Cost Containment Advisors

1-203-531-0770 15 East Putnam Avenue
Greenwich, CT 06830

July 2015 Newsletter

July 5, 2015 | Newsletter
TEXAS – Natural gas production and processing equipment is taxable by a county if located in the county on January 1 for more than a temporary period, even if county is not the equipment owner’s principal place of business. Valerus is in the business of leasing compressor packages that are used to extract oil and gas by reducing well-head pressures, which facilitates the lifting and gathering of oil and gas, and also to pressurize natural gas so that it can be processed and transported through natural gas pipelines. Valerus filed a notice of protest with the Gregg County Appraisal District’s Review Board, contesting the determination that natural gas compressor packages offered for lease should be on Gregg County’s 2012 appraisal rolls, and challenging the valuations placed on the equipment. The Review Board ruled against Valerus, and Valerus appealed that order to the trial court, asserting that since its principal place of business is in Harris County, its equipment should be taxed in Harris County. Valerus also asserted that Texas Tax Code Section 23.1241(b), which provides the formula for determining market value of a dealer’s heavy equipment inventory, applied to its leased natural gas compressor packages. Valerus argued that because the compressor packages and coolers meet the definition of “heavy equipment” as defined by Section 23.1241(a)(6) and Valerus is a “dealer,” the compressor packages and coolers are equipment, and taxable as personal property, as a matter of law. The trial court held that the taxable situs is Gregg County and that Valerus had met its burden to prove that Section 23.1241 was applicable. The Court of Appeals affirmed the trial court on the situs issue, and reversed on the definitional issue.

In Texas, situs for purposes of property taxation is based on the length of time property is located in the taxing unit. With a few exceptions, tangible personal property is taxable by a taxing unit if it is located in the unit on January 1 for more than a temporary period, Texas Tax Code Section 21.02(a)(1), determined by looking back in time to the location of the property in the year preceding January 1 of the applicable tax year. Valerus admitted that all equipment at issue was in Gregg County on January 1, 2012, with arrival dates ranging from September 23, 2005, to October 18, 2011. While the record did not contain specific arrival dates for thirteen coolers, the District produced other evidence that established all of the equipment had been in Gregg County for more than a temporary period. Accordingly, the Court of Appeals concluded that because all of the equipment was in Gregg County on January 1, 2012, and had been there for more than a temporary period, the evidence showed as a matter of law that the 2012 taxable situs for the equipment was Gregg County.

The court also held that Valerus’s compressor packages and cooler units were not “heavy equipment” as that term is used in Texas Tax Code Section 23.1241(a)(6). In the context of determining value for purposes of taxation, § 23.1241(a)(6) defines “heavy equipment” as “self-propelled, self-powered, or pull-type equipment, including farm equipment or a diesel engine, that weighs at least 1,500 pounds and [which] is intended to be used for agricultural, construction, industrial, maritime, mining, or forestry uses.” The compressor packages and cooler units at issue weigh at least 1,500 pounds and are intended to be used for industrial or mining purposes. However, Valerus failed to provide convincing evidence that the compressor packages and cooler units possessed the characteristics of “self-propelled,” “self-powered,” or “pull-type” equipment. They are not “pull type equipment” because they do not operate while being pulled, and while the evidence showed they can be pulled, the intent is always to pull them a short distance to place them in the location where they are to be used or on a truck for transport. Even though the compressor packages and the cooler units have internal combustion engines that, by themselves, power the equipment, the equipment cannot be considered “self-propelled” or “self-powered” because it must be moved by trucks and trailers and does not transport itself. Valerus did not meet its burden to prove as a matter of law that its equipment meets Section 23.1241(a)(6)’s definition of heavy equipment. Valerus Compression Services v. Gregg County Appraisal District, — S.W.3d —-, 2015 WL 82938 (Tex. App.-Tyler, January 7, 2015).

MARYLAND – Tax Court rejects taxpayer’s cost approach valuation based on assumption that efficient, environmentally compliant coal-fired electric generating plant would be replaced with natural gas facility. Genon Mid-Atlantic, LLC, a non-regulated utility generator, challenged the 2009 and 2010 real and personal property assessments of its Morgantown Generation Station, contending that during the years in question, there was a convergence of events that caused a fundamental change in the market and a decrease in the value of Morgantown which the State failed to recognize in its assessments. GenMA argued that commencing in 2000, the electric generation market in Maryland transitioned from a vertically integrated and monopolistic electric market to a competitive wholesale market, where electricity prices became determined by the basic economic principles of supply and demand, and that a generation facility would be valued by buyers solely for its ability to generate revenue in excess of operating costs, at an expected rate of return, over a given period of time.

GenMA presented expert testimony that (1) coal plants were being closed for environmental reasons and being replaced by combined cycle gas turbines; (2) natural gas prices declined due to the effects of hydrofracking which increased the supply of natural gas in excess of its demand; (3) there was significant growth of demand side and demand response resources; (4) there were increases in efficiencies in and conservation of electricity use; (5) renewable power resources (e.g. wind) increased due to Maryland’s requirement for 22% of generation by renewables by 2022; (6) environmental uncertainties particularly affected coal plants (CO2 or greenhouse gas reduction measures); and (7) electricity prices decreased while at the same time coal prices returned to more historic levels in 2009, reducing the gross margin on the assessment dates. As a result of these changes, GenMA’s expert testified, coal plants were not being sold and new coal plants were not being planned for development as of the assessment dates; major capital expenditures at existing coal plants had ceased due to the uncertainty of environmental issues (especially CO2 or hydrocarbon regulation); and natural gas plants were replacing coal plants. He concluded that Morgantown’s net operating income, and therefore its value, was negatively impacted.

GenMA’s appraiser utilized the cost and income approaches in his valuation of the Morgantown plant. Due to the alleged fundamental changes in the energy market, GenMA claimed that natural gas became the fuel of choice, while coal was no longer a desired source of energy, as of the valuation dates. Its appraiser’s cost approach analysis assumed that the Morgantown plant would be replaced with a gas plant, rather than a coal-fired plant, even though the cost of fuel with the gas plant exceeds that of the coal plants by over $573 million dollars over the remaining life of the plant.

The Court rejected GenMA’s cost approach because it disagreed that a gas plant replacement represented the highest and best use of Morgantown on the date of assessment. The Morgantown plant is one of the most efficient coal-fired plants in the region and is one of the top 20 coal plants in the United States. GenMA had invested hundreds of millions of dollars in the coal plant for pollution control equipment, the plant is ideally-located and fully compliant with all pollution control regulations, making it more valuable than non-compliant coal plants. Even with an increasing supply of natural gas through “fracking,” a substantial market still exists for coal plants, which are the dominant supplier of energy in the United States, providing about 40% of the overall energy supply. A decrease in overall demand, said the Court, simply makes the more efficient plants like Morgantown more valuable to a potential purchaser.

The Court also objected to the use by GenMA’s appraiser of large, negative adjustments for what he determined, solely from the standpoint of lessees, to be “adverse” or unfavorable lease payments associated with the property. Although the leases were merely an acquisition financing tool, GenMA’s appraiser failed to value both the leased and non-leased portions of Morgantown. He conceded that the lessors under the leases would be hypothetical sellers on the assessment date, yet he only analyzed the leases from the lessees’ perspective. The Court considered the failure to value the leased property a fundamental appraisal error in determining the fair market value of the property for ad valorem tax purposes.

In contrast, the county appraiser’s cost approach valued the improvements by using the Marshall Swift Valuation Service for individual industrial buildings and comparable sales to establish the contributing value of the land. He utilized an independent engineering study done for the taxpayer when the plant was acquired in 2000 to estimate a remaining useful life of Morgantown of 37 years. In order to recognize the heavy wear and tear of industrial use, he used 17% to 30% depreciation of the existing real property structures. His cost approach produced a higher value than the 2009 assessed value. Genon Mid-Atlantic, LLC v. State Department of Assessment and Taxation, 2015 WL 865476 (Md. Tax, Feb. 18, 2015).

HAWAII – Intermediate Court of Appeals holds that wind turbines are not taxable real property under Maui County Code. Kaheawa Wind Power, LLC operates a business producing electrical power from wind energy, with the power generated by twenty wind turbines on property leased from the state of Hawaii. Kaheawa received an assessment from the County of Maui treating the turbines and the towers on which the turbines are mounted as real property included in “building” value for real property tax assessment purposes. Kaheawa asserted that the turbines and the associated towers are equipment and machinery, moveable, and therefore not taxable real property.

The Supreme Court agreed with Kaheawa. The turbines are mounted on towers, which rest on poured concrete foundation slabs. The concrete slabs are affixed to the ground, and the turbines and the towers are bolted in place. They can be unbolted and removed without any harm to either the equipment or the land. The turbines and towers were purchased as commercially available hardware, and Kaheawa did not have to obtain a building permit, or submit plans and drawings, for the turbines and the towers. When the turbines and towers were purchased and placed in service, Kaheawa claimed a Capital Goods Excise Tax Credit for Hawaii State income tax purposes. Under HRS § 235–110.7, the Capital Goods Excise Tax Credit only applies to “tangible personal property” that meets certain requirements, and the Department of Taxation of the State of Hawaii allowed the credit. Finally, Kaheawa’s lease with the State specifically requires the removal of the turbines and towers at the end of the lease term, subject to a right of the lessor to elect to take ownership.

The County maintained that the turbines were “fixtures” under the Maui County Code, which provides that “real property” includes “any fixture which is erected on or affixed to such land, building structures, fences and improvements, including all machinery and other mechanical or other allied equipment and the foundations thereof, whose use thereof is necessary to the utility of such land, buildings, structures, fences, and improvements, or whose removal therefrom cannot be accomplished without substantial damage to such land, buildings, structures, fences, and improvements, excluding, however, any growing crops.” The wind turbines are mounted on towers, which are bolted onto poured concrete foundation slabs, so the first part of the definition is satisfied. There was no dispute that removal of the wind turbines could be accomplished without damage to the land or any structures or improvements. However, the County maintained that the use of the wind turbines was not “necessary to the utility of the land, buildings, structures, fences, and improvements.” The Court disagreed with the County’s interpretation of the Code.

The County argued that the land is in use as a wind farm, and the wind turbines are absolutely necessary to that utility. Kaheawa argued instead that the proper construction of the Maui County Code requires that the machinery be necessary to the general inherent utility of the land or realty. The Court framed the issue as whether “utility” should be construed to mean general utility or utility that is specific to the particular business or use of land at the time. Traditional common law “fixture” analysis supported Kaheawa’s assertion that the “utility” in question refers to the general inherent utility of the land or realty. In order to satisfy the traditional common law test for determining whether an item of personal property has become a “fixture,” three elements must be met: the actual or constructive annexation of the article to the realty, the adaptation of the article to the use or purpose of that part of the realty with which it is connected, and the intention of the party making the annexation to make the article a permanent accession to the freehold. In this case, said the Court, the wind turbines are only necessary to the utility of the land or realty given the particular business that Kaheawa is currently operating. The wind turbines are not accessory or useful to the land whatever business may be carried on upon it. Thus the wind turbines were not “fixtures” and were not “real property,” and therefore not taxable by the County. Kaheawa Wind Power, LLC v. County of Maui, 347 P.3d 632 (Haw. Int. Ct. App., November 20, 2014).

VERMONT – Supreme Court holds that value of utility easements and rights of way not taxable to easement holder. Vermont Transco LLC challenged a decision of the state appraiser fixing the 2011 listed value of its utility property in the Town of Vernon – five electrical substations, seven transmission lines, a fiber-optic line, land, and utility easements – at $92 million. The equipment was designed and installed to handle the transmission of electric power generated by the Vermont Yankee Nuclear Power Plant and the Vernon Hydroelectric Station. On appeal to the state appraiser, the principal issue was the correct method of calculating depreciation with respect to the electrical equipment that comprises almost the entire value of the property. In addition, Vermont Transco LLC and the Town disagreed about whether the valuation should include the value of utility easements and rights of way held by taxpayer, estimated by the Town’s appraiser at $277,100. Finally, the parties disagreed about whether to apply depreciation for certain equipment’s first year of life. The state appraiser agreed with the Town that an appraisal based on replacement cost new, depreciated in a straight line, provided the most accurate basis for estimating the value of the improvements. The state appraiser did not address taxpayer’s arguments that easements cannot be taxed and that depreciation should have been taken for 2010, the first year of service.

On appeal to the Supreme Court, Vermont Transco argued that the state appraiser erroneously accepted the Town’s valuation without making specific findings concerning the lifespans of the equipment to be used in depreciation or addressing the proper approach for estimating those lifespans. Vermont Transco’s appraiser used an “economic life” approach, resulting in estimated lifespans of fifty to sixty years for the equipment. The Town’s appraiser employed a “useful life” approach, resulting in estimated lifespans of sixty-five to ninety years. Because the state appraiser failed to explain why he favored using a useful lifespan in calculating depreciation, the Court remanded the case back to him for further findings. The state appraiser further failed to explain why he accepted the Town’s argument that equipment acquired during calendar year 2010 need not have been depreciated for a year as of April 2011, and the Court remanded on that issue also. Finally, the Court held that easements were not subject to property tax because the value of the fee interest is taxable to the fee owner without setoffs for easements conveyed to third parties. Therefore, said the Court, the state appraiser erred by including the value of the utility easements in the Vermont Transco valuation. Vermont Transco LLC v. Town of Vernon, 109 A.3d 423 (Vt. Sup. Ct., September 19, 2014).

GEORGIA – Supreme Court allows Southern LNG to seek declaratory judgment compelling State Revenue Commissioner to recognize it as a “public utility” and to accept its property tax returns rather than requiring filing with the County. Southern LNG, Inc. owns and operates a facility on Elba Island in the Savannah River in Chatham County, Georgia. Liquefied natural gas is unloaded from ships, re-gasified, and then placed into interstate pipelines. The Elba Island facility began operations in 1978, and Southern started filing its ad valorem property tax returns with Chatham County at that time. In 2002, Southern first contacted the Commissioner to request that it be permitted to file its property tax returns with the Commissioner rather than with the County, but the Commissioner refused. Southern also appealed the County’s ad valorem tax assessments for the years 2003 through 2010 to the County Board of Equalization and then to the Chatham County Superior Court, arguing both that the County’s assessed values were incorrect and that Southern’s property should be valued only by the Commissioner. The Board of Equalization agreed with Southern that the County’s assessed values were incorrect without ruling on Southern’s claim that its property should be valued only by the Commissioner.

In this action, Southern LNG, Inc. brought a complaint for declaratory judgment and mandamus, seeking to compel the State Revenue Commissioner to recognize Southern as a “public utility” and to accept Southern’s ad valorem property tax returns pursuant to OCGA §§ 48–1–2(21) and 48–5–511(a). Southern filed a motion for summary judgment on the merits, and the Commissioner filed a cross-motion for summary judgment, arguing that Southern had an “acceptable” alternative remedy precluding mandamus by way of an appeal from any final tax assessment by Chatham County to the County Board of Equalization and then the Chatham County Superior Court under OCGA § 48–5–311.6 The trial court granted the Commissioner’s motion and Southern appealed.

The Supreme Court reversed, explaining that even if Southern’s statutory issue can be properly raised and ruled upon in the Chatham County tax appeal proceedings, the process envisioned by the Commissioner can hardly be described as “ ‘equally convenient, complete and beneficial’ ” to the present action for mandamus as a means for requiring the Commissioner to accept Southern’s tax returns. There is no assurance, said the Court, that the Chatham County actions will produce a binding appellate precedent on the statutory issue for Southern to invoke in a later mandamus case (and found it noteworthy that the Commissioner did not say that he would abide by a statutory ruling by the Chatham County Superior Court). The County might settle the actions, or choose not to appeal if the trial court rules in favor of Southern, or an appeal may be decided on some other ground. If any of those events occurred, there would be no opinion by the Court of Appeals or this Court for Southern to invoke in a subsequent mandamus proceeding. More importantly, only a judgment that formally and enforceably binds the Commissioner—like a judgment in this mandamus action—would finally resolve the legal issue that Southern has raised, so the Court held that Southern was entitled to proceed. Southern LNG, Inc. v. MacGinnite, 294 Ga. 657 (Ga. Sup. Ct., March 3, 2014).

NEW HAMPSHIRE- Department of Revenue Administration could use utility tax appraisal of renewable energy windpark in determining the equalized value for property tax purposes. Granite Reliable Power, LLC constructed a renewable energy windpark in Millsfield, Dixville, and the town of Dummer, to generate electric power. Millsfield and Dixville are unincorporated places located in Coos County. The Coos County Commissioners entered into a payment in lieu of taxes (PILOT) agreement with Granite Reliable, under which it would make specified payments in lieu of local property taxes. The windpark was valued at $113 Million, apparently because the Coos County Administrator and several Commissioners, at an informational session with the Department of Revenue Administration on the utility property tax, were advised by a Department real estate appraiser that the windpark had a value of approximately $113 million. They were also cautioned at the meeting that the equalized value of each unincorporated place where the windpark was located would increase substantially, which would have the effect of raising the county tax in those places. The Coos County Commissioners did not consult with another appraiser prior to entering into the PILOT agreement.

In their annual 2012 report of local property value to the Department, both Millsfield and Dixville reported the value of the windpark as zero because neither had appraised the property at that time. Also in 2012, the Department appraised the windpark for purposes of the utility property tax at a value that was significantly higher than the $113 million figure. Because neither unincorporated place had appraised the windpark, the Department used its utility tax appraisal in calculating the total equalized values, and as a result, the Department’s total equalized value for each place—including the utility valuation—increased significantly from 2011. Millsfield’s value increased from $6,426,362 to $180,342,176, and Dixville’s increased from $16,697,647 to $54,453,216.

The Commissioners responded by filing two equalization appeals with the Board of Tax and Land Appeals on behalf of Millsfield and Dixville, asking it to revise downward the Department’s 2012 total equalized valuation, which the Board denied. The Commissioners sought review.

The Supreme Court held that the Department of Revenue Administration could use a utility tax appraisal of the renewable energy windpark in determining the equalized value for property tax purposes, and that it had discretion as to whether it would consider a payment in lieu of taxes agreement between the county commissioners and the developer of the windpark in calculating equalized values. The Department’s use of the utility tax appraisal was reasonable given that the unincorporated areas had not fulfilled their statutory duty to appraise the windpark for property tax purposes. The Court also rejected the Commissioner’s argument that the Department was statutorily obligated to consider the payment in lieu of taxes agreement between Commissioners and the windpark, and adjust downward the value of the windpark in determining the equalized value of unincorporated areas; pursuant to statute, renewable generation facilities that were subject to such agreements had to be valued at their true and market value. N.H. Rev. Stat. Ann. §§ 21-J:3, 72:74. Appeal of Coos County Commissioners on behalf of Unincorporated Places of Dixville, New Hampshire and Millsfield, New Hampshire, 97 A.3d 654 (N.H., June 18, 2014).

NEBRASKA – Payment in lieu of tax exempted public power and irrigation district from liability for property taxes on leased parcels, regardless of whether the parcels were used for an authorized public purpose. The Central Nebraska Public Power and Irrigation District is a political subdivision of the State of Nebraska which owns and manages Lake McConaughy and the surrounding land. Central provides irrigation, hydropower generation, endangered species management, and recreational opportunities for the public. As a public power and irrigation district, Central makes an annual payment in lieu of tax pursuant to article VIII, § 11 of the Nebraska Constitution.

Central leases 13 parcels of land around Lake McConaughy to private parties: four of the parcels are leased to private businesses that put the land to commercial use, and the remaining parcels are leased for residential use. For tax year 2011, the Keith County assessor determined that Central was liable for property taxes on these parcels, because they were being “leased out for residential or commercial use” and should be “treated uniformly & equitably with other governmental properties leased out for other than public purposes.” Central filed protests with the Board of Equalization, claiming that the parcels were exempt from taxation under Neb. Rev. Stat. § 77–202(1) (a) (Supp.2011), which provides that property of the state or a governmental subdivision is exempt from taxation when it is used for a public purpose. The Board approved the protests and the Department of Revenue appealed to the Tax Equalization and Review Commission. The lessees were not joined as parties.

The Department argued that leasing the relevant parcels to private individuals for residential or commercial use was not a public purpose, so the parcels were subject to taxation under article VIII, § 2, of the Nebraska Constitution, regardless of the fact that Central had made a payment in lieu of tax for tax year 2011. Central argued that the dominant purpose of leasing the relevant parcels was to provide a “buffer zone” for Lake McConaughy as required by its Federal Energy Regulatory Commission permit, which qualified as a public purpose. The Commission affirmed the Board’s decision that the relevant parcels “should not be taxed,” on the basis that Central had already made a payment “in lieu of tax” for that year pursuant to article VIII, § 11, of the Nebraska Constitution.
On appeal, the Supreme Court affirmed the Commission’s order that Central’s payment in lieu of tax exempted it from liability for property taxes regardless of whether the parcels were used for an “authorized public purpose.” Article VIII, § 11 expressly provides that every public corporation and political subdivision organized primarily to provide electricity or irrigation and electricity shall annually make the same payments in lieu of taxes as it made in 1957, which payments shall be allocated in the same proportion to the same public bodies or their successors as they were in 1957,” and that “the payments in lieu of tax as made in 1957, together with any payments made as authorized in this section shall be in lieu of all other taxes.” (Emphasis supplied.) Thus, a payment in lieu of tax made pursuant to article VIII, § 11 has the effect of exempting Central from paying property taxes by taking the place of any property tax obligations it might otherwise have been required to pay for that tax year, making consideration of public purpose unnecessary.

In dicta, the Court observed that as with all lessees of public property, lessees of the property of a political subdivision organized primarily to provide electricity or irrigation and electricity may be subject to taxation under Neb. Rev. Stat. § 77–202.11 if the property is not being used for a public purpose. The Court said that the statute evinces a legislative intent that in relation to public property owned by a political subdivision governed by § 11, property taxes (assessed against the lessee) and a payment in lieu of tax may both be collected. However, the Court also noted that without the lessees being made parties to the action, the Commission could not determine whether there should be a separate tax obligation on the parcels or whether the parcels had an assessed value, and furthermore, could not make a determination as to the lessees’ tax obligations without also determining whether the parcels were or were not used for a public purpose. The Commission did not make this determination as to public purpose, and such determination was not required in order for the Commission to conclude that Central was not liable for the assessments on the parcels. Conroy v. Keith County Board of Equalization, 288 Neb. 196, 846 N.W.2d 634 (Neb., May 23, 2014).