National Property Tax Developments: The Latest & Greatest

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1 W. Scott Wright Partner Zachary T. Atkins Associate National Property Tax Developments: The Latest & Greatest SEATA Annual Conference Point Clear, Alabama July 15, 2014

2 Learning Objectives 1 Economic Update Increase your understanding of the economy and its impact on state and local taxes 2 Intangibles Expand your understanding of the growing importance of intangibles 3 Valuing Property Increase your understanding of important valuation concepts 4 Central Assessment & Telecommunications Highlight how the boundaries of central assessment have been redrawn and how telecommunications has been redefined 2

3 ECONOMIC UPDATE

4 Economic Update State tax revenues grew by 3.5% in Q4 2013, but early figures for Q indicate further softening of state tax collections Local property tax revenues grew 3% in nominal terms in Q compared to the Q states reported growth in the first half of FY 2014; 10 states reported declines Revenues for local governments have not recovered to the same extent as state revenues, in part because property tax collections have not rebounded *Nelson A. Rockefeller Institute of Government, State Revenue Report, No. 95 (Apr. 2014). **National Association of State Budget Officers, Fiscal Survey of the States, (Spring 2014). 4

5 Economic Update * Nelson A. Rockefeller Institute of Government, State Revenue Report, No. 95, at 3 (Apr. 2014). 5

6 Economic Update *Nelson A. Rockefeller Institute of Government, State Revenue Report, No. 95, at 15 (Apr. 2014). 6

7 Economic Update Ernst & Young LLP and COST, Total State and Local Business Taxes: State-by-State Estimates for FY12 (July 2013). 7

8 Economic Update Tax Foundation s Top 10 1 New Mexico 2 North Dakota 3 Idaho 4 Utah 5 Indiana 6 Arizona 7 Missouri 8 Montana 9 Nevada 10 Alabama Tax Foundation s Not Top New Jersey 49 Connecticut 48 Vermont 47 Massachusetts 46 Rhode Island 45 New York 44 Illinois 43 Pennsylvania 42 New Hampshire 41 Maryland Rankings based on: Property tax collections per capita (40%) Property tax collections as percent of personal income (40%) Capital stock tax (20%) *Scott Drenkard & Joseph Henchman, Tax Foundation, 2014 State Business Tax Climate Index, Background Paper, No. 68, at 25 (Oct. 2013). 8

9 INTANGIBLES

10 Intangibles Issues with Taxing Intangibles Lack of Predictability Intangible assets are difficult to identify and value Lack of Predictability Relevant statutes and cases are murky at best, and subject to multiple interpretations Not Equitable The value of intangibles is already captured in the income tax No Relationship to Ability to Pay Many states eliminated the property tax on intangibles at the time they imposed an income tax 10

11 Intangibles California s Intangible Issue Elk Hills built gas-fired power plant; required to acquire Emission Reduction Credits (ERCs) as a condition to build Board assessed Elk Hills on value of ERCs; replacement cost approach included the ERCs as a cost of construction; did not deduct value of ERCs from income approach Elk Hills Power, LLC v. Bd. of Equalization, 304 P.3d 1052 (Cal. 2013) California Supreme Court holds that under the cost approach you cannot add the value of intangibles because it amounts to direct taxation of intangibles For indirect intangibles, such as ERCs or FCC licenses, you need not deduct any income from the income approach For direct intangibles, such as franchises and goodwill, you must deduct income from the income approach to remove them from the value indicator 11

12 Intangibles California s Intangible Issue Indirect intangibles make an indirect contribution to the income stream (e.g., FCC licenses) So how do you distinguish indirect intangibles from direct intangibles? Direct intangibles make a direct contribution to the income stream (e.g., goodwill, customer base, franchises, operating contracts) Direct intangibles have a quantifiable fair market value 12

13 Intangibles Does California Still Have an Intangible Issue? County assessed hotel property using the Rushmore Approach, which calls for the deduction of expenses associated with intangibles SHC Half Moon Bay v. Cnty. of San Mateo, No. A137218, 2014 WL (Cal. Ct. App. May 22, 2014). Court held that county illegally assessed intangibles (e.g., work force, leasehold interest, and operating agreement) by failing to remove the value of taxpayer s intangibles when using an income approach Rushmore Approach only allows return of the investment in intangibles, not a return on intangibles; approach rejected by the court 13

14 VALUING PROPERTY

15 Valuing Property Valuing Leased Retail Property Walgreens leased commercial properties, which were constructed by developer at Walgreens direction, pursuant to uniform business model followed by Walgreens Walgreens lease payments included compensation to developer for financing, land acquisition, construction, development and financing costs; results in above-market rents City valued properties using income approach; used actual income from the leases (i.e., contract rent) rather than market rent Walgreen Co. v. City of Madison, 752 N.W.2d 687 (Wis. 2008). Wisconsin Supreme Court rejects City s valuation and use of actual income from Walgreens leases; leased fee interest is equal to the market value as long as the lease rate is not encumbered to the point of falling below market rate Walgreens above market rate leases increased the value of the stores to purchasers, but there is a difference between property value and contract value; increased value as a result of contract is not a real property value that is subject to taxation Court holds that a lease never increases the market value of real property rights to fee simple estate 15

16 Valuing Property What is the value of a a broken nuclear reactor? Crystal River 3, a nuclear-powered generating unit, sustained delamination within concrete of outer wall of containment building in late 2009; went offline immediately Third-party estimate of cost to repair was between $1.49 and $3.43 billion; owner announced intention to retire generating unit in 2013 and decommission County appraiser nevertheless valued CR3 as if it were operational because it was still in rate base; capitalized income stream from ratepayers Florida Power Corp. v. Greene, Nos CA-1816, 2013-CA-1354, 2013-CA-1355 (consolidated) (Fla. Cir. Ct.) 16

17 CENTRAL ASSESSMENT & TELECOMMUNICATIONS

18 Central Assessment & Telecommunications Three Central Themes State-level valuation Unit valuation Intangibles How does your state determine whether property is subject to central assessment? 1 Nature of owner (e.g., regulated utility) 2 Use of assets 3 Services provided 18

19 Central Assessment & Telecommunications Statutory terms vary greatly among the states, and sometimes the same words may be defined differently or not at all Confusion abounds in the industry; who is included has been the primary issue in litigation to date Telecommunications Communication Telephone Company Public Utility Data Transmission 19

20 Central Assessment & Telecommunications Arizona Arizona centrally assesses every telecommunications company Cable One provided cable television, Internet access, and VoIP services; DOR reinterpreted definition of telecommunications company and centrally assessed Cable One Trial court held that Cable One did not provide telecommunications exchange and inter-exchange access because it did not connect subscribers to an exchange Cable One, Inc. v. Arizona Dep t of Revenue, 304 P.3d 1098 (Ariz. Ct. App. 2013). Court held that Cable One was a telecommunications company because it owned communications transmission facilities and provided telecommunications exchange and inter-exchange access Court reviewed the legislative history and determined that the phrase telecommunications exchange and inter-exchange access means local telephone service and long-distance telephone service, respectively 20

21 Central Assessment & Telecommunications Montana Cable television systems locally assessed as class 8 property taxed at 3%, but allocations of telecommunications services companies are centrally assessed as class 13 property taxed at 6%; DOR reclassified all of cable provider s property as class 13 property Taxpayer prevailed in trial court; determined to be a locally assessed cable television system on bulk of its assets despite offering VoIP service Bresnan Commc ns, LLC v. Mont., Dep t of Revenue, 315 P.3d 921 (Mont. 2013). Supreme court reversed, holding that all of cable provider s property was class 13 telecommunications services property and upholding retroactive assessments; refused to consider evidence of actual use and productivity of assets; instead, court focused on capability of assets Charter, which acquired Bresnan in 2013, proposed ballot initiative to effectively reverse supreme court s holding; also filed cert. petition in U.S. Supreme Court Settled in June

22 Central Assessment & Telecommunications Oregon DOR reinterpreted data transmission services, found in the statutory definition of communication, to draw numerous taxpayers into the central assessment regime, including providers of television, Internet access, and VoIP and owners of data centers Centrally assessed taxpayers taxed on intangibles; DOR gives significant weight to stock and debt approach; resulted in huge windfall for the state Comcast Corp. v. Or. Dep t of Revenue, No. TC 4909, 2011 WL (Or. Tax Ct. Aug. 10, 2011). DOR unable to articulate a coherent definition for data transmission services ; tax court finds that it includes Internet access but excludes television Court found that the primary use of the property is for the cable television business and thus is not subject to central assessment Appealed to Oregon Supreme Court, oral argument in January

23 Central Assessment & Telecommunications Colorado Qwest, a public utility, wanted same treatment as cable companies (i.e., local assessment, exemption for intangibles, cost cap valuation method); argued that it was entitled to these tax preferences, also asserted equal protection claim Colorado Supreme Court held that Qwest was not entitled to same treatment as cable companies; rejected equal protection claim because differential treatment had sound basis in policy Qwest Corp. v. Colorado Division of Property Taxation, 304 P.3d 217 (Colo. 2013). Iowa Qwest (local phone company) wanted same treatment as cable companies and wireless companies (i.e., no personal property taxation, exemption of certain real property); asserted equal protection claim Iowa Supreme Court held that differential treatment was rationally related to legitimate interest in encouraging competition; also that revenue raising was a plausible justification for differential treatment Qwest Corp. v. Iowa State Bd. of Tax Review, 829 N.W.2d 550 (Iowa 2013). 23

24 QUESTIONS?

25 Learning Outcomes The fight over intangibles Special valuation concepts The economy s slow recovery Property taxation in The central assessment battle 25

26 Contact Information Scott Wright (404) Zack Atkins (404)

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