Summary
The Supreme Court of Virginia held that leaf tobacco stored in Virginia while naturally aging was not being "used" within the meaning of Code § 58.1-409. Accordingly, the tobacco’s value was properly excluded from the property factor used to apportion the taxpayer’s Virginia taxable income, and the court affirmed the circuit court’s order requiring refunds.
Topics
Practice areas
Questions Presented
- Whether leaf tobacco stored in Virginia and naturally aging before being shipped to another state for manufacturing is "used" in Virginia under Code § 58.1-409 and therefore must be included in the Virginia property factor.
- Whether 23 VAC § 10-120-160 applies to the stored leaf tobacco and requires its inclusion in the property factor.
Holdings
- Leaf tobacco is not "used" within the meaning of Code § 58.1-409 merely because it ages while stored in Virginia, where the taxpayer performs no affirmative act to prompt or aid the aging process. Its value therefore should not be included in the Virginia property factor.
- 23 VAC § 10-120-160 does not apply to naturally aging agricultural raw materials stored in Virginia and cannot be used to interpret the unambiguous term "used" in Code § 58.1-409.
Key quotations
“That the leaf tobacco ages as it sits in the ambient conditions of the Danville Facilities is a natural consequence of the passage of time, not of any effort on Lorillard’s part.” (at 10)
“We therefore affirm the judgment of the circuit court.” (at 11)
Factual background
Lorillard purchased leaf tobacco from third-party suppliers and stored it in warehouses in Danville, Virginia, for 13 to 23 months before shipping it to North Carolina for processing into cigarettes. The tobacco aged naturally during storage, without human intervention, specialized equipment, temperature controls, or other affirmative action by Lorillard. Lorillard originally included the value of the stored tobacco in the Virginia property factor for apportioning its multistate corporation income, then sought refunds after removing that value from the factor.
Procedural history
Lorillard Tobacco Company, later acquired by and merged into R.J. Reynolds Tobacco Company, sought correction of Virginia corporation income tax assessments and refunds for multiple tax years. The circuit court consolidated the applications, held that leaf tobacco aging in Virginia warehouses was not property "used" in Virginia under Code § 58.1-409, and ordered refunds totaling $11,021,507 plus interest. The Department appealed to the Supreme Court of Virginia, which affirmed.