Academic journal article William and Mary Law Review

Good Intentions, but Unintended Consequences: Expanding Virginia's Manufacturing Tax Exemption

Academic journal article William and Mary Law Review

Good Intentions, but Unintended Consequences: Expanding Virginia's Manufacturing Tax Exemption

Article excerpt

The Virginia Supreme Court recently opened the door to challenges by Virginia manufacturers requesting exemptions or refunds of local property taxes with its decision in City of Winchester v. American Woodmark Corp.(1) American Woodmark, a nationwide furniture manufacturer headquartered in Winchester, Virginia, filed suit against the City of Winchester in 1995 requesting a property tax refund of approximately half a million dollars.(2) Although American Woodmark did not perform any manufacturing functions within the Winchester city limits, the company argued that the computers and office equipment in its corporate headquarters were exempt from the local personal property tax because this equipment was "used in manufacturing" under [sections] 58.1-1101(A)(2) of the Virginia Code.(3) Counterintuitively, the Virginia Supreme Court agreed.

As a result of this decision, cities and counties in Virginia now face requests for tax refunds on a variety of property that businesses claim is "used in manufacturing."(4) Prominent examples include Coca-Cola, which claims that its vending machines are "part of the manufacturing" of Coke,(5) and Sherwin Williams, which claims that equipment at its retail stores is "used in manufacturing" paint.(6) Local governments stand to lose millions of dollars in tax revenues if these challenges succeed.(7)

This Note analyzes the impact of American Woodmark on Virginia's personal property tax exemption for manufacturers, comparing the recent consequences of the court's holding with legislative and judicial intent. The first section describes the constitutional and statutory background against which the American Woodmark decision took place. The second section presents an overview of American Woodmark and places the court's holding in the context of previous decisions granting tax exemptions to Virginia manufacturers. The third section compares Virginia's personal property tax exemption for manufacturers with similar tax exemptions offered by other states.

Next, the fourth section discusses the repercussions of the decision and argues that although Virginia's expansive exemption is consistent with the tax breaks offered in other states, the court's convoluted interpretation of the Virginia Code may have unintended consequences for both consumers and Virginia cities and counties. This Note concludes with suggestions for ways in which local governments can defend against upcoming challenges by manufacturers.


Unlike the manufacturing exemptions offered by most states, Virginia's exemption is fairly convoluted(8) because it classifies tangible property as intangible property for tax purposes.(9) In general, personal property is usually divided into two categories: tangible and intangible.(10) Tangible personal property is "property which is touchable and has real [physical] existence."(11) Examples include motor vehicles, jewelry, books, or computer equipment.(12) Intangible property, on the other hand, is "property which cannot be touched because it has no physical existence."(13) Intangible property also includes property that has only representational value;(14) examples include corporate stock, bonds, goodwill, or franchises.(15)

Unlike most states, Virginia classifies a number of items of a manufacturer's tangible personal property as intangible for property tax purposes.(16) According to the Virginia Constitution,(17) the General Assembly has the power to determine whether property should be taxed at the state or local level.(18) In 1942, the Virginia Supreme Court in City of Roanoke v. James W. Michael's Bakery Corp.,(19) extended this power to include the ability to classify tangible personal property as intangible property.(20) This extension essentially gave the General Assembly the authority to merge the intangible and tangible categories together.

Virginia has five statutes concerning the local government taxation of intangible personal property. …

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