September 2014 NewsletterSeptember 29, 2014 | Newsletter
DP & L argued on appeal to the Court of Appeals of Kentucky that the trial court incorrectly interpreted the statutes governing the manner in which public service companies are taxed. KRS 136.120(2) (c) states that “[o]perating property and nonoperating tangible property shall be subject to state and local taxes at the same rate as the tangible property of other taxpayers not performing public services.” Operating property is defined as “both the operating tangible property and the franchise, and the payment of taxes on the assessment of operating property shall be deemed the payment of taxes on the operating tangible property and the franchise.” KRS 136.115 (2). The Court of Appeals has defined franchise as “the earning value ascribed to the capital of a domestic public service corporation by reason of its operation as a domestic public service corporation. It comprises the operating property and is assessed by the Revenue Cabinet by its fair cash value as a unit…. [T]he value of the franchise is determined by subtracting the assessed value of the tangible operating property from the “capital stock,” which is the “entire property, real and personal, tangible and intangible, assets on hand, and its franchise as well.”
The Court of Appeals said that the plain import of the statutory language demonstrated that the General Assembly did not intend for the franchise of public service companies to be exempt from state and local taxes, nor for the franchise to be taxed separately. KRS 136.115 (2) directs that taxes are to be assessed on both operating tangible property and franchise. Franchise is treated separately. Nothing in the statutes indicates that franchise is included in operating tangible property. Additionally, KRS 132.208 provides a state and local tax exemption for intangible personal property except for that which is assessed under Chapter 136, the chapter which governs tax on public service companies.
Further, KRS 136.120(2) (c) provides that operating property (which includes franchise) is to be taxed at the same rate as the tangible property of non-public service company taxpayers. KRS 132.020 (1) (a)—(q) sets forth the tax rates for seventeen types of property that are not associated with a public service company, and carves out certain exceptions. None of the exceptions is related to public service companies or to franchise. It is clear that the General Assembly considered the types of property that should be exempt from the “catch-all” rate, and it did not include franchise of public service companies—although it identified seventeen other categories of property. Based on this analysis, the Court of Appeals concluded that the franchise of a public service company is not subject to the exemptions and is not entitled to be spread over and among other types of assets. It is a separate asset for which the legislature has provided clear and distinct taxation guidelines. Dayton Power and Light Co. v. Department of Revenue, 405 S.W.3d 527 (Ky. App., Nov. 2, 2012).
The Court of Appeals held that the Tax Court did not err in disregarding the effect of the ground leases, because Cordish did not establish that the leases in issue restricted its use of the properties. Cordish argued that the existence of the ground leases owned by Baltimore City, and the obligation to pay ground rent, made the property less marketable, raised the risk of investment, and thus required an increase in the overall capitalization rate in its income approach valuation of the property. The Supervisor of Assessments argued that no ground lease may be considered in such a valuation, because of the instruction in Section 8–113 of the Tax–Property Article that the lessee be treated as the owner. Cordish urged that any ground lease constitutes a burden on the use of commercial property, whereas the Supervisor of Assessments contended that a ground lease can never be considered as a burden. The Court rejected both arguments.
The Court said that hypothetical ownership is attributed to the lessee under § 8-113 in order to identify the lessee as the taxpayer for the convenience of the tax collector, not to preclude consideration of the effect of a ground lease on the valuation of the property. However, not all ground leases adversely affect value. Although restrictions imposed by a ground lease may be considered for purposes of valuing commercial income producing properties under Section 8–113 of the Tax–Property Article, Cordish did not offer the ground leases at issue into evidence, and thus failed to prove that the they contained restrictions negatively affecting their value. Cordish Power Plant Ltd. Partnership v. Supervisor of Assessments for Baltimore City, 427 Md. 1, 45 A.3d 273 (Md., May 23, 2012).
Georgia employs the “unit tax” method for determining the property tax owed by public utilities, which requires the State Revenue Commissioner and the State Board of Equalization to determine the fair market value of all of a utility’s taxable assets in the state as a unit and then apportion that value among the counties. The State Revenue Commissioner’s determination is then binding on the counties in calculating the public utility’s property taxes for property in each county. OCGA § 48–1–2(21). “Public utility” is defined in § 48–1–2(21) to include “all gas, electric light, electric power, hydroelectric power, steam heat, refrigerated air, dockage or cranage, canal, toll road, toll bridge, railroad equipment, and navigation companies.” The Georgia tax code does not contain a definition of “gas company,” but the Georgia statutes elsewhere define “gas company,” to mean “any person certified . . . to construct or operate any pipeline or distribution system, or any extension thereof, for the transportation, distribution, or sale of natural or manufactured gas.” OCGA § 46–1–1(5).
At issue in this appeal was whether Southern could 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), or whether Southern had an adequate alternative remedy in its appeals of the Chatham County tax assessments. The Georgia Supreme Court had previously decided that Southern’s mandamus action was not barred by the doctrine of sovereign immunity. The Court began by observing that mandamus is a remedy for improper government inaction, such as the failure of a public official to perform a clear legal duty. The Court also found that Southern had statutory standing to seek writ of mandamus to compel the Commissioner to accept its ad valorem property tax returns, because Southern had alleged that it was a public utility, that it had a special interest in enforcing the Commissioner’s alleged public duty to accept returns from public utilities, and that the Court’s decision would resolve the ongoing uncertainty about where Southern was required to file its tax returns and the amount of taxes that it ultimately would be required to pay. Without deciding whether Southern was a “public utility,” the Georgia Supreme Court held that the County tax appeals would not provide an adequate alternative remedy, but only if the Commissioner could not be made a party to them. That issue had not been decided by the trial court, so the Supreme Court remanded the case for further proceedings. Southern LNG, Inc. v. MacGinnitie, 294 Ga. 657, 755 S.E.2d 683, 14 FCDR 362 (March 3, 2014).
The Board conducted an evidentiary hearing. The assessor produced documentary evidence showing that no return was received from Midwest prior to May 1, 2009. Midwest submitted an affidavit to the Board from its controller, averring that she prepared Midwest’s personal property tax return on April 21 and mailed it “by first class mail with sufficient postage” to the assessor’s address on April 23, that Midwest’s return address was on the envelope and that the envelope was not returned. Midwest also offered an affidavit from a certified public accountant who was chairman of Midwest’s board of managers that he had reviewed Midwest’s office records and that those records confirmed the return was mailed on April 23, 2009. Ultimately, the Board voted to affirm the imposition of the penalty due to a lack of evidence that the return had been received by the assessor prior to May 1, 2009. Midwest appealed to the Tax Equalization and Review Commission, which affirmed, and then to the Court of Appeals, which also affirmed (this decision was reported in our October, 2012 Quarterly Newsletter). The Supreme Court, however, reversed the Court of Appeals and held that the penalty was improper.
The Supreme Court began by observing that Neb. Rev. Stat. § 49–1201 provides “[a]ny … tax return … required or authorized to be filed or made to the State of Nebraska, or to any political subdivision thereof, which is: (1) Transmitted through the United States mail [or] (2) mailed but not received by the state or political subdivision … shall be deemed filed or made and received on the date it was mailed if the sender establishes by competent evidence that the … tax return … was deposited in the United States mail on or before the date for filing or paying.” It was clear from the record, said the Court, that the Board upheld the penalty based on its mistaken belief that mailing the return could not, under any circumstances, constitute filing. This was incorrect, because if the requirements of § 49–1201 are met, mailing can constitute filing. Midwest Renewable Energy, LLC v. Lincoln County Bd. of Equalization, 284 Neb. 34, 815 N.W.2d 922 (July 13, 2012).
The issue on appeal was whether natural gas stored in facilities located in Kansas under contract with interstate companies was subject to ad valorem taxation. The Kansas Constitution, Article 11, § 1 (2012 Supp.) exempts merchants’ inventory from such taxation, but that exemption does not include tangible personal property owned by a public utility. All three classes of taxpayers claimed they were entitled to the exemption. The Court of Tax Appeals consolidated the appeals and denied the taxpayers’ exemption requests, holding that all of the taxpayers were public utilities under K.S.A. 2012 Supp. 79–5a01 and, therefore, none of them qualified for the merchants’ inventory exemption as codified in K.S.A. § 79–201m. The taxpayers appealed, arguing, in part, that the decision violated the Commerce Clause of the United States Constitution and the Due Process Clause of the Fourteenth Amendment to the United States Constitution, as well as Article 11, § 1(b) of the Kansas Constitution, which provides for the ad valorem tax exemption for merchants’ inventory.
The Kansas Supreme Court first held that the taxation would not violate the Commerce Clause or Due Process Clause of the Federal Constitution. Applying the test set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977), the Court held that the Commerce Clause was not violated by the tax because there was a “substantial nexus” between Kansas and gas stored within the state, the tax was fairly apportioned and non-discriminatory, and because it was fairly related to the taxpayers’ contact with Kansas (their storage of gas within the state). The Court similarly rejected the taxpayers’ Due Process claim that they lacked the necessary minimum contacts with Kansas to permit ad valorem taxation of their natural gas, because the taxpayers owned personal property in Kansas, even if it was intended that the gas would ultimately be delivered out-of-state.
The Court then considered the constitutionality under the Kansas Constitution of the broad statutory definition of “public utility” in K.S.A. 2012 Supp. 79–5a01(a), which included “every individual, company, corporation, association of persons, brokers, marketers, lessees or receivers that now or hereafter own, broker or market natural gas inventories stored for resale in an underground formation in this state, or now or hereafter are in control, manage or operate a business of . . . transporting or distributing to, from, through or in this state natural gas, oil or other commodities in pipes or pipelines, or engaging primarily in the business of storing natural gas in an underground formation in this state,” as applied to the three classes of taxpayers.
The Court held that the natural gas marketers and brokers in this appeal were not public utilities as that term is used in Article 11, § 1 of the Kansas Constitution, even though they fit the statutory definition, because they were not obligated to provide nondiscriminatory services to the public, did not have eminent domain powers, and did not enjoy natural monopolies. Similarly, the Court held that out-of-state municipal utilities were not “public utilities” under the Kansas Constitution. Instead, the Court favored a definition restricting public utilities to private business organizations, consistent with the common meaning of public utility, especially in light of Kansas’ regulatory discernment between true public utilities on one hand and municipal utilities on the other. With respect to these two classes of taxpayers, the ad valorem tax exemption for merchants’ inventory should be applied. But the local distribution companies certified as public utilities in other states met the definition of “public utilities” in all respects, and the Court found no reason to limit the term to utilities operating in the state of Kansas. Their property was properly taxable, since the tax exemption for merchant’s inventory clearly did not apply. In re Appeals of Various Applicants from a Decision of Division of Property Valuation of State for Tax Year 2009 Pursuant to K.S.A. 74-2438, 298 Kan. 439, 313 P.3d 789 (December 6, 2013).