August 2021 Newsletter

August 17, 2021 | Newsletter

TENNESSEE – Tenn. Code Ann. § 67-5-501(10)(B)(iii), which classifies certain pipelines and other property as real property for purposes of classification and assessment, applies to pipelines located within easements

Colonial Pipeline Company is an interstate company which transports petroleum products for third parties. Colonial’s pipeline traverses thirteen states, including Tennessee.  The company has the power of eminent domain, but typically obtains easements from property owners, rather than buying property, to allow the company to bury its pipeline. Tennessee classifies Colonial as a public utility company, and the Office of State Assessed Properties assesses public utility property at 55 percent of assessed value. In 1997, however, the Tennessee Supreme Court held that the assessment value of personal property owned by centrally-assessed taxpayers was to be reduced by 15 percent to reflect the fact that locally assessed personal property is under-assessed due to the use of statutory depreciation tables overstating depreciation.

Colonial appealed the classification of its pipelines as real property to the Board of Equalization, arguing that it violated the equal protection clause of the Tennessee constitution on the ground that Tenn. Code Ann. § 67-5-501(10)(B)(iii), which defines certain pipelines and other property as real property for purposes of classification and assessment, had been inconsistently applied. The BOE interpreted the statute to apply to Colonial’s pipeline property but not to most locally assessed taxpayers who owned piping. Colonial appealed.

Colonial argued that the statute “applies to all piping capable of conveying any substance that is ‘built, laid or placed in, upon or under’ land,” and thus would cover locally assessed piping such as piping used in manufacturing. The evidence presented before the BOE, however, indicate that locally assessed piping is typically assessed as personal property based upon the application of the law of fixtures. The BOE relied upon the statutory phrase “pipelines and tanks permitted or authorized to be built” in classifying Colonial’s pipelines as real property. According to the BOE, the words “permitted or authorized” included pipelines placed on or under property pursuant to easements, since they “permit or authorize” Colonial to build its pipeline under the property owner’s land. The BOE asserted that pipelines placed by the property owners themselves—for example, at a manufacturing plant—are not “permitted or authorized.”

The Court of Appeals agreed with the BOE. Piping installed on land owned in fee simple does not require legal approval and thus did not fall within the plain meaning of the statutory language.

Colonial Pipeline Company v. TN State Board of Equalization (Tenn. Ct. App., Jan. 25, 2021) 2021 WL 235994

LOUISIANA – Trucks and trailers used by taxpayer to transport cut cane sugar to a sugar mill do not fall under manufacturing machinery and equipment exclusion and are subject to personal property tax

Cora is a sugar cane milling and sugar manufacturing company located in White Castle, Louisiana. This appeal arose from a dispute between Cora and the Louisiana Department of Revenue regarding the alleged overpaid of refunds involving the manufacturing machinery and equipment (MM&E) tax exclusion. Cora claimed that the Department was unfamiliar with the customary business activities of a sugar mill and therefore did not properly apply the MM&E exclusion to the sugar mill’s operations, resulting in “erroneous disallowances.” Following a hearing before the Louisiana Board of Tax Appeals, Cora was awarded a refund in total amount of $14,946.49, and appealed to the Court of Appeals claiming that the refund was insufficient in amount.

Cora argued that the trucks and trailers used to transport cut cane to the sugar mill are an integral part of the sugar manufacturing process and therefore should not be taxed due to the MM&E exclusion. Cora’s witnesses testified that in order to maximize the amount of sucrose in the sugar cane after it is cut, it is necessary to rapidly transport the sugar cane from the field to the mill, and therefore the transport is an integral step in the manufacturing process. The Louisiana MM&E exemption applies to tangible personal used as an integral part of the production, processing, and storing of food, but expressly excludes “[t]angible personal property used to transport raw materials or manufactured goods prior to the beginning of the manufacturing process or after the manufacturing process is complete.” Cora takes no part in the harvesting or cutting of the cane, other than telling farmers how much cane needs to be cut on any given day. Cora’s trucks simply transport the cut cane to the sugar mill for storage and processing. The Department argued that the manufacturing of raw sugar begins when “the raw material goes to the first piece of machinery that changes its composition.”

The Court of Appeals agreed with the Department of Revenue that the trucks and trailers used by Cora for the transport and/or storage of cane played no part as machinery that changes the form of the cane. Other than natural chemical processes to the cane after it is cut that Cora cannot alter, no physical changes are made to the cane while it is being transported and stored in the trailers. The Court held that MM&E exemption claim was properly denied.

Cora-Texas Mfg. Co., Inc. v. Robinson, — So.3d —- (La. Ct. of App. April 16, 2021) 2021 WL 1439804

WISCONSIN – Court of Appeals holds that taxpayers must go to the Wisconsin Tax Appeals Commission before bringing a state court claim that the Department of Revenue issued an unpromulgated rule on a new personal property tax exemption

The Wisconsin Legislature enacted a new personal property tax exemption in 2017 for “[m]achinery, tools, and patterns.”  WIS. STAT. § 70.111(27) (2017-18)1; 2017 Wis. Act 59, § 997J.  The Wisconsin Manufacturers and Commerce, Inc, a trade association, asked the Wisconsin Tax Appeals Commission to offer its interpretation of § 70.111(27) based upon hypothetical facts, arguing that Department’s application of § 70.111(27) violated statutory rulemaking procedures. The trade organization, dissatisfied with the Tax Appeals Commission’s interpretation, filed a declaratory judgment action claiming that the Department’s interpretation of § 70.111(27) was invalid, that it conflicted with state law and that its interpretation and application of the statute constituted an unpromulgated administrative rule in violation of statutory rulemaking procedures. The Circuit Court, pursuant to the primary jurisdiction doctrine, dismissed the action deferring to the principle of administrative review.

The issues on appeal were whether the Department of Revenue’s construction of the personal property tax exemption on machinery, tools, and patterns conflicts with state law, and whether the Department properly implemented this construction without going through the rulemaking process.

The Court of Appeals held that the doctrine of primary jurisdiction was properly applied, noting that the Wisconsin Legislature had declared that the Tax Appeals Commission is “the final authority for the hearing and determination of all questions of law and fact arising under” the tax code, subject to judicial review. The Court of Appeals also rejected the Trade Organization’s claims that the Department was required to formerly adopt an administrative rule to interpret the statute, that it created such a rule improperly by issuing a statement of policy to interpret the statute, and that it failed to promulgate the ad hoc rule appropriately. The Court said that the issue was not whether the Department had promulgated a rule addressing § 70.111(27) – it had not – but whether the Tax Appeals Commission had authority to review a claim that the Department interpreted and applied a statute under the tax code improperly, either under its plain language or through application of a rule, promulgated properly or not. The Court held that the issue was one that the administrative agency had the authority to rule on, and affirmed the Circuit Court’s decision.

Wisconsin Property Tax Consultants, Inc. v. Wisconsin Department of Revenue (Wis. Ct. App., June 2, 2021) 2021 WL 22127

ARIZONA – Court of Appeals rejects Tax Court ruling that an electrical generating plant on land leased from a Native American tribe was a permanent structure subject to property tax

South Point owns and operates an electrical generating plant on land leased from the Fort Mojave Indian Tribe in Mohave County, Arizona. Under the lease, South Point owns “[t]he Facility and all Improvements,” but at the end of the term, is obligated to “remove any and all above ground Improvements and personal property from the Leased Land,” except for certain roads, foundations, and underground piping and equipment. South Point sued the Arizona Department of Revenue to recover property taxes paid for the tax years 2010-2013.

The Tax Court rejected South Point’s contention that 25 U.S.C. § 5108 categorically preempts state and local property taxes on permanent improvements on leased tribal land and ruled that the entirety of the generating facility was taxable personal property rather than permanent improvements. South Point appealed.

The Court of Appeals noted that under § 5108, “lands or rights” taken in the name of the United States in trust for an Indian tribe “shall be exempt from State and local taxation.” Under the federal statute, taxation of permanent improvements is per se preempted, regardless of whether the improvements are owned by Indians. The Court of Appeals said that a tax on any permanent improvements subject to the lease with the Tribe was effectively a tax on one of the privileges of the Tribe’s ownership of trust land, and therefore was barred by § 5108.

The Tax Court’s conclusion that the generating plant was entirely personal property was based upon a lease provision requiring South Point to remove all above-ground improvements at the end of the lease term. The Tax Court reasoned that if taxpayer retained the right to remove an improvement, that improvement was by definition not a permanent improvement. The Court of Appeals reversed, holding that the Tax Court had erroneously disregarded the principle that federal law, not state law, determines whether specific property is a permanent improvement exempt from taxation under § 5108, and that it should have considered the following factors: (1) whether the property was capable of being moved, and had in fact been moved; (2) whether the property was designed or constructed to remain permanently in place; (3) whether there were circumstances which showed that the property could or would have to be moved; (4) whether the property was readily removable; (5) the damage the property would sustain upon its removal and (6) the manner of affixation of the property to the land.

South Point Energy Center LLC v. Arizona Department of Revenue, — P.3d —-, 43 Arizona Cases Digest 13 (Az. Ct Appeals, April 27, 2021)

OREGON – Tax Court agrees with taxpayer that ORS 308.162 applies to preclude revaluation of pipeline system transferred because taxpayer acquired the entire centrally assessed “unit of property” from seller

Tesoro Logistics Northwest Pipeline is owned by Tesoro Logistics LP, a publicly traded limited partnership in the business of “gathering” crude oil, as well as “terminalling,” transporting and storing crude oil and refined oil products, including through pipelines. On June 19, 2013, Tesoro Logistics Northwest Pipeline and another affiliate wholly owned by Tesoro Logistics bought the “Northwest Products System” from Chevron Pipe Line Company and Northwest Terminalling Company for a total purchase price of $354.8 million. The Northwest Products System consisted of a federally regulated petroleum products pipeline extending from Salt Lake City to Spokane, Washington, as well as other assets including a five-mile jet fuel pipeline connecting to the Salt Lake City airport and certain products terminal rights, properties, facilities and equipment located in Idaho and Washington. Before acquiring the Northwest Products System, Tesoro Logistics Northwest Pipeline had no property in Oregon subject to local or central assessment.

For tax year 2013-14 and prior years, the Department maintained a centrally assessed property tax account for Chevron that included the Oregon portion of the Northwest Products System, and Tesoro Logistics Northwest Pipeline acquired and continued to hold that property as of the January 1, 2014, assessment date for tax year 2014-15. A dispute arose because the Maximum Assessed Value that the Department had assigned to Tesoro Logistics Northwest Pipeline’s account on the central assessment roll ($38,723,000) was substantially higher than the MAV that the Department previously assigned to Chevron’s account on the central assessment roll ($10,786,200). After initially using the MAV set for tax year 2013-14, which the Department claimed was a mistake, the Department determined the MAV for tax year 2014-15 by following the normal procedures for new centrally assessed property, without regard to the 2013-14 MAV. Tesoro Logistics Northwest Pipeline asked the court to determine that the MAV for tax year 2014-15 should have been the same as that assigned to Chevron’s account for tax year 2013-14.

ORS 308.162 provides that if two or more property tax accounts are merged into a single account, or if property that is attributable to one account is changed to another account, the maximum assessed value of the property may be adjusted to reflect the merger or change, but the total maximum assessed value for all affected accounts may not exceed the total maximum assessed value the accounts would have had if the merger or change had not occurred.

The Tax Court said that the issue was whether the acquisition of the Northwest Products System by Tesoro Logistics Northwest Pipeline caused the exception under Or Const Art XI, § 11(1)(c)(A) and ORS 308.149(6)(a) for “new property or new improvements” to apply for purposes of determining the MAV for tax year 2014-15, and if so, did ORS 308.162 nevertheless require the Department to apply the MAV as determined for Chevron’s centrally assessed account for tax year 2013-14 to the property attributable to Taxpayer’s account for tax year 2014-15.

The Tax Court began by observing that for purposes of ORS chapter 308, “new property or new improvements” is not limited to property that has been created or acquired by the taxpayer within some designated time period, but includes all property that is lawfully added by the assessor to a taxpayer’s property tax account on an assessment roll. Further, “new property” includes additions to the accounts of companies on the central assessment roll.  In other words, “new” means “new to a property tax account on an assessment roll.”

The Tax Court said that it was clear that the Department properly established an account for Tesoro Logistics Northwest Pipeline, and therefore a new unit of property, on the central assessment roll for tax year 2014-15. However, the Court agreed with Tesoro Logistics Northwest Pipeline that even if the property in question otherwise fell within the definition of “new property,” ORS 308.162(1) prohibits the Department from assigning a MAV to the Property that exceeded the MAV in the hands of Chevron for tax year 2013-14. The Court found that the Northwest Products System property, consisting of a large assemblage of pipeline assets located in Oregon, was recorded under Chevron’s account on the central assessment roll for tax year 2013-14 as a unit of property, and that all of that same property was recorded under Taxpayer’s account on the central assessment roll for tax year 2014-15. The Court ordered that the MAV of the Northwest Products System property in Tesoro Logistics Northwest Pipeline’s account was $10,786,200 for tax years 2014-2015.

Tesoro Logistics Northwest Pipeline LLC v. Department of Revenue, (Or. Tax Reg. Div., Feb. 19, 2021) 2021 WL 670471