Commissioner discovers company owes $15 million in taxes

By DAN KEGLEY/Staff

Northrup Grumman, the state’s beleaguered information technology vendor contracted under the Gov. Mark Warner administration, owes as much as $15 million in local taxes to communities across Virginia, a Smyth County official has found.
Smyth County Commissioner of the Revenue Jeff Richardson, whose job includes discovery and assessment of equipment by businesses operating in the county, saw in a report from the Town of Marion this summer that the town issues a business license to Northrup Grumman for its computer operations at Southwest Virginia Mental Health Institute.
His curiosity aroused, Richardson found computers tagged as property of Northrup Grumman installed at the county’s social services department.
What he did not find was receipt by the county of personal property taxes on the computer equipment in the county by Northrup Grumman. Nor had the company filed a report of taxable property with the county.
“The code section said it’s mine,” Richardson said, referring to his authority under Virginia law to tax the company’s equipment at the county’s business personal property tax rate, $2.25 per $100 of assessed value.
The contract between Northrup Grumman and the state “is written as lease to own,” Richardson said, meaning the equipment still belongs to the company. Had Northrup Grumman sold the equipment to the state, the company would not be liable for its tax.
Richardson’s counterpart in Bristol, Terry Frye, who is also an attorney, told Richardson he was correct in his reading of the state’s tax laws.
“The Code of Virginia says you have to report it,” Richardson said.
Richardson reported his finding to the Commissioners of the Revenue Association of Virginia, whose other members told him they also received no taxable property report from Northrup Grumman.
“The commissioners association said this is a big deal,” Richardson said, and the association later calculated the statewide receipt of local back taxes from Northrup Grumman is expected to run as much as $15 million.
When it met in late September, the commission formed a committee of six to handle the matter with Northrup Grumman. Richardson is a member of that committee that is chaired by Frye.
Richardson said Northrup Grumman has paid Smyth County its two-years-late business personal property taxes totaling $8,992. In December it will pay the current year’s $7,011, Richardson said.
That $16,003 won’t renovate the county courthouse, but, Richardson said, “Every dollar from out-of-county corporations is a dollar that doesn’t have to come from Smyth County taxpayers.”
Smyth is the first county to bill the company and receive payment of back taxes, and thus “established a precedent” strengthening other counties’ claims, according to Richardson.
“We’re months ahead of everybody else,” Richardson said.
Richardson expects Smyth’s business and personal property tax receipts from Northrup Grumman to continue increasing as the company installs more equipment in state offices here. “They’re still replacing computers,” he said. “This will continue to grow.”
Northrup Grumman has been “very cooperative,” Richardson said, and the commissioner believes the non-payment of taxes is an oversight as opposed to overt malfeasance.
“If this would be the only problem Northrup Grumman had, it would be a yawn, but it’s cumulative,” Richardson said, referring to a series of controversies that have dogged the state, its Virginia Information Technologies Agency, or VITA, and Northrup Grumman. Created by an act of the General Assembly in 2003, VITA provides information technology services for state offices in partnership with California-based defense contractor Northrop Grumman, contracted in 2005 to run nearly all state agencies’ IT infrastructure at a cost that is supposed to be capped at $236 million a year. Under VITA, the Warner administration envisioned consolidating IT services previously left to individual agencies. The umbrella approach, Warner claimed, could save taxpayers $100 million.
“This was clearly a cutting-edge approach” to providing technology services to state agencies, and other states have followed the Virginia model, Warner said.
Under the novel 2005 public-private venture, Northrop Grumman is installing 60,000 computers across the state under a $2.3 billion, 10-year contract—the state’s richest-ever privatization pact.
Four days ago, the General Assembly’s Joint Legislative Audit and Review Commission reported the giant info-tech program has been blocked by delays, rising costs and political turmoil, and that “Northrop Grumman lacked the experience to undertake a project of Virginia’s scale.”
VITA is penalizing Northrop Grumman by withholding $7.4 million in payments for unacceptable service in getting the state’s computer systems to run properly, timely responses to agency requests for services, accuracy of billing, meeting schedules, and providing modernization plans to state agencies.
This week, Gov. Timothy M. Kaine and legislators warned Northrop Grumman that they won’t allow the IT system to become a money pit.
Following the release Monday of a General Assembly report sharply critical of Northrop Grumman and the state’s information-technology bureaucracy, lawmakers told the company that righting the embattled project should not come at additional cost, particularly when Virginia is slashing spending by billions to balance its budget.
VITA has had its own problems and in August, George F. Coulter succeeded Lemuel C. “Lem” Stewart Jr., a state government veteran who was fired in June after proposing to withhold a $14 million monthly payment to Northrop Grumman as punishment for poor service and incomplete billing.
Discovery of Northrup Grumman’s tax debt surprised Richardson, who said that “it took about a nanosecond” to understand the likely statewide implication of what he found.
“It clicked like a light switch,” he said.
Richardson takes evident personal as well as civic pride in assessing taxable equipment, spending each New Year’s Day driving the county roads to find, photograph and assess any valuable construction equipment based outside Smyth but present in the county on that day. He then sends the equipment owners a tax bill for the assessed value of the equipment he finds.
Currently, Richardson said, eight such accounts are open in Smyth County, representing contractors and others who have no intent to avoid paying taxes. This year, those accounts are pumping $73,102.11 into county coffers.
Even equipment not in use here is accessible for taxation. Richardson assessed mining equipment parked in the county but bound for the coalfields where a mine fire delayed its delivery. He billed the equipment’s owner for a two-year total of $32,000, the commissioner said, at the machinery and tools rate of $1.55 per $100.
“My job is to go find the assets, but if I have someone come up who has been erroneously assessed, I’ll fight for them as hard as I do to get what’s owed,” he said.
Richardson said he is also appreciative of his staff members, one of whom researched and printed for him the code section that confirmed the importance of his Northrup Grumman discovery within minutes of his making it.
“I tell people all the time I have the best staff in the Commonwealth,” Richardson said. “We work as a team to serve the people of Smyth County.”

Jeff Schapiro, Olympia Meola, Andrew Cain and Peter Bacque, Media General News Service, contributed.