December 2021 Newsletter

ARIZONA – Court of Appeals holds that taxpayer failing to submit a timely personal property tax return forfeits its right to appeal the valuation, and it may not obtain the same relief through a claim for special action or declaratory relief

Mesquite Power operates an electric generation facility subject to an annual property tax. The Department of Revenue assesses the value of an electrical generating plant based mainly on an annual report the plant owner submits using a Department-created form. By statute, the Department must send each plant owner a blank copy of that form by February 1 of each year, and each plant owner must file its annual property tax report by April 1 using that form. If a taxpayer fails to file the report by May 20, it “forfeits its right to appeal” the valuation. A.R.S. § 42-14152(D).

 When the Department did not receive Mesquite’s report for the tax year 2020 by April 1, 2019, the Department estimated Mesquite’s 2020 value as directed by statute, setting it at $206,714,000—105 percent of the previous year’s full cash value. The Department also assessed a statutory penalty against Mesquite for failing to file its report on time. On June 7, 2019, the Department sent notice to Mesquite of the estimated preliminary 2020 valuation. Mesquite then filed its 2020 Report a month later. Mesquite also submitted more information about its valuation and requested a meeting with the Department to persuade it to adopt a lower amount. The Department declined Mesquite’s request to meet and did not reduce the valuation.

Mesquite appealed to the Tax Court asking for a declaratory judgment or special action relief on the basis that the Department had disregarded all available information in setting Mesquite’s 2020 value, ignored the information submitted by Mesquite, and incorrectly estimated the 2020 value by basing it on the 2019 value since the latter was under appeal. The Tax Court dismissed the complaint, holding that Mesquite forfeited its right to appeal the valuation by failing to file the report in a timely manner, and that an appeal disputing the Department’s valuation was the taxpayer’s “exclusive remedy,” so Mesquite could not seek alternative relief through a declaratory judgment or special action.

The Court of Appeals affirmed and held that because Mesquite failed to comply with the statutory duty to file a return, it forfeited its right to appeal. The Court rejected Mesquite’s argument that the Department’s performance of its statutory duty to send the form is a condition precedent to the taxpayer’s duty to file a report using the form. The Court first observed that “Everyone is presumed to know the law,” and Mesquite may be presumed to know that it must pay taxes. Taxpayers may download the form from the Department’s website, and Mesquite had used the forms in prior years.  Moreover, there was no genuine dispute that Mesquite had, in fact, received the form, since the Department presented both a receipt for emails with attached forms sent to two email addresses supplied by Mesquite and a supporting affidavit from a Department employee. The fact that the form ended up in a “junk mail” folder was of no consequence.

Mesquite Power, LLC v. Arizona Department of Revenue, — P.3d —- (Ariz. Ct. App. Aug 24, 2021) 2021 WL 3732580.       

MINNESOTA – Tax Court holds that pipeline valuations in Minnesota need not contain analysis and determination of a pipeline’s highest and best use

Minnegasco appealed its Minnesota natural gas distribution pipeline valuation as of January 2, 2018 and 2019.  Prior to trial, the parties were required to exchange expert appraisal reports and to object to the other’s report if they wished to do so. Following the appraisal exchange, Minnegasco filed a motion to exclude one of the appraisal reports prepared for the Commissioner on the basis that it contained no analysis and determination of the pipeline’s highest and best use. The Commissioner responded that Minnesota Rule 8100, which governs pipeline valuations in Minnesota, does not require a highest and best use determination.

Under Rule 8100, pipeline valuation and allocation is a four-step process. First, the Commissioner establishes an estimate of the unit value for each utility company. The resulting valuation is then allocated to each state in which the utility company operates. The Commissioner subtracts the value of property located in Minnesota that is exempt from property tax or that is locally assessed from Minnesota’s allocation, and apportions the remaining allocation to the various taxing districts in which the pipeline property is located.

In its decision on the motion to exclude, the Tax Court first summarized the arguments of the parties.  Although Rule 8100 does not require a highest and best use determination, Minnegasco urged the Tax Court to import such a requirement from general appraisal practice and to hold that a pipeline appraisal not including a highest and best use determination is inherently unreliable and, therefore, inadmissible in a Tax Court proceeding. The Commissioner countered that Minnegasco’s argument, and all cases and secondary sources it cited regarding highest and best use, pertained to the value of real property and did not bear directly on the valuation of utility operating property, which is personal property.

The Tax Court agreed with the Commissioner. Rule 8100 does not require an analysis or determination of highest and best use and, indeed, is silent on the matter. The Court said that this silence does not conflict with any statute the Rule implements, for no such statute mandates a highest and best use determination. Were the Court to import a highest and best use requirement from general appraisal practice, and to condition the admissibility of all pipeline valuations upon compliance with that requirement, the Court would be deviating from the Rule in favor of an extrinsic notion of proper valuation method. The Tax Court said that it lacked such authority.

The Tax Court further noted that the assets at issue were tangible personal property, and that the cases cited by Minnegasco involved real property valuation, which can require a different approach than the valuation of the tangible personal property of a utility company. Further, said the Court, even if highest and best use is taken into account, the assets being valued constitute special-purpose property and the highest and best use of a special-purpose property as improved is probably the continuation of its current use if that use remains viable and there is sufficient market demand for that use. The probable stability of a special purpose property’s highest and best use may account for the Rule’s silence on the subject. The Court refused to exclude the Commissioner’s appraisal.

CenterPoint Energy Resources Corp. v. Commissioner of Revenue, Minn. Tax Reg. Div. (Aug. 4, 2021) 2021 WL 3477527.   

MAINE – Supreme Judicial Court holds that highest and best use determination is a question of fact, not a matter of law, in upholding assessment of paper mill functioning on valuation date but closed soon afterward

This case was a challenge to the April 1, 2016, valuation of a paper mill owned by Madison Paper Industries in Somerset County, Maine. Madison Paper Industries was a partnership between UPM-Kymmene Corporation, a global paper products manufacturer, and the New York Times Company.  Madison Paper purchased a mill property in the Town of Madison, including two hydroelectric power plants, to produce super-calendared paper (highly polished and uncoated magazine paper) for the New York Times. The hydros produced roughly 40 percent of the energy that the mill used, thereby saving the mill money as an avoided cost on energy purchases. The Madison Paper mill was the only super-calendared paper manufacturing mill that UPM owned in North America and was producing 12 percent of North America’s entire super-calendared paper supply. Madison Paper’s mill assets included the mill premises, the paper-making machinery, and the equipment for producing the mechanical pulp used in the production of the paper.

In 2016, UPM and the New York Times dissolved Madison Paper, and announced the dissolution in March 2016. As of the April 1, 2016, valuation date, the mill and the two hydros were fully operational, but the mill closed in May 2016. The mill had been operating at a profit as of April 1, 2016, and it continued to do so until its closure in May 2016, when it was still considered a “state of the art” facility, but its earnings were steadily declining. UPM and the New York Times decided that the hydros and mill assets would be sold separately rather than as an operating paper mill complex. In fact, Madison Paper intended that the mill machinery and equipment be sold as scrap separately from the mill premises. Madison Paper advertised the sale of the hydro assets, but neither UPM nor the New York Times nor Madison Paper made any attempt to advertise the sale of the mill assets.

After the closure announcement, Madison Paper began receiving bids for the mill assets. The bids were almost exclusively from liquidators who intended only to purchase the assets, not to operate the mill itself. In December 2016, six separate pieces of mill equipment essential for paper production were sold under restrictions that, as expressed in the asset-purchase agreement between Madison Paper and the buyer, prohibited their use in super-calendared paper production in any location for ten years “to protect the legitimate competitive interests of Madison Paper and its Affiliates.” These mill assets sold for $2,000,000. Madison Paper sold both hydros in July 2017.

Rather than adopting Madison Paper’s self-imposed liquidation restrictions for the mill assets, the Town assessed the value of the mill and hydros as “an operating whole” as of the April 1, 2016, valuation date. Based on Madison Paper’s mill closure announcement, the Town’s appraiser assumed the mill assets’ “highest and best use” for valuation purposes to be liquidation rather than continued operation. His valuation of the mill assets relied on the cost approach rather than the income or sales comparison approaches. His analysis factored in the age and condition of the premises and equipment as well as economic obsolescence based on UPM’s sweeping restrictions on the equipment’s use after sale. He ultimately determined that the reproduction cost of the mill assets should be reduced by 90 percent to reflect economic obsolescence. His final calculation of the value of the mill assets was $21,341,883. The Town followed its appraiser’s guidance for the mill assessment, though it set the reduction for economic obsolescence at 82 percent, rather than 90 percent, because it disagreed with his assumption that liquidation represented the mill’s “highest and best use.” The Town’s assessment of the taxable mill assets was $38,070,181.

Madison Paper’s appraiser also assumed, based on Madison Paper’s determination that the mill would be closed and that the mill property, mill assets, and hydros would not thereafter be used to make paper, that the “highest and best use” of the mill assets would be liquidation. His valuation of the mill assets used only the sales comparison approach to set their liquidation value at $2,675,000. His analysis made no reference to the restrictions Madison Paper had placed on the buyer’s use of the mill equipment and therefore did not analyze their potential effect on the sales price.

The Board of Tax Review found that Madison Paper’s valuation of the mill assets was not credible for several reasons. It found that the appraiser’s report and hearing testimony never discussed whether the comparable sales cited in his sales comparison analysis were subject to owner-imposed restrictions on use comparable to those imposed by Madison Paper on the mill assets. It further found that the report failed to distinguish between liquidation (or salvage) value and scrap value. The Board also rejected both appraisers’ determinations that liquidation was the “highest and best use” of the mill assets based on Madison Paper’s March 2016 closure announcement and said that the announcement alone did not support a finding that the mill’s “highest and best use” was liquidation. The Board determined that the mill’s “highest and best use” was its “current use” as of April 1, 2016, as an operating paper mill. The Board agreed with Town’s appraiser’s use of the cost approach to value the mill assets and criticized Madison Paper’s reliance on the sales approach, noting that owner-imposed restrictions may distort the market price if a market remains for the property as unrestricted, and that in such circumstances the cost approach should be used. Finally, the Board rejected Madison Paper’s argument that the Town’s assessment double counted the value of energy produced by the hydros by including it in the assessment of both the mill assets and the hydro assets.

Madison Paper filed in the Superior Court a petition for judicial review of the Board’s decision, and the Superior Court affirmed. On appeal to the Supreme Judicial Court, Madison Paper claimed that the Board committed an error of law by deciding that the mill should be valued based on its “current use” as of April 1, 2016 (the valuation date), rather than its “highest and best use,” which Madison Paper asserted was its liquidation or salvage value. The Supreme Court first noted that what constitutes the highest and best use of any particular property is a question of fact, not a question of law, involving consideration of factors such as current use, physical depreciation, sales in the secondary market, functional obsolescence, and economic obsolescence. The Court then rejected Madison Paper’s argument that the Board erred as a matter of law in upholding the Town’s valuation of the mill assets based on their “current use,” because it was based on the incorrect assumption that, as a matter of law, a property’s “current use” cannot also be its “highest and best use.” The Court noted that “current use” and “highest and best use” were indeed distinct concepts. However, said the Court, a property’s “current use” informs the determination of its “highest and best use” for purposes of determining the property’s fair market value.

The Board was not persuaded that “liquidation is the highest and best use of the property as of April 1, 2016, rather than its current use on that date as an operating mill complex.” The Board plainly did not conflate or confuse “current use” with “highest and best use,” but simply found that the mill’s “current use” was its “highest and best use.” The Board pointed out that at the time of the assessment the mill was a state-of-the-art facility operating “unrestrictedly in the black,” that its owners were not in any financial difficulty, and that they had announced the mill’s closure without “communicating cooperatively with the Town.” The Court agreed with the Board’s finding that the mill had been closed and its equipment and machinery sold as scrap under restrictions because its owners did not want to operate it anymore and did not want anyone else to operate it, but that the owners’ business decisions should not dictate the mill’s “highest and best use.” Those were all factual determinations, not subject to the de novo review standard as Madison Paper contended.

The Court also rejected Madison Paper’s argument that the Board erred in upholding an assessment that counted the value of the energy produced by the hydro assets twice—once by including that value in the valuation of the hydro assets as “merchant power plants” that sell their power in the market and again by attributing the value of energy supplied by the hydros to the mill as an “avoided cost,” thereby increasing the value of the mill. The Board had found that the 40 percent of the mill’s energy requirement that the hydros provided constituted an avoided cost for the mill, which the Board deemed equivalent to income for the mill. However, the Board’s finding did not necessarily mean that the Town’s valuation factored the avoided cost into its assessment of the mill assets. Under the income approach to valuation, the value of property is essentially derived from the net income capable of being generated by the property. Thus, in an income approach valuation, the value of the energy generated by the hydros could be factored into the assessed value of either the mill or the hydros but not both. Either the hydros would have added value based on the income they could produce by selling the energy to a third party, or the mill would have added value from the avoided cost of the energy it received from the hydros. But, said the Court, the Town’s appraiser did not use the income approach in valuing the mill assets, instead relying on the cost approach. Because he did not rely on the income approach in valuing the mill assets, the Town’s assessment of the mill assets did not count the value of the energy generated by the hydros as an avoided cost equivalent to income. The Board’s finding that there had been no double counting was thus consistent with the evidence.

Madison Paper Industries v. Town of Madison, 2021 ME 35, 253 A.3d 575 (Sept. 7, 2021).

NORTH CAROLINA – Court of Appeals holds partially constructed solar energy equipment was used “directly and exclusively for the conversion of solar energy to electricity,” and, though under construction, entitled to statutory exemption

Innovative Solar 63, a solar energy company, requested a 2016 tax exemption on solar energy electric equipment valued at $8,640,679.00. Following a hearing before the Greene County Board of Commissioners, the Board denied the exemption. Innovative Solar appealed the decision to the North Carolina Property Tax Commission, which reversed the Board, and the County appealed.

N.C. Gen. Stat. § 105-275(45) (2017) provides that “Eighty percent (80%) of the appraised value of a solar energy electric system are excluded from tax,” and defines the term “solar energy electric system” as “all equipment used directly and exclusively for the conversion of solar energy to electricity” (emphasis added). Both Innovative Solar and the County acknowledged that construction of the solar energy system in question was completed during the 2016 calendar year. But on the tax assessment date, January 1, 2016, the solar energy system was under construction. The County contended that because the solar energy system was under construction on the assessment date, it was not being “used” for the conversion of solar energy to electricity, and thus, was not eligible for the statutory tax exemption.

The Court of Appeals first noted that statutes exempting specific property from taxation because of the purposes for which such property is held and used are strictly construed. However, said the Court, here, though the equipment was under construction, the taxpayers were using the equipment directly and exclusively for the purpose of conversion of solar energy to electricity and thus satisfied the statutory requirement set forth in  N.C. Gen. Stat. § 105-275(45) that the “equipment [be] used directly and exclusively for the conversion of solar energy to electricity.” Accordingly, the Court affirmed the order of the Property Tax Commission concluding that the taxpayers’ equipment was exempt from taxation pursuant to section 105-275(45).

Matter of Innovative Solar 63, LLC, 262 N.C.App. 508, 821 S.E.2d 315 (2018).

TEXAS – Court of Appeals holds that tax exemption for installation of solar device applies only to increase in property value due to solar panel installation, not the solar panels or equipment

Sunnova AP5 Conduit is a company which leases solar panels and related equipment to homeowners. In 2015, the company installed a solar panel system at a residence in Hunt County and leased it to the homeowners. Sunnova then filed an application requesting a property tax exemption for the solar panel system from the Hunt County Appraisal District pursuant to § 11.27 of the Texas Tax Code. The District denied the exemption, and Sunnova protested. The District’s appraisal review board heard Sunnova’s protest and determined the solar device should be taxed at an appraised value of $9,310. Sunnova appealed to the Tax Court, which granted the District’s motion for summary judgment.

Sunnova and the District agreed the solar device fell within the exemption’s definition of “solar energy device,” and that Sunnova was the sole owner. On appeal to the Court of Appeals, Sunnova, as the owner and lessor of the solar device, argued it was entitled to the exemption because the statutory language does not require the solar device to be used on the owner’s real property and does not disqualify for-profit lessors from receiving the exemption. Sunnova asserted that it qualifies as a “person” and the parties’ stipulation satisfied all other requirements of the exemption. The District contended that the exemption does not apply to the actual solar device or related equipment, but instead applies only to the incremental increase in real property value arising from the installation or construction of the solar device on a homeowner’s property.

 Although Sunnova agreed the exemption applies to the incremental increase in the value of the homeowner’s real property, it argued that the exemption was not limited to that but also applies to any property, not just real property, and suggests the legislature could have provided the exemption to just “owners of real property” rather than to all “persons” if it had so intended.  The Court of Appeals disagreed, holding that in light of prior case law and reading the exemption narrowly, contextually, and in harmony with other provisions of the Tax Code, the exemption is intended for the person whose property receives enhancement through installation of the solar device. The Court of Appeals affirmed the Tax Court.

Sunnova AP5 Conduit LLC v. Hunt County Appraisal District, — S.W.3d —- (Tex. Ct. App. 2019) 2019 WL 3886654.

FLORIDA – Court of Appeal holds land leased from federal government but not occupied by or used by United States is not exempt from property taxation

The Okaloosa County Property Appraiser assessed an ad valorem tax on solar panels which Gulf Coast Solar had installed on land used in connection with its solar energy generating facility located on a ground lease within the territorial confines of the Eglin Air Force Base. Gulf Coast Solar filed a complaint against the Property Appraiser, asserting that its solar energy generating facility was exempt from ad valorem taxation because it was located on land under the exclusive jurisdiction of the federal government. The trial court held that Gulf Coast Solar’s tangible personal property was taxable, granted summary judgment, and Gulf Coast Solar appealed.

The District Court of Appeal affirmed and held that federal government consented to taxation with the Military Leasing Act, and the property, once leased for private enterprise and no longer occupied by or used for the United States, was no longer exempt from taxation under the deed of cession and applicable State statutes.

In 1951, Florida ceded to the federal government exclusive jurisdiction over the land which became Eglin Air Force Base. According to the Deed of Cession, the land was provided “for the purpose of erecting and maintaining thereon forts, magazines, arsenals, dockyards and other needful buildings or any of them as contemplated and provided in the Constitution of the United States.” The Deed specifically addressed taxation and provided that the property was exempt from taxation under the laws of Florida while it continued to be “owned and occupied by the United States” for the purposes set forth in the Deed of Cession but “not otherwise,” and that cession was subject to the terms and effect of Florida Statutes.

Gulf Coast Solar argued that the U.S. and Florida supreme courts have definitively held the property is exempt from taxation because it is located on a federal enclave under the exclusive jurisdiction of the federal government. But the Court of Appeal found the federal enclave doctrine much more “nuanced.” First, said the Court, because the property is on land leased pursuant to the Military Leasing Act, Congress consented to taxation. Under the Military Leasing Act, the “interest of a lessee of property leased under this section may be taxed by state or local governments.” Additionally, even if Congress had not consented to taxation under the Military Leasing Act, the property would be subject to taxation pursuant to Florida law and the Deed of Cession. The Deed exempted the property from taxation so long as it was occupied by the United States for the purpose set forth in the Deed of Cession, and it no longer was. Similarly, said the Court, § 6.04, Florida Statutes, exempts property conveyed to the federal government for “needful” federal purposes while it continues to be “owned, held, used, and occupied by the United States for the purposes” set forth in the statute “and not otherwise.” Once the property was leased for private enterprise the property, the Court held that it was no longer exempt under the Deed of Cession and applicable Florida statutes.

Gulf Coast Solar Center I, LLC v. Busbee, — So.3d —- (Fla Dist Ct App, July 19, 2021) 2021 WL 3029547.