In Virginia Department of Taxation v. R.J. Reynolds Tobacco Co., the Virginia Supreme Court ruled that the taxpayer was entitled to a corporate income tax refund because leaf tobacco stored in the taxpayer’s Virginia warehouse was not “used” by the taxpayer for purposes of inclusion in its Virginia property factor.
The taxpayer stored leaf tobacco in its Virginia facilities in order to allow the tobacco to reach its target drying age and then shipped the tobacco to the taxpayer’s production and manufacturing team in North Carolina for processing and manufacturing into cigarettes. While stored in Virginia, the tobacco aged naturally without any action taken or directed by the taxpayer. The Virginia Department of Taxation argued that the taxpayer’s storage of the tobacco in the Virginia facilities constituted “use” for Virginia property factor purposes because the tobacco was aging during the time it was stored there, and aging was important to the subsequent use of the tobacco. The taxpayer argued that it merely exercised ownership over the tobacco by storing it in Virginia and did not take any positive action with regard to the tobacco so as to constitute use.
Finding that there was no ambiguity in the Virginia Code’s employment of the term “used,” the Court thus limited its analysis to the plain meaning of the word, which it defined as putting “into action or service” or “employ[ing] for the accomplishment of a purpose.” Applying this definition, the Court held that the taxpayer did not use the tobacco while stored in Virginia because the taxpayer did not “introduce any treatment to the leaf tobacco” or “perform any affirmative act or activity to prompt or aid the aging process.” Accordingly, the Court concluded that the taxpayer should not include the tobacco in calculating its property factor.
Virginia Dept. of Taxation v. R.J. Reynolds Tobacco Co., Va., No. 201263, 2/10/22.