August 2020 Newsletter

August 29, 2020 | Newsletter

MASSACHUSETTS – Thermal energy provider’s tax appeal dismissed for failure to file abatement application with City Assessors; protest letters accompanying quarterly tax payments deemed insufficient

Veolia Energy Boston, Inc. operates a steam manufacturing and distribution system providing thermal energy to customers in Boston. In fiscal year 2014, Veolia was assessed a $2 million personal property tax on its machinery and equipment, consisting of boilers, a network of pipes, and appurtenances. Veolia filed an application for abatement with the Boston Assessors, claiming that it was exempt from paying personal property tax on all components of its systems because it was classified as a manufacturing corporation by the Commissioner of Revenue. The Boston Assessors denied the application for abatement, and Veolia appealed to the Appellate Tax Board, which sustained its appeal and concluded that the property at issue was exempt.

Veolia was then assessed a tax for fiscal year 2015 of $2.2 million on the same machinery and equipment. Veolia paid the tax when due in quarterly installments on July 25, 2014; October 14, 2014; January 21, 2015; and April 20, 2015. Each payment was accompanied by a letter addressed to the Tax Collector, typed on Veolia’s stationery and signed by its Vice-President of Finance, stating: “Please note that Veolia Energy Boston, Inc. has filed a Petition under Formal Procedure with the Appellate Tax Board [for fiscal year 2014, which was still pending], the outcome of which may affect the tax assessment for this period and others.” Veolia did not, however, file an abatement application for fiscal year 2015, which would have been due on February 6, 2015. When contacted by the Assessor’s Office, Veolia indicated that it believed the 2014 abatement application would also apply to fiscal year 2015. Thereafter, on May 28, 2015, counsel for Veolia filed an abatement application with the Assessors for fiscal year 2015, which was denied by the Assessors as untimely. Veolia then appealed to the Appellate Tax Board.

The Assessors filed a motion to dismiss Veolia’s appeal on the ground that the Tax Board lacked jurisdiction because Veolia had not filed a timely abatement application. Veolia objected on the basis that its letter to the tax collector dated January 21, 2015, which accompanied its third quarterly tax payment, constituted a valid abatement application because it had provided notice to the Assessors that Veolia was challenging the assessment. The Appellate Board agreed with the Assessors and dismissed Veolia’s appeal. The Appellate Court affirmed. The letter submitted with the payments to the Tax Collector did not satisfy the statutory jurisdictional requirements that the taxpayer file an abatement application on a form approved by the Commissioner on or before February 6, 2015.

Veolia Energy Boston, Inc. v. Board of Assessors of Boston, 95 Mass.App.Ct. 26, 120 N.E.3d 1232 (March 8, 2019)

MISSOURI – State Tax Commission determines depreciation of natural gas distribution company’s real property based on evidence of actual physical depreciation and economic obsolescence, rather than relying on Commission’s 2013 form recommending depreciation be calculated pursuant to IRS Publication 946

The cost approach is used in Missouri for valuing business real and personal property. Pursuant to statute, the State Tax Commission promulgated a form for county assessors to use in the assessment of the real and tangible personal property of natural gas distribution systems. The form requires the taxpayer to file the original or historical costs of its property as reported to the Missouri Public Service Commission, and recommends that the assessor reduce that amount by accrued depreciation “following the IRS guidelines found within IRS Publication 946” in determining the market value for property tax purposes.

Union Electric Company, doing business as Ameren Missouri, is a natural gas distribution company and a regulated utility. Ameren transmits and distributes natural gas in various counties in eastern and central Missouri. Ameren contested the 2013 valuation and assessment of the real property components of its natural gas pipeline located in Cole County. Consistent with the State Tax Commission form and instructions, Ameren had reported the original cost of its property to be $53,252,364 and depreciation to be $32,753,859, resulting in a taxable value of $20,498,505 as of January 1, 2013. The Cole County Assessor did not accept Ameren’s valuation, and instead valued Ameren’s real property at $53,252,400, effectively adopting Ameren’s pre-depreciation, original cost amount. Ameren appealed to the Board of Equalization, the State Tax Commission, and the Circuit Court, all of which sustained the Assessor’s valuation. On appeal to the Court of Appeals, the Court reversed the Circuit Court’s judgment and ordered the Circuit Court to remand to the State Tax Commission for it to determine the appropriate depreciation to be taken against the Assessor’s calculated “market value” of $53,252,400. See Union Electric Company d/b/a Ameren Missouri v. Christopher Estes, Assessor, Cole County, Missouri, 544 S.W.3d 352 (Mo. App. WD 2017).

On remand, the State Tax Commission considered a variety of evidence offered by the parties to make the calculation of depreciation. Ameren submitted a depreciation study conducted by Gannet & Fleming which considered statistical analyses, company policy and outlook by managers, survivor curve estimates from prior studies of Ameren, and studies of other gas companies to estimate service life. The study found that approximately 95 percent of Ameren’s mains had been placed in service in the past 40 years, the average life of mains is 50 years, and the average service life is 37 years. The average service life estimates were based on analysis of available historical service life data related to the property, a review of management’s current plans and operating policies, and a general knowledge of service lives experienced and estimated in the natural gas industry. Combining historical data and future trends, Gannet & Fleming established “a survivor curve,” from which they derived the average service life and remaining service life of the property in question.

Ameren’s director of Missouri natural gas operations testified that the property had negligible salvage value and the equipment, at the end of its service life, is left in place because removal costs are higher than the salvage value. Robert Reilly, Managing Director of Willamette Management Associates, an expert in the valuation of utility property, prepared a “depreciation analysis.” Mr. Reilly testified that for rate-based regulated utilities, historical cost is frequently used to value property for ad valorem purposes because the income regulated utilities are allowed to earn is based on historical cost less depreciation, or “net book value.” Mr. Reilly’s analysis considered physical deterioration, functional obsolescence, and external obsolescence, defining physical deterioration as “a reduction in the value of an industrial or commercial property due to physical wear and tear, the impact of continued use and the elements of nature.” To determine an estimate of the physical depreciation of the property at issue, Mr. Reilly relied on the depreciation study prepared by Gannet & Fleming and the accumulated depreciation Ameren reported to the Public Service Commission.

Further, Mr. Reilly concluded that the property did not suffer from functional obsolescence, or the loss in value of a property caused by the inability of the property to perform the function for which it is used. However, he did find economic obsolescence, which occurs when the property owner can no longer earn a fair return on investment in the property due to external factors. Mr. Reilly based his findings of economic obsolescence on four factors that all were negatively affecting Ameren’s return: the decrease in the allowed rate of return, increased competition, weather conditions, and higher energy efficiency standards; in addition, numerous factors were negatively affecting the industry outlook. Allowing for physical depreciation and 25 percent economic obsolescence, he concluded the total depreciation that should be allowed was $28,031,000.

The Assessor presented evidence to support a depreciation estimate in the amount of $6,390,288 to be deducted from the reported costs of $53,252,400. George Sansoucy testified on behalf of the Assessor that one cannot deduct market-derived depreciation from historical original costs, and that deducting depreciation from original cost of real property is not a generally accepted appraisal method. Mr. Sansoucy developed a market-derived depreciation estimate, which he described as a measurement of depreciation extracted from the market, based on sales of similar property. This depreciation amount, once determined, would be subtracted from the reproduction cost or replacement cost new of an asset, not from the $53,252,400 of original cost, to arrive at an estimate of fair market value. Mr. Sansoucy testified that “[s]ales of state regulated retail gas distribution property tend to fall in a range of 85 percent and 115 percent of the surviving original cost.” He selected six comparable sales to calculate a mean and a median percentage of depreciation, concluding that “the mean and median sales price to original costs are 89 percent and 88 percent, respectively.” Applying the median sales price to original costs ratio of 88 percent to the Ameren original cost of $53,252,400, he arrived at a value of $46,862,112.

The State Tax Commission agreed with Ameren’s analyses. The Commission said that Mr. Reilly’s methodology complied with the directives of the Court of Appeals for determining depreciation, and correctly stated that the issue on remand was the appropriate amount of depreciation to be applied in the cost approach, using the historical cost less depreciation method to estimate the market value of the property. The Commission found that the appropriate depreciation to be taken against the Assessor’s calculated “market value” of $53,252,400 was $28,031,000, for a resulting assessed value of $25,221,400.

Union Electric Company d/b/a Ameren Missouri v. Christopher Estes, Assessor, Cole County, Missouri, (Mo.St.Tax.Com., May 28, 2019) 2019 WL 2369464

NEW JERSEY – Tax Court rejects taxpayer’s claim that highest and best use of watershed property was as timberland due to lack of sales demonstrating a market for such property

The City of Newark owns eight parcels of land in Jefferson Township, totaling approximately 4,036 acres of vacant land. Except for 400 acres of open water that is part of a Newark reservoir, the property is heavily wooded and has topographical constraints consisting of steep slopes, rock outcroppings, and floodplain areas. The property is restricted under the State Watershed Moratorium Act, which prohibits the sale of land used for the purpose or protection of a public water supply without specific authorization under the Act; is designated as a Highlands Preserved Area under the New Jersey Highlands Protection Act, N.J.S.A. 13:20-1; and is subject to two conservation easements granted by the City to the New Jersey Department of Environmental Protection, reflecting a per-acre value of $1,000 and $1,350, respectively. The conservation easements prohibit subdivision and development, mining, construction of new roads, and dumping or placing of trash or waste, and also bar activities that would be detrimental to drainage, flood control, water conservation, erosion control, or soil conservation. Although the conservation easements prohibit the clear cutting of timber stands, they do allow the selective cutting of timber so long as it is done for certain enumerated purposes under the supervision of a New Jersey State Forester with prior approval by Newark. Furthermore, should the selective harvesting of timber be for any commercial purpose, it must be done on a sustainable basis and in accordance with an approved Forest Management Plan.

Jefferson’s tax assessor performed a reassessment of all of the real property in Jefferson for the 2010 tax year. In 2009, prior to the reassessment, the watershed property was assessed at $3,500 per acre; after the reassessment, the property was assessed at $5,000 per acre for tax years 2010 through 2012 and $4,000 per acre for tax years 2013 through 2016. Newark appealed the assessments, and at trial, both sides presented the testimony of a licensed real estate appraiser.

Both parties agreed that the key issue in this matter was determining the property’s highest and best use. Newark’s real estate appraiser determined that the residual rights of the use of the property, after the conservation easements, consisted of three potential uses: (1) conservation, (2) timbering, and (3) recreation, and concluded that the highest and best use of the property was for “woodland management” and sale of the property for the purpose of harvesting timber for sale. Jefferson’s real estate appraiser considered the encumbrances on the property and concluded that its highest and best use would be for active/passive recreation, determining the most probable buyer to be a land preservation group or governmental agency.

Both appraisers determined that the comparable sales approach was the most appropriate method of valuation. Newark’s appraiser searched for comparable sales but could not find any transactions of property sold for timber value, and so looked to the Farmland Assessment Program, the sales of deed-restricted farmland, and the annual reports of the State Farmland Evaluation Advisory Committee for indications of value. Newark’s appraiser then concluded that the property’s true value on all relevant valuation dates was $1,500 per acre, which would have resulted in reductions in the tax assessments for all years at issue. Jefferson’s appraiser, in contrast, determined values for each lot based upon a per-acre valuation that varied from $4,500 to $6,500 per acre.

The Tax Court rejected the Newark appraiser’s valuation because it was based on a defective highest and best use analysis. Once Newark’s appraiser determined that there were no sales of land in New Jersey for the purposes of timbering, they should have eliminated timbering as a potential highest and best use for the property and considered other uses for which there was a demand in the marketplace. Although the Court accepted the highest and best use analysis of Jefferson’s appraiser, it also rejected that valuation because the comparable sales used differed significantly from the watershed property due to the severe restrictions which encumbered the latter. Because Newark, the taxpayer, had failed to prove its case, the Court dismissed the appeal.

City of Newark v. Township of Jefferson, 31 N.J. Tax 303 (October 3, 2019)

NEW YORK – Cell phone service provider’s cellular data transmission equipment (rooftop equipment and antennas) subject to taxation as real property under New York Real Property Tax Law 102 (12) (i)

T-Mobile owns large cellular data transmission equipment that it has installed on the rooftop of buildings in Mount Vernon. T-Mobile enters multi-year leases with the owners of the buildings, allowing it to occupy the exterior space on the buildings for installation of the equipment. The Mount Vernon City School District separately assessed real property taxes on this equipment, and T-Mobile filed applications to correct the tax rolls and receive refunds of taxes paid, asserting that the equipment was not taxable real property and that the taxes therefore were illegal. The School District denied the applications on the merits, determining the property was taxable. The City did not respond. T-Mobile then brought a declaratory judgment action and CPLR Article 78 proceeding, seeking a declaration that the property was not taxable and a judgment annulling the School District’s contrary determination.

T-Mobile argued that its property is not taxable pursuant to Real Property Tax Law (RPTL) 102 (12) (i). Under that statute, certain “lines, wires, poles, supports and inclosures for electrical conductors” used for transmission of electromagnetic data qualify as taxable real property. Rather, T-Mobile claimed its installations fall within categories of property phased out from taxation in 1987 or constitute “station connections” excepted from taxation in RPTL 102 (12) (i). The School District answered, arguing that the T-Mobile property is encompassed by RPTL 102 (12) (i) based on the plain text of that provision and its legislative history and, alternatively, that certain components of the equipment are fixtures and thus taxable under the RPTL 102(12)(b). The City moved to dismiss, raising untimeliness and other procedural objections, and joined in the School District’s argument that the equipment is taxable under RPTL 102 (12) (i). The Supreme Court denied the petition and dismissed the proceeding, holding that the property in question is taxable under RPTL 102 (12) (i). The Appellate Division affirmed, reasoning that under the plain text of the statute each component of T-Mobile’s equipment is taxable, and further noting that even if RPTL 102(12)(i) did not apply, the antennas that are part of the equipment installations are structures “affixed” to real estate under the common law definition of “fixtures” and thus are taxable real property under RPTL 102(12)(b).

The Court of Appeals affirmed, observing that “[i]t is clear from the plain language and legislative history of [RPTL 102 (12) (i)] that T-Mobile’s arguments lack merit.” The Court did not address the question of whether T-Mobile’s property was taxable as “fixtures” under RPTL 102(12)(b).

T-Mobile Northeast, LLC v. DeBellis, 32 N.Y.3d 594, 118 N.E.3d 873, 94 N.Y.S.3d 211 (December 13, 2018)

MINNESOTA – Tax Court is obligated to follow administrative rule requiring use of income approach, rather than cost approach, in valuation of petroleum company’s pipeline system

Enbridge Energy, LP appealed the Commissioner of Revenue’s valuation of its petroleum pipeline system for property taxes payable in 2013, 2014, and 2015. After a trial, the Tax Court concluded that the Commissioner had overvalued Enbridge’s pipeline system for all three years. In determining the value of Enbridge’s pipeline system, the Tax Court rejected both the sales comparison approach and the cost approach. The cost approach is used in Minnesota Rule 8100, an administrative rule adopted by the Commissioner to guide the valuation of utilities, including pipeline systems. The Tax Court concluded, however, that it was not bound by Rule 8100 in determining market value, because the formula applied only to the Commissioner during the valuation of the pipeline system. The Tax Court applied the income approach to valuation, setting the unit value of the pipeline system for the three years at issue. The Tax Court declined “to allocate [the] system unit value between Minnesota and other states,” because the Tax Court determined that it was not limited to the formula the Commissioner used under Rule 8100 and had not utilized the cost approach, which therefore rendered the allocation formula in Rule 8100 unworkable. The Tax Court therefore “invited the parties to submit proposals for allocating” the system unit value. The Commissioner objected to the Tax Court’s conclusion that it is not bound by Rule 8100 when valuing a pipeline system and allocating system unit value, and filed a petition for review which the Supreme Court granted.

The issue on appeal was whether the Tax Court is bound by Rule 8100 when valuing a pipeline system. The Tax Court is an agency in the executive branch with “sole, exclusive, and final authority for the hearing and determination of all questions of law and fact arising under the tax laws of the state . . .” according to Minn. Stat. § 271.01, subd. 5 (2018).

The Minnesota property-tax system rests on the principle that all property must be valued at its market value. Generally, each item of personal or real property must be separately and independently valued, and property tax is assessed by local taxing authorities. The Legislature has made an exception to this arrangement of local valuation in the valuation of pipeline systems. The Commissioner must annually list and assess “[t]he personal property, consisting of the pipeline system of mains, pipes, and equipment attached thereto, of pipeline companies and others engaged in the operations or business of transporting products by pipelines,” and then must provide this list and assessment to the various taxing jurisdictions in which the property “is usually kept”—that is, through which the pipeline runs. Instead of providing an individualized valuation, the Commissioner assesses pipeline property as a whole, using the unit-rule method. The unit-rule method values the entirety of a business, including all property, as a going concern when the business enterprise is located in more than one jurisdiction.

The Legislature has given the Commissioner considerable authority to make administrative rules, and pursuant to this rule-making authority, the Commissioner promulgated Rule 8100 regarding ad valorem taxes for utilities, including pipeline systems. Under the Rule, valuation and allocation is a four-step process. The Commissioner first establishes an estimate of the unit value for each utility company primarily relying on a mix of the cost and income methods. The resulting valuation is then allocated to each state in which the utility company operates, the value of property located in Minnesota that is exempt from property tax is subtracted, and the remaining allocation is apportioned to the various taxing districts in which the pipeline property is located.

The use of Rule 8100 was deemed necessary by the Commissioner’s “limited staff and expertise” and the statutory time constraints under which the Commissioner must assess pipeline property. The Tax Court decided it was not bound by Rule 8100 in determining market value, for two reasons. First, according to the Tax Court, the formula provided by Rule 8100 was likely to lead to an incorrect valuation, while the Tax Court’s proceedings, which it asserted are free of such constraints, would not. Second, the Tax Court concluded that because the text of Rule 8100 is “directed solely to the Commissioner” rather than to “the Tax Court,” it “could not make Rule 8100 applicable to the Tax Court simply by substituting ‘Tax Court’ for ‘Commissioner’ without violating the principles of statutory interpretation.”

The Supreme Court rejected both reasons. Courts are free to disregard administrative rules only when they conflict with the statutes they implement, which was not the case with Rule 8100 because it did not violate any statute. More significantly, the Tax Court misapprehended its role in the judicial review of the Commissioner’s decisions. If a taxpayer objects to the Commissioner’s valuation, it is the duty of the Tax Court to determine whether the Commissioner has correctly valued property pursuant to the relevant statutes and rules. If the Tax Court concludes that the Commissioner has not correctly valued the property, the court must then do so itself—pursuant to those same statutes and rules. The administrative rules apply not only to the Commissioner, but also, by extension, to the Tax Court. Accordingly, the Tax Court is bound by Rule 8100, and it erred by concluding otherwise.

Commissioner of Revenue v. Enbridge Energy, LP, 923 N.W.2d 17 (Minn., February 19, 2019)

LOUISIANA – Taxpayer’s failure to pay property tax assessments precluded any challenge to assessments in court

D90 Energy, LLC acquired three oil wells and one saltwater disposal well in Jefferson Davis Parish in October 2012. In March 2013, D90 submitted to the Tax Assessor a letter and a copy of a document identified as an “Assignment, Conveyance and Bill of Sale,” along with a copy of a cancelled check in the amount of $100,000. On the basis of these documents, D90 maintained that it had purchased the three wells in Jefferson Davis Parish for the sum of $100,000, despite the fact that the Bill of Sale contained no indication of the consideration paid. No other documentation was provided to the Assessor. Based on its letter and attached documentation, D90 asserted that its wells should be valued at $100,000 for tax assessment purposes for 2013 as well as subsequent tax years including 2014 and 2015. For tax year 2016, D90 informed the Assessor that the wells were all shut in but provided no supporting documentation. Based on that representation, D90 asserted the property should now be valued at $10,000.

The Assessor did not consider the information submitted by D90 sufficient to make a determination of the value of these wells and did not use D90’s suggested sales price valuation approach as the sole method to establish fair market value. Instead, the Assessor used valuation tables promulgated by the Louisiana Tax Commission, which resulted in a valuation of $3,347,240 for tax year 2013 and $3,347,240 for tax year 2014. D90 paid its tax obligation for 2013 and 2014 under protest, but it did not pay any tax, under protest or otherwise, for tax years 2015 and 2016. D90 objected to all four years’ assessments and filed protests with the Jefferson Davis Board of Review. The Board denied all of D90’s protests and upheld the Assessor’s assessments for 2013, 2014, 2015, and 2016. On appeal to the Louisiana Tax Commission, the Assessor filed exceptions challenging D90’s right to attack the assessments for 2015 and 2016 because D90 had not paid those taxes under protest or otherwise.

The Commission found the fair market value of the wells to be $100,000 plus the cost of plugging and abandonment, and valued them at $235,000 for each of years 2013 and 2014, considering the $100,000 purchase price and the plug and abandon liability cost of $135,000 for the three wells. Despite D90’s admission at the hearing that it had not paid any amount of its 2015 or 2016 tax obligation, the Commission reached the same decision regarding tax years 2015 and 2016 without mentioning the Assessor’s exceptions. The Assessor appealed the Commission’s rulings to the District Court, which affirmed the Commission’s decision, and the Assessor appealed to the Court of Appeals.

The Court of Appeals reversed, holding that D90’s failure to pay assessments in 2015 and 2016 precluded any challenge to the assessments, emphasizing that only timely payment preserves the right to litigate the validity of an assessment in court. The Court of Appeals also held that the District Court was required to determine whether the Assessor abused their discretion in determining fair market value, rather than whether the Commission abused its discretion in evaluating the evidence, and that the Assessor was not obligated to base the valuation of D90’s property solely on the documentation it provided. The Court explained, “We cannot say [the Assessor] abused his discretion in determining that it was not proper to base his valuation solely on an alleged sale price, when he was not provided sufficient information to determine the actual amount of the price paid and whether this was a true arm’s-length transaction.” The Court reinstated the decision of the Jefferson Davis Board of Review finding no abuse of discretion in the Assessor’s assessed values for 2013 and 2014, and ordered D90 to pay its taxes for 2015 and 2016 in accordance with the assessments.

D90 Energy, LLC v. Jefferson Davis Parish Board of Review, — So.3d —- (La.App. 3 Cir. December 30, 2019) 2019 WL 7491513

MINNESOTA – Tax Court improperly relied solely on recent sale price of property in IRS § 1031 like-kind exchange when determining value under sales comparison approach

Inland Edinburgh Festival, LLC owns real property improved with a retail shopping center that includes two adjacent strip malls. The Assessor valued Inland’s property as of January 2, 2015, at $8,384,300, and Inland appealed to the Tax Court. While the court proceeding was underway, Inland sold the property on June 1, 2017, for $9,600,000. A trial was held on May 2, 2018. During trial, Inland introduced expert appraisal testimony which estimated the 2015 market value of the property at $7,100,000 using both an income approach and a sales comparison approach. Its expert’s appraisal contained mathematical and other errors relating to rental values, which the Tax Court determined affected the analysis of the property’s value, so Inland offered into evidence a second report prepared by its appraiser that corrected some of the errors of the initial report. The County called no witnesses and offered only one exhibit—the rent rolls that Inland had produced. The Tax Court concluded that the market value of Inland’s property was higher than either the initial assessed value determined by the County or the valuation opinion presented by the sole appraiser to testify at trial. On appeal, Inland argued that the Tax Court’s value determination was excessive because the Court rejected Inland’s appraiser’s opinion under the income approach and relied instead on the single 2017 sale of Inland’s property to value the property under the sales comparison approach.

The Supreme Court affirmed the Tax Court’s decision to afford no weight to the expert’s opinion on the income approach, but reversed the Tax Court’s valuation determination based on the sales comparison approach and remanded for further proceedings. While the Tax Court was justified in rejecting Inland’s income approach valuation on the basis of its lack of evidentiary support and lack of credibility, it was not justified in relying solely on the 2017 sale of the property to establish its value. The Court noted that the sales comparison approach, as the title suggests, analyzes and compares the sale price paid for multiple comparable properties in market transactions. The sale price of the property in question may be an important fact to consider when valuing real estate, said the Court, but it cannot be the only fact considered. Further, the sale in question was part of an IRS § 1031 like-kind exchange, and so may not have represented an arm’s-length transaction.

Inland Edinburgh Festival, LLC v. County of Hennepin, 938 N.W.2d 821 (2020)

HAWAII – County lacked power to redefine “real property” to include wind turbines for property tax purposes; wind turbines are not “fixtures” and therefore not otherwise taxable as real property

Kaheawa Wind Power, LLC leases land on the island of Maui for the operation of wind farms. The State Constitution grants counties the power to tax real property only, not personal property. The County of Maui, claiming authority under Article VIII, Section 3 of the Hawaii Constitution, included the value of Kaheawa’s wind turbines in its real property tax assessments and redefined the term “real property” within section 3.48.005 of the Maui County Code for that purpose.

Kaheawa challenged the County’s actions in the Tax Appeal Court, which held that the County, by amending the County Code, exceeded its constitutional authority by redefining “personal property” as “real property.” The County appealed, and the appeals were transferred to the Hawaii Supreme Court.

The Supreme Court agreed that the County exceeded its constitutional authority by amending the County Code to expand the definition of “real property” to include “personal property,” and that the delegates to the 1978 Constitutional Convention did not intend to grant counties the power to define the term, reserving such power for the legislature. The Court said that the taxing power provision of the State Constitution, generally reserving taxing power to the State but providing that “all functions, powers and duties relating to the taxation of real property shall be exercised exclusively by the counties,” grants counties only the power to tax real property and does not allow the redefinition of personal property as real property by counties. Further, the Court stated that wind turbines on the taxpayer’s property were “not necessary to the utility of land,” could not be considered “fixtures,” and thus were not real property which could be taxed by the County.

Kaheawa Wind Power, LLC v. County of Maui, 146 Hawaii 76, 456 P.3d 149 (2020)