Virginia High Court Ends Logging Tax Dispute

Setliff Law is pleased to announce that the Supreme Court of Virginia has denied a request to review a decision by the Virginia Court of Appeals that found entirely in favor of its client in a significant tax dispute. The case, Underwood Logging, LLC d/b/a Underwood Logging v. County of Franklin, Virginia, arose from a dispute regarding Franklin County’s tax assessments for Underwood Logging’s forestry equipment. The decision by the Supreme Court of Virginia brings the lawsuit, which has been pending for almost five years, to a final conclusion in favor of Setliff Law’s client.

Underwood Logging filed a complaint that challenged the tax assessments for 2018 and beyond on two grounds. First, Underwood Logging argued that starting in 2020, its forestry equipment was physically located in Pittsylvania County on “tax day,” which is January 1 each year, and that as a result, Pittsylvania County — not Franklin County — is the locality with the authority to issue assessments for that equipment for 2020 and beyond.

Second, Underwood Logging challenged the assessments based on its registration with the Department of Taxation as a forestry severer, and its payment of the Forest Product Tax. Like many logging companies, Underwood Logging cuts timber and processes the trees into logs, pulpwood, and biomass chips. Underwood Logging paid the Forest Product Tax on its chipping operations and argued that, under the applicable statutes, it was therefore entitled to a tax deduction at the machinery and tools rate for all of its forestry equipment, and that Franklin County’s assessments were erroneous because they were based on a higher tax rate for heavy equipment.

After years of discovery, a bench trial was held before Judge James Reynolds, and the parties also submitted post-trial briefs at his request. Judge Reynolds then issued a split decision that was partly in favor of Underwood Logging and partly in favor of Franklin County. Judge Reynolds agreed with Underwood Logging that beginning in 2020, Underwood Logging’s forestry equipment was located in Pittsylvania County on tax day, and Franklin County therefore did not have authority to issue tax assessments for those years. However, Judge Reynolds agreed with Franklin County that Underwood Logging was not entitled to a tax deduction at the machinery and tools rate for all of its equipment. Judge Reynolds found that Underwood Logging had separate lines of business for its logging, pulpwood, and chipping operations, and that because Underwood Logging only paid the Forest Product Tax on its chipping operations, Underwood Logging was only entitled to a tax deduction at the machinery and tools rate for the percentage of its business made up by its chipping operations.

Underwood Logging and Franklin County both appealed the decision of the Circuit Court to the Virginia Court of Appeals. After receiving briefs from the parties and hearing oral arguments, the Court of Appeals issued a unanimous decision in favor of Underwood Logging on both issues.

The Court of Appeals agreed that Underwood Logging had shown that its forestry equipment was located in Pittsylvania County on tax day starting in 2020, and that Franklin County therefore did not have authority to tax that equipment.

The Court of Appeals also agreed with Underwood Logging that it was entitled to a tax deduction at the machinery and tools rate for all of its equipment, and not just the percentage of its business that made up its chipping operations. Underwood Logging explained in both the Circuit Court and the Court of Appeals that about 95% of Underwood Logging’s jobs involve the production of logs, pulpwood, and chips. Underwood Logging also explained that it does not have a separate business unit or business line that is dedicated to chipping operations, and it does not file a separate tax return for its chipping operations. The Court of Appeals found that the Circuit Court therefore erred by finding that Underwood Logging had separate lines of business that could be taxed separately. The Court of Appeals also agreed with Underwood Logging that because it uses all of its forestry equipment to produce chips, its payment of the Forest Product Tax on its chipping operations entitled it to a tax deduction at the machinery and tools rate on all of its equipment.

Franklin County filed a petition to appeal the decision of the Court of Appeals to the Supreme Court of Virginia that argued the Court of Appeals was wrong on both issues. Setliff Law filed an opposition to the petition to appeal on behalf of Underwood Logging that argued the Court of Appeals was right on both issues, and the firm is pleased to announce that the Supreme Court of Virginia recently issued an order denying the petition for appeal. The Supreme Court of Virginia found that there was no reversible error in the decision by the Court of Appeals, and its decision brings the years-long lawsuit to an end in favor of Underwood Logging.

Setliff Law attorneys Mitch Goldstein and Danielle Brim led the appeal on behalf of Underwood Logging. If you would like more information about the case or the issues it involved, please contact Mitch Goldstein (mgoldstein@setlifflaw.com) at (804) 377-1269 or Danielle Brim (dbrim@setlifflaw.com) at (804) 377-1264, or Steve Setliff (ssetliff@setlifflaw.com) at (804) 377-1261.