July 2018 NewsletterJuly 24, 2018 | Newsletter
California Revenue and Taxation Code 1 Section 73, enacted to encourage the building of active solar energy systems by providing tax benefits for new construction, excludes newly constructed energy systems from the definition of “new construction” such that they are not considered, for property tax purposes, to be improvements that add value. Between 1986 and 1991, Luz Partners built seven utility solar energy generating system (“SEGS”) units. These units generate electricity largely through solar energy, but conventional boilers and furnaces fueled by natural gas are used as a backup source of power generation. The solar component is composed of mirrors, conduits, generators, and transformers, and accounts for approximately 97% of the cost of installation. The non-solar component comprises the natural gas boilers and furnaces, and accounts for approximately 3% of the cost of installation. There is no dispute that the non-solar component parts have lost most of their original value.
Until 2010, the San Bernardino County Assessor valued the solar property with the non-solar component of the SEGS unit based on the then-current market values for boilers and furnaces, and placed those values on the assessment rolls under the fixtures category. Under this method, the Assessor found that from year to year, these assessed values generally declined as the boilers and furnaces depreciated. In 2010 and thereafter, the Assessor followed newly issued California Board of Equalization guidelines on the valuation of solar property. Real property in California is assessed on the basis of the lesser of two possible taxable values. One option is the base year value (i.e., the value of the property at the time of acquisition) as adjusted for inflation since the base year, not to exceed 2% each year, to produce the “factored” base year value. The other option is the full cash, or market, value. For the purpose of conducting this comparison to determine whether there had been appreciation or depreciation of the solar property, the Board of Equalization’s guidelines directed that the factored base year value should include only the non-solar component, but the current full cash value should include both the solar and the non-solar component. The lower of the two values thus serves as the basis for calculating the property tax owed. When the San Bernardino Assessor applied the Board’s assessment methodology to Luz Partners’ seven solar properties for 2011 and 2012 tax years, the result was an increase of approximately 150% in Luz Partners’ taxes. Luz Partners applied for a changed assessment, which the Board denied, as did the Superior Court, and so it appealed to the Court of Appeals.
In challenging the Board of Equalization’s assessment methodology, Luz Partners argued that the Board treats depreciating assets as if they were appreciating. It claimed that by comparing the factored base year value (3% of the SEGS unit) against the current cash value (100% of the unit), the Assessor “always ends up treating the only taxable portion of these SEGS as if it were appreciating, and thereby increasing the value entered on the roll and increasing the taxes each year, even though the non-solar component, which is wholly comprised of equipment and machinery, incontrovertibly is depreciating.” The Court of Appeals observed that Luz Partners’ claim is premised on its view that SEGS units should be separated into solar and non-solar components, rather than looking at them as integrated units. However, said the Court, the appraisal unit is the real property improved with the SEGS unit, not the unit alone. A buyer in the marketplace would not purchase the real property improved with the non-solar component of the SEGS unit only. Rather, the buyer would purchase the real property improved with the entire SEGS unit. Prior to 2011, the assessment methodology used by the Assessor was not in compliance with the applicable law, because the Assessor treated the taxable portion of the unit (boilers and furnaces) as a depreciating asset and reduced its value as one would an ordinary piece of personal property. However, after receiving instructions from the Board, the Assessor began assessing the factored base year value of the solar property based on the 2% maximum index rather than as a depreciating asset, enrolling the lesser factored base year value rather than the higher current full cash value. The Court concluded that this was the correct procedure to follow.
Luz Solar Partners Ltd., III v. San Bernardino County, 15 Cal.App.5th 962, 223 Cal.Rptr.3d 451, 17 Cal. Daily Op. Serv. 9615 (September 27, 2017).
Arizona Electric Power Cooperative owns electric generation property in Cochise County, which collects taxes imposed based on the Department of Revenue’s determination of value. The Department determined the value of the Cooperative’s property for tax year 2016 to be $148,915,000. The Cooperative appealed to the State Board of Equalization, claiming a full cash value of $106,030,000, on the basis that the Department’s proposed value failed to take into account proper obsolescence factors. At the conclusion of the hearing, the State Board announced it was upholding the Department’s valuation and set the full cash value of the Cooperative’s property at $148,915,000. The State Board then issued a written decision titled “Findings of Fact, Decision and Conclusions of Law,” dated and mailed on November 13, 2015 (“November 13 Findings”), which incorrectly listed the cash value of the Cooperative’s property as $188,646,735. Reviewing the November 13 Findings, counsel for the Department immediately notified the State Board’s chairman of the error, and the chairman advised both parties that the State Board would issue an amended decision correcting the error.
Accordingly, on November 16, the State Board issued an “Amended Findings of Fact, Decision and Conclusions of Law” (“November 16 Amended Findings”) stating the correct value. The same day, the State Board posted on its website a notice that reflected the correct valuation number but incorrectly identified Maricopa County as the entity that valued the property, instead of the Department (“November 16 Web Notice”). The November 16 Web Notice also incorrectly listed the date the Amended Findings as November 14, 2015, instead of November 16, 2015. In addition, although the November 16 Amended Findings stated the correct valuation number, it contained a typographical error (“petition” was spelled “petiton”). Upon discovery of these errors, the State Board issued a second “Amended Findings of Fact, Decision and Conclusions of Law” on December 8, 2015 (“December 8 Amended Findings”) and posted a “corrected” web notice to its website (“December 7 Web Notice”).
The Cooperative filed its appeal of the State Board’s valuation on February 3, 2016, within 60 days of the December 8 Amended Findings but more than 60 days from the November 13 Findings and the November 16 Amended Findings. The Department and the County moved to dismiss the complaint as untimely, arguing the 60-day appeal window started running, at the latest, upon the mailing of the November 16 Amended Findings. The Tax Court ruled the complaint was untimely and granted Defendants’ motion to dismiss. The Cooperative appealed.
The Court of Appeals observed that the State Board is required by statute to “issue its decision at the conclusion of the hearing,” and, as here, in cases involving centrally assessed property, the State Board’s decisions “shall be issued on or before November 15.” This taxing scheme anticipates that issues addressing valuation and recommended classification be resolved by November 15, and any valuation or classification changes be transmitted to the Department on or before the fourth Friday in November. The State Board is required to issue its decision in writing to each party and, in all cases, to the department by mail, and an appeal to court may be taken within 60 days after the date of mailing. The Tax Court lacks jurisdiction over an untimely appeal from a decision of the State Board.
The 60-day period within which to appeal runs from the mailing of the State Board’s “final decision.” The Cooperative argued that the State Board’s “final” decision in a case is the last decision it issues in the case. The defendants argued the State Board’s “final” decision was its first decision, issued on November 13. They contend the two decisions that followed were not “final” decisions, but “clerical corrections” of the original “final” decision. The Court agreed with the defendants. It saw no significance in the chairman’s statement that the December 7 Web Notice was the State Board’s “final amended Notice of Decision, from which the Cooperative had sixty days to file an appeal, and did not accept its contention that the statutory time to appeal begins to run anew whenever the State Board issues a new, corrected, or amended decision, regardless of the significance of the correction or amendment.” Such a construction of the statute’s reference to “final decision” is illogical, said the Court, and is inconsistent with the overall taxing scheme, which relies on timely completion of valuation and classification appeals.
With respect to the date which triggered the start of the appeal period, the Court noted that after the State Board had announced its decision to accept the Department’s valuation and to issue a “no change” decision, the erroneous valuation stated in the November 13 Findings materially misstated the State Board’s resolution of the Cooperative’s challenge. The State Board’s November 16 Amended Findings, which corrected the error, therefore were materially different from the November 13 Findings. However, the changes the State Board made on December 8 in the second Amended Findings and the corresponding Web Notice were not material to the State Board’s determination after the hearing to adopt a “no change” valuation. Thus, because the November 16 Amended Findings accurately reflected the final decision of the State Board in all material respects, the 60-day appeal period began November 16 and expired before the Cooperative filed its February 3 appeal. The Court affirmed the Tax Court’s order dismissing the Cooperative’s appeal as untimely.
Arizona Electric Power Cooperative, Inc. v. State ex rel Department of Revenue, 243 Ariz. 264, 405 P.3d 238, 777 Ariz. Adv. Rep. 4 (October 31, 2017).
ARKANSAS – Under the statute governing determination of fair market value for utilities and carriers in assessment of property taxes, the Public Service Commission’s Tax Division may, but need not, consider physical or economic obsolescence in valuing a company.
Fayetteville Express Pipeline owns a 185-mile natural gas pipeline that originates in Conway County, Arkansas, and terminates by connecting with another pipeline in Mississippi. Fayetteville entered into long-term contracts with four gas producers in the Fayetteville Shale region, reserving 92.5% of the pipeline’s capacity. These contracts expire in 2020 and 2021 and pay Fayetteville roughly $55 million a year regardless of the amount of gas carried through the pipeline. The Express Pipeline went into operation in 2012. On March 27, 2014, Fayetteville filed its 2014 ad valorem tax report for the year ending December 31, 2013. Based on the information provided, the Tax Division prepared Fayetteville’s 2014 ad valorem tax assessment, showing a total unit value of $886,387,572, resulting in an Arkansas-assessed value of $149,580,000.
Fayetteville filed a petition for review with the Commission, challenging the assessment. Fayetteville argued that the Tax Division had failed to consider economic obsolescence and the fact that the market for natural gas had substantially declined, causing its pipeline to be underutilized, noting that the Federal Energy Regulatory Authority had allowed some 770 miles of mainline transmission pipeline to be abandoned, including 725 miles that Fayetteville described as being essential to its original purpose in constructing the Express Pipeline. Fayetteville further argued that the Tax Division applied an improper capitalization rate. A hearing was held before the Administrative Law Judge, who eventually affirmed the Tax Division’s assessment of Fayetteville’s property. Fayetteville appealed, the Circuit Court affirmed, and Fayetteville sought review from the Court of Appeals.
The Court of Appeals found the central issue to be economic obsolescence, or “a loss of value brought about by conditions that environ a structure such as a declining location or down-grading of a neighborhood resulting in reduced business volume.” The Court affirmed the assessment. The language of the applicable statute, Code Section 26–26–1607(b)(1), vested the Tax Division with both the option and the discretion to consider economic and functional obsolescence in valuing taxable property. The Court rejected Fayetteville’s argument that the Tax Division violated Section 26–26–1607 by failing to consider its “undisputed” evidence concerning negative economic conditions in the Fayetteville Shale field as part of its argument that there should be an adjustment for economic obsolescence. Consideration of obsolescence is optional and discretionary, meaning that the Tax Division can, but is not required to, consider physical or economic obsolescence in valuing a company. Further, the Court determined that the Tax Division did not abuse its discretion in not making an additional adjustment for obsolescence, because the Tax Division deducted depreciation in its cost approach valuation and depreciation implicitly takes into account factors such as the obsolescence of an asset.
Fayetteville Express Pipeline, LLC v. Arkansas Public Service Commission, 2017 Ark. App. 557, 533 S.W.3d 106 (October 25, 2017).
NEW MEXICO – Cable Television provider determined to comprise part of a “communications system” subject to central assessment under New Mexico Tax Code.
Cable One operates two cable systems in New Mexico capable of providing its customers with cable television service, internet access, and interconnected Voice over Internet Protocol (VoIP). When Cable One began its operations in New Mexico in the early 1980s, its primary purpose was to provide cable television service. Between 2002 and 2011, Cable One repurposed a number of its channels in order to provide high-speed internet and interconnected VoIP services. Cable One’s tangible property within New Mexico includes a “headend” for each of the two systems it operates. According to Cable One, a headend “serves as a collection system for signals over the cable television system” and “also houses equipment that enables Cable One to provide internet access service and interconnected VoIP service to customers over the same cable television system.” Cable One’s system uses optical means to transmit and receive information.
In 2008, the Department of Taxation and Revenue became aware that many cable companies were transitioning from one-way to two-way communication services. Historically, cable television companies were considered to provide one-way service, meaning that their systems were designed to transmit but not receive information and thus were not considered “communications systems” for purposes of central assessment. However, in response to the “ever[-]evolving technological advancements [in] the cable television, broadband internet, VoIP, and traditional telephone industr[ies,]” the Department began centrally assessing all cable television companies that provided broadband internet and VoIP services. Upon being notified that the Department reclassified Cable One’s property as a “communications system,” Cable One began paying its taxes under protest and filed a complaint in January 2014 seeking a partial refund of its 2013 taxes paid and a declaratory judgment that its property is not part of a communications system.
Cable One acknowledged that its internet access and VoIP services fit within the New Mexico Property Tax Code Section 7-36-30(B) definition of “communications system,” but argued that the Court could not look at Subsection (B)(1) “in a vacuum.” Cable One argued that “canons of statutory construction are clear … that [courts are] to look at a statute in its whole and give effect to every provision of it,” and that the Court should consider the Code’s overall scheme of central assessment and whether the Legislature intended for property such as Cable One’s to come within that scheme. As evidence that the Legislature did not intend for its property to be centrally assessed, Cable One relied on (1) distinctions between it and other centrally-assessed industries, such as whether they are regulated by the Public Regulations Commission and cross county lines; (2) the definition of “plant” property contained in Section 7-36-30(B)(4), of which Cable One contended it had none, meaning it had no relevant property to be centrally assessed; (3) the failure of House Bill 617 (H.B. 617) during the 2008 legislative session, which would have amended the definition of “communications system”; and (4) the Department’s own long-standing construction that cable companies are not subject to central assessment, which Cable One argued should be controlling. The District Court granted in part Cable One’s motion for summary judgment and concluded that Cable One’s property “is not part of a ‘communication[s] system’ under the … Code.” The District Court did not address whether Cable One’s property met the Section 7-36-30(B)(1) definition of a communications system, but instead relied on the doctrine that an administrative interpretation may bind an agency over a period of time to a particular construction, and its view of the failure of H.B. 617 as “persuasive evidence that [the Legislature] intended to preserve the then current assessment practices concerning cable television property.” The District Court ordered the Department to refund Cable One amounts representing the difference between the property taxes Cable One paid under central assessment and what it would have paid under local assessment. The Department appealed.
The Court of Appeals reversed the District Court. The Court held applicable rules of statutory construction indicated that cable television providers fall within the statutory definition of “communications system” based on the purpose for which the property was used; the Property Tax Code did not restrict the Department’s central assessment authority to only traditional, regulated telecommunications companies; and thus, Cable One’s tangible property was subject to reclassification and valuation by the New Mexico Taxation and Revenue Department and was not to be assessed locally.
Cable One, Inc. v. New Mexico Taxation and Revenue Department, — P.3d —- (October 30, 2017) 2017 WL 4986178.
MISSOURI – Reproduction cost approach, using original cost less depreciation, is to be employed for calculating assessed value of both personal and real property belonging to natural gas companies.
Ameren is a regulated public utility that distributes natural gas to 25 counties in Missouri. Ameren’s pipeline consists of both real and personal property subject to county taxation. This appeal involved its property tax assessment in Cape Girardeau County as a representative case.
The Missouri State Tax Commission oversees tax assessments conducted by individual counties. As part of its regulatory function, the Commission requires assessors to collect “such annual reports as shall enable said commission to ascertain the assessed and equalized value of all real and tangible personal property listed for taxation” (Missouri Tax Code § 138.380.2). The Commission promulgates uniform reporting forms and instructions for use by Assessors and taxpayers. Assessors must strictly comply with all such instructions issued by the Commission, and taxpayers must complete and file the forms in accordance with the instructions.
In 2013, the Commission published a new form and instructions for natural gas companies to report their real and personal property for purposes of valuation and assessment. Both the form and the accompanying instructions directed taxpayers to start with their original costs as reported to federal and state regulatory bodies, and then apply depreciation using IRS guidelines and in specific percentages indicated on the form, to arrive at market value. Prior to 2013, value was determined from original cost only, without depreciation.
In 2013, Ameren submitted its report in substantial compliance with the Commission’s form and instructions. For its assets in Cape Girardeau County, Ameren reported original costs of approximately $42.9 million and a depreciated value of $19.9 million, for an assessed value of $6.4 million. The Assessor, noting a decrease compared to previous years, questioned Ameren’s figures, believing that Ameren had applied double depreciation. The Assessor used an initial figure of $39.5 million and made no deduction for depreciation, arriving at an assessed value of $12.7 million. Ameren then appealed to the State Tax Commission. Ameren established that its figures reflected its actual original costs as reported to regulatory bodies, minus depreciation, as required by the Commission’s reporting form and instructions. The Assessor established that the 2013 form and instructions deviated from past practices and acknowledged that his suspicion of double depreciation was unfounded. The Assessor then sought to demonstrate that his own valuation was nonetheless valid, based on an appraisal that he later commissioned which used different methodologies. That appraisal indicated that the “reproduction cost new” of Ameren’s assets in Cape Girardeau County was $81.4 million, yielding an after-depreciation value of $39.8 million, consistent with the Assessor’s initial figures. The Commission affirmed the Assessor’s valuation, reasoning that Ameren failed to prove the value of its assets with market evidence whereas the Assessor provided support for his valuation via the commissioned appraisal. The trial court affirmed, and Ameren appealed to the Court of Appeals.
Ameren argued on appeal that the Commission erred in affirming the Assessor’s valuation because he misapplied the cost approach method by failing to account for depreciation. The parties agreed that the cost approach was the proper method to use for both Ameren’s real and personal property. The cost approach generally starts with reproduction or replacement cost of the property and then applies depreciation to arrive at value. Reproduction cost is based on the actual original cost of construction, whereas replacement cost is an estimate of the cost of a new construction of equal utility with modern materials and according to current standards. In 2013, the Commission mandated use of the reproduction cost approach, expressly instructing taxpayers to report “original or historical costs” and calculate depreciation following IRS guidelines. The Court said that once the Commission mandated the use of a particular approach, that approach must be applied properly, taking into account all relevant factors. The Assessor admitted that he did not apply depreciation and so failed to follow the required methodology.
The Court rejected the Assessor’s argument that the Commission justifiably relied on an appraisal performed sometime after the Assessor’s initial determination using entirely different valuation methods. That commissioned appraisal combined income, market, and cost “new” approaches—every possibility except the original (historical) cost approach mandated by the Commission for the year in question—and it conveniently yielded the same assessment after depreciation by doubling the starting point. Relying on this inflated appraisal using different methods to redress the Assessor’s previous error was improper. “Put simply,” said the Court, “an expert witness cannot be employed to erase a clear error in methodology.”
Union Electric Company v. Adams, — S.W.3d —- (November 7, 2017) 2017 WL 5145965.