July 2015 NewsletterJuly 5, 2015 | Newsletter
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).
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).
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).
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).
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).
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).