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Virginia High Court Finds County's M&T Tax Scheme Unconstitutional

Posted on Jan. 3, 2023

The Virginia Supreme Court has held that a paper production company is entitled to a full refund of local machinery and tools (M&T) taxes paid because the county’s tax scheme is unconstitutional.

In a December 29, 2022, decision in County of Isle of Wight v. International Paper Co., the state supreme court affirmed a circuit court decision that granted the company a refund of its 2017 M&T taxes because the county’s attempts to rectify a budget deficit by raising the tax rate by 142 percent for a single fiscal year violated the Virginia Constitution’s uniformity clause.


International Paper Co. is a New York-based company that owns a paper production factory in Isle of Wight County and pays M&T taxes for the machinery and tools used in the factory. The company successfully challenged the valuation of its machinery for tax years 2012–2014 and received a tax refund of $2.4 million.

In 2016, while International Paper’s refund action was still pending, taxpayers in the county were notified that their property valuations for tax years 2013–2015 exceeded fair market value. As a result, the county changed its method for valuing machinery and tools and corrected M&T assessments for 2013–2015, which led to the county issuing refunds totaling about $5.6 million.

In 2017, facing a significant budget shortfall as a result of the refund payments, the county administrator sent a letter to the M&T tax payers stating that the county was facing a deficit and that a tax increase was likely for 2017, with the estimated increase totaling the amount of refunds the companies received.

The county board of supervisors then approved a 142 percent increase to the M&T tax, raising the rate from $1.75 per $100 of assessed value to $4.24 per $100 of assessed value for only the 2017 tax year. After that, the board adopted a resolution establishing an economic development retention grant program, which the state supreme court called the M&T Tax Relief Program, that credited M&T tax payers against their 2017 assessment an amount equal to the difference between the higher 2017 rate and the previous rate. The program was funded by $32,125 in appropriations and around $1.1 million raised from the increased 2017 M&T tax.

International Paper I

International Paper received a 2017 M&T tax bill of about $5.485 million. It filed another refund action (International Paper I), claiming, among other things, that the tax and retention grant scheme was unconstitutional because it violated the state uniformity clause. The circuit court granted the county’s motion to strike several counts, including the uniformity claims, and the company appealed.

On appeal, the supreme court reversed the circuit court decision, finding that International Paper had established a prima facie case that the M&T tax scheme was nonuniform, in violation of the constitution, and remanded the matter for further proceedings consistent with the ruling.

On remand, the circuit court determined that International Paper had demonstrated a clear link between the increased tax rate and the retention grant program, and that the resulting effect was an unconstitutional nonuniform tax. The circuit court granted International Paper a full refund of about $5.485 million in M&T taxes paid for 2017, plus interest. The county appealed.

International Paper II

On appeal, the county argued that the tax scheme did not violate the uniformity clause and was therefore not unconstitutional. It further argued that even if the scheme was unconstitutional because of nonuniformity, the circuit court erred because it should have severed the M&T Tax Relief Program grants from the increased tax rate.

The state supreme court noted that it had held in International Paper I that the company established a prima facie case that the tax was nonuniform because it “marshalled ample evidence to prove that the higher tax rate and the Economic Development Retention Grant Program were integrated and interwoven and resulted in non-uniform taxation.” The court further noted that the county presented no new evidence on remand.

“Evaluating this evidence on remand, the circuit court could find this evidence persuasive and reach the conclusion that the County had established that the Economic Retention Grant Program and the elevated tax rate worked in tandem and, consequently, that the County’s M&T tax was non-uniform,” the supreme court stated.

The supreme court next rejected the county’s argument that the relief program and the increased tax rate could be severed. The court agreed that “there are times when an illegal provision can be feasibly severed from the overall taxation scheme” if the lawmakers would have enacted an ordinance containing the remaining portion after the illegal portion was severed. But in this case, the increased tax rate and the relief grant program were clearly linked, the court said.

“Abundant evidence established that the two were enacted together to serve a complementary purpose. . . . The manifest intent of the County Board of Supervisors was not simply to enact a high tax rate at $4.24 per $100 of assessed value; it was to impose a high rate of taxation which would then be mitigated through the economic retention grants,” the supreme court said, declining to invalidate the relief program while maintaining the higher tax rate.

The county argued that the circuit court could have granted an alternative remedy by requiring International Paper to pay the $1.75 tax rate even if the scheme was found unconstitutional and non-severable. However, since the county advanced that argument only during oral arguments and not during trial, the supreme court declined to consider the question, saying that “the rules of this Court should be consistently applied, and the County must now live with the choices it made during this litigation.”

“At trial, the County asked the court to uphold both the $4.24 tax rate and the Economic Development Retention Grants, or, in the alternative, to strike the grant program and uphold the higher tax rate. It did not pursue alternative arguments,” the supreme court stated.

Representatives for the taxpayer did not respond to a request for comment by press time.

The taxpayer in County of Isle of Wight v. International Paper Co. (Record No. 211032) is represented by Craig Bell, Alec Sauble, and Robert Loftin of McGuireWoods.

Subject Areas / Tax Topics
Magazine Citation
Tax Notes State, Jan. 9, 2023, p. 211
107 Tax Notes State 211 (Jan. 9, 2023)
Institutional Authors
Tax Analysts
Tax Analysts Document Number
DOC 2022-40826
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