How tangible machinery became intangible for tax purposes – Wacky Tax Wednesday

If you had to guess, would you say that machinery is tangible or intangible? Would your answer change if the machinery wasn’t operational?

I think most people would agree that machinery is tangible whether in use or gathering dust. And I think the folks at Merriam-Webster would back us up: They define “tangible,” in part, as “capable of being perceived especially by the sense of touch” and “substantially real.”

Conversely, “intangible” is defined as “not tangible: impalpable.”

Yet tangible personal property can apparently be “declared intangible” in Virginia. Aside from triggering my own existential crisis, this can have a very real impact on the taxability of that property. 

Tangible personal property in Virginia is “presumed to be used from the date it is placed in service, usually the date it is purchased or received by the business.” As such, it’s generally taxable.

Yet according to Rulings of the Tax Commissioner 19-109, machinery that’s to be used in a manufacturing business is considered intangible if it isn’t yet operational. And as intangible property, it’s eligible for an exemption from the machinery and tools (M&T) tax, a local tax in Virginia.

Virginia Code § 58.1-3507 specifies that the M&T tax may not be levied on “idle machinery and tools.” (I love the thought of machinery and tools lazing about.) Machinery and tools are considered idle if they haven’t been used for at least one year prior to the day tax is due and aren’t expected to be used during the tax year.

Furthermore, the Attorney General of Virginia has repeatedly determined that “machinery and tools may not be considered to be used in a manufacturing business until they are actually used in the manufacturing process.” Which seems reasonable, really.

Thus, although the machinery in question in Ruling 19-109 is evidently placed in service, the Tax Commissioner finds that “it should not yet be considered to be machinery used in a manufacturing business” because it isn’t yet producing products.

Just like that, the tangible has become intangible; the taxable exempt. Isn’t it wonderful?

Want more wacky tax tales? You’ll find them in the Avalara blog.