establishment for sale. See 2006 Op. Va. Att’y Gen 06-036.

A locality may impose either a business, professional and occupational license (BPOL) tax or a merchants’ capital tax on merchants but is prohibited from assessing both. See Virginia Code § 58.1-3704. Accordingly, for those businesses that are selling merchandise, a locality may impose either a license tax on the privilege of doing business, or it may impose a merchants’ capital tax on the businesses’ inventory.

Merchants’ capital and tangible personal property are two separate classes of property in Virginia that have been segregated for local taxation only. See 1985-86 Op. Va. Att'y Gen. 289. Merchants’ capital is specifically excluded from the definition of tangible personal property. See Virginia Code § 58.1-3500. Therefore, because merchant’s capital and tangible personal property are two separate classes of property, a locality may impose both a merchant’s capital tax and a business tangible personal property tax on its taxpayers. See Public Document (P.D.) 17-15 (3/10/2017).

Return Requirements

Virginia Code § 58.1-3518 generally requires a taxpayer who owns any property subject to BTPP or merchant’s capital tax to file a return with the commissioner of the revenue in the taxpayer’s respective locality. If a taxpayer neglects or refuses to file within the time prescribed, Virginia Code § 58.1-3519 authorizes the commissioner of the revenue to issue an assessment based on the best information available.

For the tax years at issue, the County had a business filing form. Taxpayers who had taxable business tangible personal property were required to complete a schedule listing a description of each item of property, the date it was acquired and its original cost. Taxpayers were also required to list the value of any inventory on hand as of January 1 of the respective year.

Final Local Determination

In its final determination, the County stated that the Taxpayer’s filing was not complete and not in compliance with its requirements. The County also explained that the assessment was based on information obtained from the Taxpayer and from a site visit of the business. The Taxpayer’s appeal alleges that the County overestimated the tax liability because the County used the sales and inventory amounts of a prior owner of the business and those amounts did not accurately reflect the extent of the Taxpayer’s current business operations.

While it is true that a locality’s assessment is deemed prima facie correct and that a taxpayer thus bears the burden of proving that the assessment was incorrect, Virginia Code § 58.1-3983.1 B 5 also requires that local determinations set forth the facts and arguments in support of the decision. Implied in this mandate is that the determination must set forth the factual basis of the decision in sufficient detail to inform the taxpayer why an assessment has been issued for the amount in question. While the County’s determination in this case states that the assessment was based on “information obtained from you and the site visit,” it fails to clearly explain what information was used or how the assessment amounts were derived.

DETERMINATION

Based on the information available, I find that neither the Taxpayer nor the County provided sufficient information for the Department to make an informed final determination in this appeal. Accordingly, this case will be remanded back to the County for further consideration. If the Taxpayer wishes to submit new additional information to the County, it should do so within 30 days of the date of this letter, or within another time mutually agreed upon with the County. Whether or not the Taxpayer chooses to submit new information, the County should issue a revised final local determination that more fully sets forth the facts and arguments in support of its assessment. If the Taxpayer does submit new information, the final determination should also include an analysis of how that information affects the case, if at all.

Once the County has issued a revised determination letter, the Taxpayer will have 90 days to file an appeal with the Department if it disagrees with the outcome. In that event, the Taxpayer’s appeal must also set forth the facts, issues and authorities in support of its position. For further information concerning local business tax appeals, the Taxpayer is directed to the Department’s Guidelines for Appealing Local Business Taxes, issued as P.D. 04-28 (6/25/2004).

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/3842-C

Related Documents

17-15