If my business gets a lump-sum manufacturer rebate after buying equipment in bulk, can I lower the equipment's taxable cost basis for business personal property tax purposes?

Plain-English summary

A Virginia county asked the Department for an advisory opinion on a recurring valuation question: when a business buys fixed assets in bulk and later receives a lump-sum rebate from the manufacturer -- not a coupon or discount applied at the time of sale, but a separate refund paid afterward that isn't tied to any specific asset -- can the business use that rebate to lower the assets' taxable "original cost" for business tangible personal property (BTPP) tax purposes? And if so, how should the rebate be divided up among the assets it relates to?

Virginia's Constitution requires most business tangible personal property to be taxed locally at fair market value, and the General Assembly has directed that fair market value for most business equipment be measured as a percentage of its "original cost" -- generally understood, consistent with legal dictionaries and prior Department and Attorney General guidance, as the net price the original purchaser actually paid, including all costs of putting the property into use.

A rebate, by definition, is a return of part of a payment -- functionally a discount or reduction, not a separate transaction like a sale of goods or services. Standard accounting principles (both U.S. GAAP and international accounting standards) and IRS guidance all treat manufacturer rebates paid to a business purchasing inventory as reductions to the purchase price, and a similar approach has been taken for property tax purposes in at least one other state's tax court. The Department found this treatment consistent with how "original cost" should work for Virginia BTPP tax too: a genuine rebate that functions as a retroactive price reduction should lower the asset's taxable cost basis.

But the label "rebate" isn't automatically controlling -- the real substance of the transaction and the parties' actual intent matter. If a payment called a "rebate" is really something else (for example, paid by an unrelated third party rather than the seller, or paid in advance of the purchase rather than as a true after-the-fact reduction), it may not function as a price adjustment at all, and the Department cited federal tax cases addressing exactly that kind of mislabeling problem. The business bears the burden of showing the rebate was genuinely intended to reduce the purchase price of the specific asset or class of assets involved -- something not shown by the original invoice or the business's own capitalized cost records. If that burden is met, the rebate should generally be spread proportionally across the affected assets based on their cost before the rebate; but if the rebate structure only rewards a limited quantity (for example, a fixed rebate that kicks in after 100 units are purchased and doesn't grow with additional purchases beyond that), it should be allocated only among that limited group of units, not spread thinly across everything purchased.

What this means for you

Businesses receiving a lump-sum manufacturer rebate on bulk equipment purchases

Keep clear documentation of the rebate terms -- who paid it (the actual seller/manufacturer, not an unrelated third party), when it was paid (after the purchase, as a true retroactive reduction, not an advance), and which specific assets or purchase volume it was tied to. That documentation is what lets you carry your burden of showing the rebate should reduce your BTPP tax cost basis, and it determines how the rebate gets allocated among your assets.

Local commissioners of the revenue assessing BTPP tax on rebated purchases

This advisory opinion gives a framework, not an automatic answer for every transaction -- examine the facts and the parties' actual intent behind any "rebate," since a mislabeled advance payment or a payment from an unrelated third party may not function as a genuine price reduction at all.

Businesses whose rebate only rewards purchasing a certain quantity

Don't assume a rebate always spreads evenly across everything you bought in that order or program -- if the rebate structure caps out after a certain number of units and doesn't grow with additional purchases, it should be allocated only among that capped group of units, not diluted across your entire purchase.

Common questions

Q: Does calling a payment a "rebate" automatically mean it reduces my taxable cost basis?
A: No -- the label isn't controlling. The Department looks at the actual facts and the parties' intent. A payment from an unrelated third party, or one paid in advance rather than as a genuine after-the-fact price reduction, may not function as a true rebate even if it's called one.

Q: Who has to prove the rebate should reduce the asset's cost basis?
A: The business does. It must show the rebate was intended as a reduction in the purchase price of the specific asset or class of assets -- something not otherwise reflected on the invoice or in its own capitalized cost records.

Q: How is a rebate divided up among multiple assets purchased together?
A: Generally in proportion to each asset's pre-rebate cost. But if the rebate is tied to a specific, capped quantity (for example, a flat rebate for the first 100 units purchased, with no increase for units beyond that), it's allocated only among that specific group of units.

Citations and references

• Va. Code § 58.1-3983.1 (Department's authority to issue advisory opinions on local business tax matters)
• Va. Code § 58.1-3103 (local commissioners must assess property at fair market value)
• Va. Code § 58.1-3503(A)(18) (original-cost method for valuing most business tangible personal property)
• Va. Code § 58.1-3507(B) (alternative valuation methodology where original-cost method overstates value)
• Article X, §§ 1, 2, 4, Constitution of Virginia (uniform, fair-market-value taxation of tangible personal property)
• Tuckahoe Women's Club v. County of Richmond, 119 Va. 734, 101 S.E.2d 571 (1958) (fair market value defined)
• Samson v. Board of Supervisors, 257 Va. 589, 514 S.E.2d 345 (1999) (plain meaning controls absent a statutory definition)
• IRS Publication 551, Basis of Assets (rebates treated as adjustments to sales price)
• Freightliner Corporation v. Department of Revenue, 3 Or. Tax 528 (1969) (persuasive, not binding: rebates reduce taxable cost basis for property tax)
• P.D. 05-129 (8/3/2005), P.D. 08-85 (6/6/1985), P.D. 14-68 (5/21/2014) (original cost includes all costs of putting property into use)

Subject

Tangible: Valuation - Rebates on Asset Purchases

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-130

Original ruling text

August 24, 2022

Re: Request for Advisory Opinion

Business Tangible Personal Property Tax

Dear *:

This is in response to your letter in which * (the “County”) requests an advisory opinion regarding the application of the business tangible personal property (BTPP) tax to assets for which a taxpayer received rebates.

The BTPP tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue advisory opinions on local business tax matters. The following opinion has been issued subject to the facts presented by the County to the Department as summarized below. Any changes in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s website.

FACTS

Under the scenario described by the County, a business receives a rebate for making purchases of certain fixed assets in bulk. The rebate is not a coupon amount or discounted sales price given at the time the sale is made. Rather, the assets are purchased and the rebate is given after the fact as a refund. The rebate is provided to the business in a lump sum and cannot be tied to specific assets. The County has requested an advisory opinion regarding whether the business may use the rebate provided by the seller to reduce the taxable cost basis of assets for purposes of BTPP taxes in the Commonwealth. If the rebate may reduce the taxable cost basis, the County asks how the rebate should be allocated among the assets to which it relates.

OPINION

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 . Article X, § 1 and § 2 of the Constitution of Virginia provide that all property, unless specifically exempted within the provisions of the Constitution , shall be taxed at a uniform rate among classes, and that “all assessments of real estate and tangible personal property shall be at their fair market value to be ascertained as prescribed by general law.” This provision of the Constitution contains the presumption that the General Assembly’s prescribed valuation method will both standardize valuation practices across all the local governments in the Commonwealth and result in something approximating fair market value. Virginia Code § 58.1-3103 specifically charges local commissioners with the responsibility of assessing property at fair market value.

Fair market value is generally defined as the price a property will bring when offered by one who desires, but is under no obligation, to sell it, and the buyer has no immediate necessity to purchase it. See Tuckahoe Women’s Club v. County of Richmond , 119 Va. 734, 101 S.E.2d 571 (1958). If the valuation methodology employed by a locality results in an assessment well above fair market value, the locality may use another methodology prescribed in Virginia Code § 58.1-3507 B. See Public Document (P.D.) 05-129 (8/3/2005).

Virginia Code § 58.1-3503 A 18 specifies that, for most items of tangible personal property that are used in a trade or business, fair market value is to be ascertained either by a percentage or percentages of original cost. The General Assembly has not provided a definition for the term “original cost” within the context of Virginia Code § 58.1-3507 B. Absent a statutory definition, the plain and ordinary meaning of the term is controlling. See Samson v. Board of Supervisors , 257 Va. 589, 514 S.E.2d 345 (1999). “Original cost” typically refers to the net invoice price for an asset, which necessarily assumes that is the amount paid and capitalized. In addition, legal dictionaries define “original cost” as “[a]n asset’s net price; the original cost of an asset. Also termed historical cost, original cost.” Black’s Law Dictionary 371 (8th Edition 2004).

The term “original cost” has consistently been interpreted to mean the cost paid by the original purchaser from a manufacturer or dealer. See 2009 Op. Va. Att’y Gen. 18 and 2014 Op. Va. Att’y Gen. 20. The Department has held that original cost includes all costs incurred for putting the property in use, i.e., the total sum of money the buyer parts with to get the article. See P.D. 08-85 (6/6/1985) and P.D. 14-68 (5/21/2014). See also S. & L. Straus Beverage Corporation v. Commonwealth of Virginia , 185 Va. 1055, 41 S.E.2d 76 (1947).

A rebate is defined as “[a] return of a part of a payment, serving as a discount or reduction.” Black’s Law Dictionary 1295 (8th Edition 2004). The rebate payment does not share the same characteristics as a receipt for goods or services because it is essentially just a reimbursement of a part of the purchase price.

Under Generally Accepted Accounting Principles (GAAP), the Financial Accounting Standards Board (FASB) has established the Accounting Standards Codification (ASC). Under FASB ASC 705-20-25-10, rebates paid by a vendor to a reseller that purchases certain levels of inventory are generally recognized as a reduction in cost of sales. Further, the International Accounting Standards Board requires that trade discounts, rebates and other similar items are deducted when valuing inventories. See IAS 2 Inventories (2001). Matching a rebate received against the purchase price in order to determine the historical cost of a fixed asset would be consistent with these principles. Such matching is also supported by the Internal Revenue Service (IRS), which treats rebates as adjustments to the sales price when determining the basis of an asset. See IRS Publication 551 (12/2018), Basis of Assets.

The Oregon Tax Court has a similar view for property tax purposes. In Freightliner Corporation v. Department of Revenue , 3 Or. Tax 528 (1969), the Oregon court determined that rebates reduce the taxable cost basis of assets for business property tax purposes. Although the Oregon case is not binding in Virginia, it is consistent with the way rebates are treated under general accounting and income tax principles.

The facts and circumstances of the particular transaction and the parties’ true intent, however, must be examined to determine whether a payment labelled by the parties as a rebate is actually something else entirely. For example, if the “rebate” is paid by a third party and not the seller or where the payment is made in advance of the purchase, the “rebate” may not reflect an adjustment to the purchase price. See, e.g., Pittsburgh Milk Co. v. Commissioner , 26 T.C. 707 (1956), John R. Wentz, et ux. v. Commissioner , 105 TC 1 (1995) and IRS Technical Advice Memorandum (TAM) 9719005 (1997).

Based on the foregoing, a business may reduce the taxable cost basis of assets subject to BTPP tax by rebates received from a manufacturer where the facts and circumstances and the parties’ intent indicate the rebate was intended as a reduction to the purchase price of the asset, or class of assets, at issue. The burden is on the business to show that it paid some other amount for the asset, or in this case, that it received a rebate for purchasing the asset, or class of assets, that is not shown on the invoice or the capitalized costs on the business’s books. If the business meets this burden, the rebate generally should be allocated among the assets in proportion to their pre-rebate cost.

In certain circumstances, however, the rebate should be allocated to only a portion of the assets. For example, if the rebate is earned after 100 units are purchased and does not increase with purchases in excess of 100 units, the rebate would be allocated proportionally among only the first 100 units purchased. See, e.g., Emerging Issues Task Force (EITF) Abstract 02-16 issued by the FASB.

Where, however, the facts and circumstances and the parties’ intent show that the allowance was not intended as a reduction in the selling price of the assets at issue, the cost basis of such assets would not be reduced. In such a case the allowance would not reduce the cost basis of the assets, but would be accounted for based on the intent of the parties.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4030.X

Related Documents

05-129

08-85

08-109

14-68