On November 24, 2015, the Virginia Department of Taxation released a ruling (P.D. 15-215) holding that Virginia localities are not eligible to claim the land preservation tax credit (LPTC). The term “locality” includes counties, cities, and towns, as defined in Va. Code § 15.2-102. Let’s take a closer look at this ruling.
Fun with Parsing Lists of Words
This ruling is based entirely on the application of technical legal principles. The Department of Taxation started its analysis by examining the statute that authorizes the LPTC, specifically Va. Code § 58.1-512. The Department of Taxation observed that, under this statute, only a “taxpayer” is eligible to claim the LPTC. The Department of Taxation then looked up the definition of “taxpayer,” which is defined in Va. Code § 58.1-1 as being “every person, corporation, partnership, organization, trust or estate subject to taxation under the laws of this Commonwealth” or under local laws. Thus, to be eligible to claim the LPTC, a locality would have to fall within one of these six categories.
The Department of Taxation then compared this statute with other statutes that have similar lists:
- One of the tax enforcement statutes (Va. Code § 58.1-3952) defines the word “person” as meaning “individuals, corporations, partnerships, institutions, and other such entities, as well as the Commonwealth and its agencies and political subdivisions” for the purposes of that particular statute.
- Similarly, Va. Code § 1-230 defines the word “person” as meaning “any individual, corporation, partnership, association, cooperative, limited liability company, trust, joint venture, government, political subdivision, or any other legal or commercial entity and any successor, representative, agent, agency, or instrumentality thereof.” This is the default definition for “person” used throughout the Virginia statutes, not just the tax statutes.
Notice how each of these definitions specifically lists the Commonwealth (or “government”) and its political subdivisions. The Department of Taxation reasoned that, because the tax definition statute did not specifically list the Commonwealth and its political subdivisions, even though similar statutes did, the General Assembly had deliberately excluded the Commonwealth and its political subdivisions from the definition of “taxpayer.” Thus, localities (which are political subdivisions of the Commonwealth) are not “taxpayers” and cannot claim the LPTC.
As further support for its conclusion that localities were not “taxpayers,” the Department of Taxation also pointed out that Article X, § 6(a) of the Constitution of Virginia specifically exempts localities from paying property taxes. This was merely an example of another situation in which localities are not “taxpayers”; the LPTC cannot be used to pay property taxes.
Finally, the Department of Taxation noted that economic development authorities (EDAs) are subdivisions of localities, and so the same rules apply to them: Neither localities nor their associated EDAs are eligible to claim the LPTC. An EDA is merely a special name for an industrial development authority (IDA)—see Va. Code § 15.2-4903—and so I presume that the Department of Taxation’s reasoning applies to IDAs generally as well.
The Department of Taxation’s Unstated Assumptions
In making this analysis, the Department of Taxation essentially relied on two rules of statutory construction, although it did not actually say so in its ruling. Rules of statutory construction are rules of thumb for determining the meaning of vague or ambiguous statutes.
First, it relied on the principle that, if specific wording is used in one place, but different wording is used someplace else, then that different wording presumably means something different. That is part of the reason why the Department of Taxation did not simply conclude that (1) localities are included in the definition of “person” under Va. Code § 1-230, (2) the definition of “taxpayer” in Va. Code § 58.1-1 includes every “person,” and (3) therefore localities are “taxpayers” and are eligible to claim the LPTC. No—the lists are different and must mean something different.
Secondly, the Department of Taxation relied on the principle that, if a statute lists specific items but leaves out another specific item, then that item was meant to be left out. That is the other part of the reason why the Department of Taxation did not treat the word “person” as being a catchall. The definition did not specifically list political subdivisions, even though it did list many other specific categories of taxpayers, and so political subdivisions were not meant to be included in the definition.
If we were to be truly thorough about it, there are several other rules of statutory construction that apply, but these two are the most important here. The analysis using these rules is not perfectly clean—what does “person” mean in Va. Code § 58.1-1, especially when you compare the list in that statute with the list in Va. Code § 58.1-3952?—but that is an inherent problem in using these rules: Rules of statutory construction are the ways that courts and administrative agencies deal with badly worded statutes. Invoking a rule of statutory construction does not magically make the statute precisely worded. It’s still a badly worded statute.
Why Is This Important?
At this point, you might be asking yourself: If a Virginia locality doesn’t pay state income taxes, why would the locality care about receiving the LPTC?
The answer is simple: The LPTC is a transferable tax credit. In other words, it can be sold and converted to cash. And that means that a locality that owns a large amount of land might have been able to donate a conservation easement on that land, claim the tax credits, and sell the tax credits for a windfall.
Probably the best example of this would be a locality that owns a municipal reservoir and the immediately surrounding watershed. Because of the need to maintain clean drinking water, the locality will already be using the land for conservation purposes. The locality likely will have already implemented many or all of the best practices that a conservation easement would require in terms of maintaining vegetated buffers along waterways emptying into the reservoir. In some cases, the reservoir might even be open to the general public for recreational purposes. These types of municipal properties have the potential to be ideal properties for conservation easements—and, if it were eligible to receive the LPTC, the locality would be paid to use the land exactly as it had intended to use the land all along.
A locality could still donate a conservation easement on its land. However, after this ruling, it would not receive any state tax benefits for doing so. Without clear financial benefits, I do not expect to see many Virginia localities donating conservation easements on their land.
And, from a policy standpoint, this is probably the right result. Localities are better suited to be the holders of conservation easements than donors of conservation easements. Returning to the example of a reservoir, a locality might own the land immediately surrounding the reservoir, but additionally solicit donations of conservation easements on adjoining private properties that are further away from the reservoir but can still significantly impact water quality. This arrangement would help to reduce runoff into the reservoir, thus protecting the public water supply. By contrast, allowing localities to claim the LPTC would disincentivize localities from holding conservation easements. This is because, entirely apart from the tax ruling that I have been discussing, Virginia law does not allow holders of conservation easements to claim the LPTC. This tax ruling ensures that a locality will not be tempted to choose between a one-time infusion of cash flow and a broader strategy to protect its water supply or other ecological assets.
As always, stay tuned for more updates.