My city assessed business personal property tax on equipment that's broken or idle and on a consumable supply item -- do I owe tax on all of it?

Plain-English summary

A medical spa was audited by its City and assessed additional Business Tangible Personal Property (BTPP) tax for 2017 and 2018. The taxpayer appealed to the City over several disputed items, conceded the 2017 items were taxable, and took three remaining 2018 items to the Department of Taxation. Because BTPP tax is a LOCAL tax, the Department's role here was narrow: on appeal, a local BTPP assessment is "prima facie correct," meaning the TAXPAYER carries the burden of proving the City got it wrong -- the City doesn't have to prove it got it right.

Property 1 (claimed to have been returned to the manufacturer). The taxpayer said this item was sent back after a short trial period and only stayed on the depreciation schedule because of a prior accountant's mistake. But the taxpayer gave the Department no objective documentation -- no proof of when, or even whether, the item was actually returned. Rather than uphold the assessment outright, the Tax Commissioner remanded this item back to the City, giving the taxpayer a 90-day window to submit further documentation. If nothing more comes in, the assessment stands as-is.

Property 2 (a broken, idle machine). The taxpayer argued this piece of equipment stopped working properly, was taken out of service, and therefore shouldn't be taxed -- and separately questioned whether it even owned the equipment. The Department rejected the ownership argument as speculative, since a financing arrangement, payments, possession, and depreciation reporting all point to ownership. More importantly, unlike the Machinery & Tools tax, Virginia's BTPP tax has NO exemption or reduction for idle or out-of-service equipment -- all non-exempt tangible personal property is taxable whether or not it is actually being used. Technological obsolescence and condition CAN be factored into fair market value on request, but merely asserting the equipment "doesn't work as intended" isn't evidence of value -- the taxpayer needed something concrete, like a bona fide independent appraisal, and didn't provide one. The assessed value stood, though the taxpayer was invited to get an appraisal and bring it to the City.

Property 3 (a USB device holding consumable treatment files). The taxpayer argued this item was really a consumable supply -- like fuel -- that got used up administering treatments, not durable property. The Department agreed the item shouldn't be taxed, but on a different legal theory: because the taxpayer bought the device specifically to resell the stored treatments to customers as part of its services, the item met the definition of INTANGIBLE personal property as inventory (supplies held for indirect resale), which is not subject to BTPP tax at all -- regardless of how it was depreciated for federal tax purposes. This item had to be removed from the City's assessment entirely.

BPOL penalty request. The taxpayer separately asked to have Business, Professional and Occupational License (BPOL) tax penalties waived. The Department couldn't touch that request -- BPOL penalty waivers are entirely within local government discretion and aren't subject to Department review, so the taxpayer was told to take that request directly to the City.

What this means for you

If you're disputing idle or broken equipment on a local BTPP assessment

Don't assume that equipment being unused, broken, or out of service makes it exempt from BTPP tax -- Virginia's BTPP tax, unlike the Machinery & Tools tax, has no idle-equipment exemption. If you want the assessed value reduced because of condition or technological obsolescence, you generally need to make that request and back it up with real evidence, such as a bona fide independent appraisal -- simply asserting the equipment doesn't work isn't enough.

If you claim property was returned, disposed of, or no longer owned

The burden is on you, not the locality. You must provide objective documentation showing when and how the property left your possession (a return receipt, shipping record, disposal confirmation, etc.). A bookkeeping note or an accountant's claimed error, without supporting records, is unlikely to satisfy a locality or the Department on appeal.

If you sell services or products that consume supply items you bought

Items you acquire specifically to resell -- directly or indirectly -- to customers as part of your product or service can qualify as intangible personal property (inventory), which is not subject to BTPP tax, even if you depreciated the item for federal income tax purposes. Federal depreciation treatment is a factor localities may consider, but it isn't determinative of BTPP tax treatment.

If your dispute involves a BPOL tax penalty

BPOL license tax penalty waivers are entirely within the discretion of the local government imposing the tax. The Department of Taxation cannot review or grant a BPOL penalty waiver on appeal -- you must raise that request directly with your city or county.

Common questions

Q: Does my equipment being broken or unused mean I don't owe BTPP tax on it?
A: No. Virginia's BTPP tax doesn't have an idle-equipment exemption like the Machinery & Tools tax does. All non-exempt tangible personal property remains taxable whether or not it's currently in use, unless you can prove it was disposed of, is legally exempt, or you have real evidence (such as a bona fide independent appraisal) establishing its value is lower than assessed.

Q: How do I prove property was disposed of or returned so it comes off my assessment?
A: You need to provide the locality with objective documentation showing when the property was disposed of or returned -- not just an assertion or a claimed bookkeeping correction. Without that proof, the assessment is presumed correct and will stand.

Q: If I say my equipment doesn't work anymore, isn't its value automatically zero?
A: No. The Department has held that equipment not working as intended doesn't, by itself, establish zero value -- it may still have value (for example, for parts). To reduce the assessed value based on condition or technological obsolescence, you need concrete evidence, such as a bona fide independent appraisal, not just an unsupported claim.

Q: I bought a consumable item that I use up while delivering services to customers -- is that taxable as BTPP?
A: It may not be. If you acquired the item specifically to resell it (directly or indirectly) to customers as part of your product or service, it can qualify as intangible personal property (inventory) rather than taxable tangible personal property, even if you depreciated it for federal tax purposes.

Q: Can the Virginia Department of Taxation waive BPOL tax penalties for me?
A: No. BPOL penalty waivers are entirely within the discretion of the local government that assessed the tax. You must direct that request to your city or county, not to the Department.

Citations and references

• Va. Code § 58.1-3983.1 D -- Department's authority to decide taxpayer appeals of local BTPP tax assessments; the assessment is prima facie correct
• Va. Code § 58.1-3500 -- defines tangible personal property (excluding property separately classified as intangible personal property, merchants' capital, or short-term rental property)
• Va. Code § 58.1-3506 A 26 -- sets BTPP aside as a separate classification of tangible personal property subject to local taxation
• Va. Code § 58.1-3503 A 18 -- BTPP is a separate category for valuation purposes, generally valued as a percentage of original cost
• Va. Code § 58.1-3503 B -- allows an alternative valuation method where the standard methodology produces an assessment well above fair market value, and requires consideration of condition/technological obsolescence upon request
• Va. Code § 58.1-3109 6 -- authorizes local commissioners of the revenue to require records and information necessary for an accurate BTPP assessment
• Va. Code § 58.1-3507 G -- the Machinery & Tools tax's idle-equipment provision, contrasted with BTPP tax (which has no such exemption)
• Va. Code § 58.1-1100 et seq. -- defines intangible personal property (property so classified is reserved from local tangible personal property taxation)
• 23 VAC 10-340-20 -- defines inventory as intangible personal property, including supplies held for direct or indirect resale
• Tuckahoe Women's Club v. County of Richmond, 199 Va. 734, 101 S.E.2d 571 (1958) -- fair market value defined as the price property would bring from a willing, unpressured buyer and seller
• Bd. of Supervisors v. Telecomms. Indus., 246 Va. 472, 436 S.E.2d 442 (1993) -- technological obsolescence as a factor in determining fair market value
• S. & L. Straus Beverage Corp. v. Commonwealth, 185 Va. 1055, 41 S.E.2d 76 (1947) -- original cost includes the full sum the buyer pays to acquire and put the property in use
• Public Document 06-142 (12/8/2006) -- federal depreciation schedules are a useful but not determinative factor in BTPP property classification
• Public Document 08-85 (6/6/1985) -- original cost includes all costs incurred to put property into use
• Public Document 11-54 (4/7/2011) -- taxpayer must provide sufficient documentation showing when disposed-of property left its possession
• Public Document 12-160 (10/12/2012) -- documentation standard for claimed disposal of BTPP; idle equipment remains taxable absent a statutory exemption
• Public Document 14-68 (5/21/2014) -- original cost standard for BTPP valuation
• Public Document 18-175 (10/23/2018) -- fair market value is determined with respect to the market, not the value to the specific taxpayer
• Public Document 20-3 (1/7/2020) and Public Document 20-18 (2/6/2020) -- BPOL tax penalty waivers are subject to local discretion, not Department administrative review

Subject

Tangible : Assessment - Burden of Proof; Intangible : Inventory - Consumable USB Applications; BPOL : Administration : Penalty and Interest - Offer in Compromise

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-29

Original ruling text

February 15, 2022

Re: Appeal of Final Local Determination

Taxpayer: *

Locality Assessing Tax: *

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 assessment of business tangible personal property (BTPP) tax issued to the Taxpayer by *** (the “City”) for the 2018 tax year.

The BTPP tax is 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 assessments. On appeal, a BTPP 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, regulation 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 Taxpayer, a medical spa, was audited by the City, resulting in an assessment of additional BTPP tax for the 2017 and 2018 tax years. The Taxpayer appealed to the City, requesting that certain items be excluded from the assets subject to tax because they were no longer in the Taxpayer’s possession, constituted nontaxable supplies or were inoperable and of no value. The City upheld the assessment because it found the Taxpayer had depreciated each of the items for federal income tax purposes and failed to provide sufficient records confirming disposal of any of the items. The Taxpayer appealed to the Department, conceding that the two items it had disputed as to the 2017 assessment were taxable, but it continues to disagree with the City’s inclusion of three items of property as taxable BTPP for the 2018 tax year.

ANALYSIS

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.”

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 .” BTPP is set aside as a separate classification of tangible personal property subject to local taxation under Virginia Code § 58.1-3506 A 26 and is considered a separate category for valuation purposes under Virginia Code § 58.1-3503 A 18.

Localities typically consider a taxpayer’s federal depreciation schedules as a factor in determining property classification for BTPP tax. The Department has previously deemed consideration of federal depreciation schedules as an acceptable factor in determining property classification. See Public Document (P.D.) 06-142 (12/8/2006). While federal treatment is an acceptable factor for consideration, it is not determinative.

* (Property 1)

The Taxpayer explains that, after a short trial period, Property 1 was returned to the manufacturer. The Taxpayer states that the property was added to its depreciation schedule in error by a prior accountant and the mistake has now been corrected.

Under the provisions of Virginia Code § 58.1-3109 6, the local commissioner of the revenue is empowered with the authority to require records and other information necessary to make an accurate assessment of BTPP. It is incumbent upon the taxpayer to prove to the satisfaction of the local taxing authority that it properly reported the value of all its property on its BTPP returns. See Virginia Code § 58.1-3983.1 B 4.

In addition, when a taxpayer asserts that an item of BTPP is no longer on its premises, the taxpayer must provide sufficient documentation to the locality to show when it disposed of the property in question. See P.D. 11-54 (4/7/2011) and P.D. 12-160 (10/12/2012). In this case, the Taxpayer has provided no objective evidence to show if and when Property 1 was returned.

* (Property 2)

The Taxpayer asserts Property 2 was a machine that did not work properly and was taken out of service after only several months of use. The Taxpayer makes several arguments as to why this equipment should not be subject to BTPP tax, namely that it has been out of service and the Taxpayer is unsure whether it even has legal title to the equipment. The Taxpayer also appears to argue that at a minimum, the value should be reduced by certain costs included with the equipment’s purchase, including costs for items consumed when Property 2 was used, an extended warranty and interest, and further reduced by the property’s technological obsolescence.

As for the property being out of service, the BTPP tax does not provide designation for idle equipment like the Machinery and Tools (M&T) tax. See Virginia Code § 58.1-3507 G. As such, all tangible personal property that is not exempt either by statute or the Constitution , is subject to BTPP taxation regardless of whether it is currently being used in the business or not. See P.D. 12-160.

The Taxpayer also questions whether it had legal title to the property. This argument is speculative. The Taxpayer, however, had a financing arrangement with the manufacturer, made payments toward the purchase, obtained possession of the property, and was reporting it on its depreciation schedule. As such, the Taxpayer is assumed to be the owner of the property for BTPP tax purposes until it affirmatively demonstrates otherwise.

As for the valuation, Virginia Code § 58.1-3103 specifically charges local commissioners of the revenue with the responsibility of assessing property at fair market value (FMV). FMV 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 , 199 Va. 734, 101 S.E.2d 571 (1958).

Virginia Code § 58.1-3503 A 18 specifies that for most items of tangible personal property that is used in a trade or business, FMV is to be ascertained either by a percentage or percentages of original cost. Although the General Assembly has provided no definition for the term “original cost,” it 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).

If the valuation methodology employed by a locality results in an assessment well above FMV, the locality may use another methodology prescribed in Virginia Code § 58.1-3503 B. That code section provides requirements relevant to valuing BTPP, including that the method of valuation be reasonably expected to determine actual FMV, and that upon request a commissioner of the revenue take into account the condition of property including, but not limited to, technological obsolescence.

Technological obsolescence generally occurs when new technology is developed that makes the old technology obsolete, and it can be considered a factor in determining FMV. See Virginia Code § 58.1-3503 B and Bd. of Supervisors v. Telecomms. Indus., 246 Va. 472, 436 S.E.2d 442 (1993). The mere fact that equipment did not work as intended fails the standard of the Court.

In addition, the Department has observed that FMV must be determined with respect to the market, not the value to the specific taxpayer. See P.D. 18-175 (10/23/2018). The Taxpayer claims that the equipment did not work properly and was in need of repairs, which the Taxpayer says the manufacturer refused to perform, and argues that a piece of equipment that does not work as intended has no value. The Department disagrees. Even assuming that the equipment was not repairable and was no longer usable in any capacity, it may still have had intrinsic value for parts, for example. While the Department does not necessarily disagree that the extent equipment works as intended could be considered in establishing the equipment’s condition for valuation purposes, the Taxpayer must still present evidence that quantifies the value, such as a bona fide independent appraisal.

* (Property 3)

The Taxpayer argues Property 3 was a universal serial bus (USB) device that contained executable files called “zones” that were consumed when administering the various treatments with Property 2. Once the applications were exhausted, the USB device was not longer useful. In that way, the Taxpayer argues that the property acted as fuel and was an expendable supply that should not have been considered tangible personal property. In the alternative, the Taxpayer argues that, if Property 3 was tangible personal property, the fair market value was zero because the treatments had been used and the property was otherwise worthless.

The definition of tangible personal property in the Code of Virginia is expansive and includes all personal property not otherwise classified as intangible personal property, merchants’ capital, or short-term rental property. Intangible personal property includes inventory, which encompasses supplies of every kind for use in a business if held for resale directly or indirectly. See Title 23 of the Virginia Administrative Code (VAC) 10-340-20. Inventory held for resale indirectly means inventory of materials or component parts which will become an identifiable part of the product or service to be sold or compensated for.

Although Property 3 was in fact tangible personal property within the ordinary meaning of the term, many items that are tangible in fact are excluded from the BTPP tax as intangible or merchant’s capital. Here, the Taxpayer acquired Property 3 in order to resell the treatments stored there on as a part of its services offered to customers. As such, it meets the definition of intangible personal property as inventory and was not subject to the City’s BTPP tax, even if the Taxpayer depreciated it for federal income tax purposes. As stated above, federal depreciation schedules, though useful as a factor in determining BTPP classification, are not determinative.

DETERMINATION

Based on the facts and documentation presented, the Taxpayer has not shown that Property 1 was returned to the manufacturer as the Taxpayer claims. However, I am remanding this issue back to the City in order to consider any other documentation the Taxpayer may be able to provide with regard to this asset.

As to Property 2, the Taxpayer has not provided sufficient evidence to show that the County’s valuation was incorrect. Should the Taxpayer wish to obtain an independent appraisal of Property 2, it should do so and submit it to the City for review.

Any further documentation as to these two items must be submitted to the City within 90 days of the date of this determination, unless the City and the Taxpayer agree to a different deadline. To the extent the Taxpayer submits additional documentation, the City should evaluate the information, revise the assessment if warranted, and issue a new final local determination. If the Taxpayer disagrees with the new determination, it may appeal to the Department within 90 days. If the Taxpayer fails to submit any further documentation, the assessment as to these items will be considered correct.

Further, the facts and documentation presented indicate that Property 3 was inventory considered to be intangible personal property and was not subject to BTPP. Accordingly, the City must remove this item from its assessment. The Taxpayer may wish to consult its tax advisors to verify the proper treatment of these items for federal income tax purposes.

Finally, it appears that the Taxpayer was also subject to an audit of Business, Professional and Occupational License (BPOL) tax, the results of which it does not dispute, but seeks an abatement of penalties. Waivers of BPOL tax penalties are subject to the review and discretion of the locality and are not subject to administrative review by the Department. See P.D. 20-3 (1/7/2020) and 20-18 (2/6/2020). Therefore, the Taxpayer should direct any penalty waiver requests to the City.

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/3656-C

Related Documents

06-142

08-85

11-54

12-160

14-68

18-175