June 2013 NewsletterJune 1, 2013 | Newsletter
The so-called “Freeport Exemption” in the West Virginia Constitution provides that “tangible personal property which is moving in interstate commerce through or over the territory of the State of West Virginia ? shall not be deemed to have acquired a tax situs in West Virginia for purposes of ad valorem taxation and shall be exempt from such taxation, except as otherwise provided in this section. Such property shall not be deprived of such exemption because while in the warehouse the personal property is assembled, bound, joined, processed, disassembled, divided, cut, broken in bulk, relabeled, or repackaged for delivery out of state, unless such activity results in a new or different product, article, substance or commodity, or one of different utility.” W. Va. Const. art. X, § 1c, codified in W. Va. Code § 11–5–13a(a) (1997). The Circuit Court held that the “Freeport Exemption” did not apply because the product is one of a “different utility” when the steel coil is converted from a generic utility to a specific utility and that this conversion creates a “different utility” by which the taxpayer loses any exemption under the Freeport Exemption.
Feroleto argued on appeal that the only thing that it does in its warehouse is to cut the steel coils into narrower strips, repackage the narrower strips of steel coils and ship them to its five out-of-state customers. Feroleto does nothing else to the steel coils. According to Feroleto, this fact coupled with the legislature’s intent that the tax exemption at issue be liberally construed in favor of a person claiming exemption from the tax compels the conclusion that the steel coils at issue should be exempted from ad valorem taxation. The Supreme Court of Appeals agreed with Feroleto. The cutting of the steel coils into narrower steel coils, as determined by the specifications of the Feroleto’s customers, does not transform the steel coils into products of new or different utility so that the steel coils are not exempt from ad valorem property taxation. The steel coils arrive at Feroleto’s plant as steel coils, and they leave the plant as steel coils, only of a narrower size. While at the plant, the composition of the steel is not changed. All that Feroleto does to the steel coils at its plant is to cut the steel coils to a smaller size. The applicable constitutional and statutory language expressly provides that property shall not be deprived of the tax exemption based solely on the fact that the property is cut. Feroleto Steel Co., Inc. v. Oughton, — S.E.2d —-, 2012 WL 4465559 (W. Va., September 25, 2012).
In 2002, the City began assessing the concessionaires for their exclusive possessory interests in tax-exempt property pursuant to Board of County Commissioners v. Vail Associates, Inc., 19 P.3d 1263 (Colo. 2001). In Vail Associates, the Colorado Supreme Court held that a ski resort’s possessory interest in tax exempt federal land was taxable provided that the possessory interest satisfied a three-pronged test demonstrating significant incidents of private ownership as determined by the possessor’s right to possession, use, enjoyment, and profits of the property. Under Vail Associates, in order to be taxable, the possessory interest must (1) provide a revenue-generating capability to the private possessor independent of the government property owner; (2) allow the private owner to exclude others from making the same use of the interest; and (3) be of sufficient duration to realize a private benefit.
After rejecting the concessionaires’ constitutional challenge to the exemption statute on vagueness grounds, the Appellate Court considered their claim that their possessory interests failed to meet the first two prongs of the Vail Associates test. The concessionaires asserted that the degree of control exercised by the City over their businesses?price controls, menu limitations, hours of operation, and security, for example?precluded “independence” under the prong of Vail Associates. The Appellate Court disagreed, noting that the question of “independence turned on the source of the possessory interest holder’s revenue, and more specifically, whether the government owner is the only or dominant source of that revenue. Despite the operational constraints, the concessionaires derived the revenue from the traveling public, not the City of Denver. The Appellate Court also rejected the concessionaires argument that their possessory interests in the City’s property were insufficient to make them taxable under the Vail Associates test. The Appellate Court observed that while the possessory interest requires some degree of exclusivity, it need not be absolute, and concurrent use of the same property by other concessionaires was not necessarily inconsistent with the exclusivity requirement. Cantina Grill, JV v. City & County of Denver County Bd. of Equalization ex rel. Pumilia, — P.3d —-, 2012 WL 4021510 (Colo. App. September 13, 2012).
On the second remand, the County claimed to have adopted a “hybrid” approach and “cobbled together . . . a combination of the market and income methods.” The Court of Appeals again rejected the County’s valuation. The Court observed that there was no expert testimony as to any valuation approach, other than that presented by IBM Credit, which the Property Tax Commission rejected. Further, “[t]here [was] absolutely no evidence, and no findings, as to the actual income, or market income, generated by the property to be valued nor as to any capitalization rate which might be applicable to this situation. The only relevance of the word “income” in the “income approach” as used in the third final decision is that IBM receives income, in some undefined amount, from the leased property for three years.” In any event, the problem with the County’s valuation was primarily that it did not make adequate deductions for depreciation in applying its standard schedules, and did not distinguish between valuation depreciation and accounting depreciation, the latter being what should have been applied. The Court remanded the case to the Property Tax Commission for a third time, this time ordering the Commission to enter a decision reducing the assessment to $ 96,458,707.00, the value as listed by IBM. In re IBM Credit Corporation, 731 S.E.2d 444 (N.C. App., August 21, 2012).
These methods are two of the four accepted methods of assigning costs to inventory items for accounting purposes. Unlike “specific-invoice inventory pricing” or “average inventory pricing,” FIFO and LIFO each assume that inventory is reduced in a particular order in relation to acquisition or manufacture of the items. FIFO assumes that “the items in the beginning inventory are to be sold first,” with additional sales being made in the order that the items were acquired. In contrast, LIFO assumes “the cost of the last goods received are charged to cost of goods sold and matched with revenue from sales.”
Under LIFO, “the last items purchased are considered to be sold first, leaving older inventory items as considered unsold and comprising the value of inventory on hand. The Commissioner maintained that by assigning old costs to new inventory, the LIFO method can give rise to an unrealistically low inventory value, and thus is not acceptable for reporting inventory values for property tax purposes.
Ohio Revised Code Section 5711.18 establishes that the taxpayer’s depreciated book value is the starting point for valuing manufacturing inventory. Book value “shall be taken as the true value of such property, unless the assessor finds that such depreciated book value is greater or less than the then true value of such property in money.” The statute further provides that if the assessor “finds” that the value on the books does not reflect true value, a different value may be substituted. Under Ohio Revised Code Section 5711.21, the assessor’s finding must “be guided by the statements contained in the taxpayer’s return and such other rules and evidence as will enable the assessor to arrive at such true value.”
Here, however, the Commissioner cited neither an administrative rule nor any aspect of Progressive’s returns in support of substituting FIFO for LIFO. As a result, “the burden was upon the Tax Commissioner to make a finding, supported by evidence pertinent to the taxpayer, that the book value of the inventory as reported by the taxpayer was not the true value of that inventory.” The commissioner, by relying on a general accounting proposition rather than on an administrative rule or on specific evidence, failed to comply with Ohio Revised Code Sections 5711.18 and 5711.21. Progressive used an accepted accounting method, LIFO, for its manufacturing inventory, and that method became binding in the absence of a rule or of particularized findings based on specific evidence, be it of the taxpayer’s operations or of market conditions. On that basis, the Ohio Supreme reversed the decision of the Board of Tax Appeals. Progressive Plastics, Inc. v. Testa, — N.E.2d —-, 2012 WL 4944291 (Ohio, October 17, 2012).
The County filed a motion to dismiss on the basis that Cactus Drilling failed (1) to give notice of the protest on a prescribed form at the time of payment of the tax and (2) to attach to the notice of protest the petition for review filed in the trial court, in violation of 68 Oklahoma Statutes § 2884(B). The Court of Civil Appeals agreed, and dismissed the petition for lack of subject matter jurisdiction. The Oklahoma legislature has mandated that, at the time of payment of the tax, the taxpayer must give notice of appeal and provide a copy of the appeal to the County Treasurer so that the Treasurer may segregate and hold apart the protested taxes. Without that, the Treasurer cannot perform its statutory duty. These provisions of the statute must be complied with in order to confer jurisdiction upon the District Court to entertain the appeal. Cactus Drilling Company v. Hefley , — P.3d —-, 2012 WL 5531298 (Okla. Civ. App. Div. 1, October 11, 2012).
Oregon taxpayers must follow the statutory procedures when challenging the real market value of their property for property tax purposes. For most appeals, the first step is to file a petition with the appropriate county board of assessment appeals by December 31 of the tax year appealed. Oregon Revised Statutes § 309.100. Prior to July 1, 2011, taxpayers dissatisfied with the assessed value of land or improvements of an industrial property could elect to proceed directly to the tax court, without first appealing to the county board. In 2011, ORS § 305.403(1) was amended to require that appeals of the assessment of industrial land and improvements be filed directly to the Tax Court.
North River Boats claimed its appeals should be allowed because “good and sufficient cause” existed under ORS § 305.288(3) for its failure to follow the statutory requirements relating to tax appeals for both the 2010–11 and 2011–12 tax years. In 2009, a receiver had been appointed for North River Boats. The receiver had relocated its equipment several times, and as of July 1, 2010, North River Boats had no interest in the property, since it had passed to Umqua Bank and its successor, GN8, LLC, also a plaintiff in the appeal. North River Boats also claimed that it never received the 2010-2011 property tax statements for the accounts at issue, and that with respect to the 2011-2012 assessments, North River Boats had several discussions about those assessments with County representatives, and there was an “implicit understanding” that they could be appealed to the County Board. A North River Boats representative testified that they were never advised that it was necessary to appeal them directly to the Tax Court.
The Tax Court granted the motion to dismiss. ORS § 305.288(5) (b) (2011) defines “good and sufficient cause” as “an extraordinary circumstance that is beyond the control of the taxpayer . . . that causes the taxpayer . . . to fail to pursue the statutory right of appeal; and does not include inadvertence, oversight, lack of knowledge, hardship or reliance on misleading information provided by any person except an authorized tax official providing the relevant misleading information.” Changes in ownership and shifting of property are not extraordinary circumstances beyond the control of a taxpayer, and every taxpayer is charged with knowledge that its property is taxable, whether it receives a statement or not. Nor are taxing officials required to volunteer detailed legal advice regarding appeals. The Court found that North River Boats had not identified good and sufficient cause for its failure to timely pursue its appeal rights for the 2010–2011 and 2011–2012 tax years. North River Boats, Inc. v. Douglas County Assessor, 2012 WL 4083322 (Or. Tax Magistrate Div., September 18, 2012).
In its income capitalization approach, the Board included property taxes actually incurred by the company in operating expenses, rather than using a tax factor, based on an explicit finding that the Department of Public Utilities “allows a utility to recover, through the rates charged to consumers, its reasonable operating expenses, taxes, depreciation and amortization, and other costs.” Boston Gas claimed that use of a tax factor rather than the tax expense actually incurred was preferable, since otherwise the very tax assessment in dispute is included in the valuation of the property for the purpose of resolving that dispute.
The Court approved the use of actual property taxes, instead of a tax factor in this case. As a rate-regulated utility, the company was entitled to charge rates that included reimbursement of its property taxes. It was appropriate for the Board, in valuing the property of a rate-regulated utility, to consider evidence of the regulatory features of the property in deciding to use the actual property taxes as an expense, rather than a tax factor. A significant regulatory feature in valuing the company property was rate setting as a means of recovering expenses and ensuring a reasonable rate of return on investment, since governmental restrictions on the financial returns of a utility company are relevant to the price which a willing buyer would pay to a willing seller for utility property. Unlike a typical commercial property, rate-regulated utility property is subject to a governmentally-imposed restriction affecting its value or its earning power. In the case of a private commercial property, rates are set by the market, while in the case of rate-regulated utility property, rates are set by the regulators. That fact must be considered in any determination of its fair cash value for property tax purposes. Boston Gas Co. v. Board of Assessors of Boston, 82 Mass. App. Ct. 517, 976 N.E.2d 176 (October 3, 2012)