MASSACHUSETTS – Letters that accompanied a thermal energy provider’s quarterly tax payments did not satisfy statutory requirement of filing an abatement application

Veolia Energy Boston, Inc., appealed from the Appellate Tax Board’s granting of a motion to dismiss its appeal from the denial of its application for abatement of personal property assessed for fiscal year 2015. Veolia operates a steam manufacturing and distribution system that provides thermal energy to customers in the city of Boston. The system consists of boilers, a network of pipes, and appurtenant equipment located throughout the city. Previously, in 2014, when Veolia was assessed a personal property tax of approximately $2 million on its machinery and equipment, it had timely filed an application for abatement on the basis that it was exempt from paying personal property tax on all manufacturing machinery, including all components of its systems, because it was classified as a manufacturing corporation by the Commissioner of Revenue. The Assessor denied the application for abatement, and Veolia successfully appealed to the Tax Board, which concluded that the property at issue was exempt. Meanwhile, Veolia again was assessed a tax for fiscal year 2015, approximately $2.2 million, on the same machinery and equipment. Veolia timely paid each installment of the tax due in quarterly payments, accompanied by a letter addressed to the “City of Boston Collector of Taxes” noting that it had “filed a Petition under Formal Procedure with the Appellate Tax Board [for fiscal year 2014], the outcome of which may affect the tax assessment for this period and others.”

The deadline for filing an abatement application for fiscal year 2015 was February 6, 2015. On May 14, 2015, Veolia received notification that the assessors “[had] no record of a Fiscal ‘15 abatement [application] being filed,” to which it responded that the 2014 Petition [application for abatement] would apply to all tax years, including [fiscal year] 2015.” Thereafter, on May 28, 2015, Veolia filed an abatement application with the assessors for fiscal year 2015 on State Tax Form 128, a form approved by the Commissioner. The Assessors denied the application as untimely filed, and Veolia appealed to the Tax Board.

Prior to the hearing before the Tax Board, the Assessors filed a motion to dismiss Veolia’s appeal on the grounds that the Tax Board lacked jurisdiction because Veolia’s abatement application had not been filed within the time period prescribed by the statute. Veolia opposed the motion, contending that its letter to the tax collector dated January 21, 2015, which accompanied its third quarterly tax payment, constituted a valid abatement application because it had provided notice to the Assessors of Veolia’s challenge to the assessed tax and had incorporated by reference the application for abatement for fiscal year 2014. According to Veolia, the abatement application filed on May 28, 2015, was merely a “protective” filing because, if its then-pending appeal from the assessors’ denial of its fiscal year 2014 abatement application was successful (as turned out to be the case at the Tax Board, but as to which judicial review remains pending), the Tax Board’s decision that the property is exempt from taxation would be binding on subsequent tax assessments. The Tax Board agreed with the Assessors and dismissed Veolia’s appeal.

The Appellate Court affirmed, reasoning that Veolia had failed to satisfy the statute’s jurisdictional requirements in three respects, any one of which would warrant dismissal of its appeal. First, Veolia’s January 21, 2015, letter to the tax collector did not constitute an “[application] in writing to the Assessors.” Second, that letter was not “a form approved by the commissioner.” And third, while the abatement application filed on May 28, 2015, was submitted on State Tax Form 128, a form approved by the Commissioner, it was nonetheless filed more than three months after the deadline of February 6, 2015.

Veolia Energy Boston, Inc. v. Board of Assessors of Boston, — N.E.3d —- , 95 Mass. App. Ct. 26 (Mass. App. Ct., March 8, 2019).

MINNESOTA – Tax Court is bound by Rule 8100, which requires use of both the cost and income approaches in the valuation of utilities, including pipeline systems, even where the Tax Court believes it will result in an inaccurate valuation ¹

Enbridge Energy challenged the Commissioner of Revenue’s valuation of its petroleum pipeline system for property taxes payable in 2013, 2014, and 2015. The Tax Court consolidated the cases for trial and concluded that the Commissioner had overvalued Enbridge’s pipeline system for all three years, issued a new valuation for all three years, and ordered the Commissioner and Enbridge to “discuss procedures for addressing the method by which the Court should allocate” the pipeline system’s unit value between Minnesota and other states.

In determining the value of the Enbridge pipeline system, the Tax Court rejected both the sales comparison approach and the cost approach. The cost approach is explicitly used in Minnesota Rule 8100, an administrative rule adopted by the Commissioner to guide the valuation of utilities, including pipeline systems. But the Tax Court concluded that it was not bound by Rule 8100 in determining market value, because the formula in the Rule applied only to the Commissioner in her valuation of the pipeline system.

Having rejected the cost approach, the Tax Court applied the income approach to valuation, setting the unit value of the pipeline system for the three years at issue. The Tax Court declined, however, “to allocate [the] system unit value between Minnesota and other states,” because the Court said it was not limited to the formula the Commissioner used under Rule 8100 and because it had not utilized the cost approach, which therefore rendered the allocation formula in Rule 8100 unworkable. The Tax Court therefore “invited the parties to submit proposals for allocating” the system unit value.

The Commissioner objected to the Tax Court’s conclusion that it was not bound by Rule 8100 when valuing a pipeline system and in allocating system unit value, and filed a timely petition for discretionary review. The Minnesota Supreme Court granted her petition.

The Supreme Court began by summarizing the administrative procedure for assessment and taxation of pipeline systems in Minnesota. Generally, property tax is assessed in Minnesota by local taxing authorities. The Minnesota Legislature has created several exceptions, one of which is the valuation of pipeline systems. By statute, the Commissioner must annually list and assess “[t]he personal property, consisting of the pipeline system of mains, pipes, and equipment attached thereto, of pipeline companies and others engaged in the operations or business of transporting products by pipelines.” The Commissioner then must provide this list and assessment to the various taxing jurisdictions in which the property “is usually kept”—that is, through which the pipeline runs. Instead of providing an individualized valuation, the Commissioner assesses pipeline property as a whole, using the unit-rule method.

The Legislature has given the Commissioner considerable authority to make administrative rules, and a validly adopted administrative rule becomes a part of the statute under which it is adopted. Pursuant to her rule-making authority, the Commissioner promulgated Rule 8100, regarding ad valorem taxes for utilities, including pipeline systems. Under the Rule, valuation and allocation is a four-step process. First, the Commissioner must “establish [. . .] an estimate of the unit value for each utility company.” Next, the “resulting valuation is allocated to each state in which the utility company operates.” The Commissioner then subtracts from Minnesota’s allocation the “value of property located in Minnesota that is exempt from property tax or that is locally assessed.” Finally, the Commissioner apportions the remaining allocation “to the various taxing districts” in which the pipeline property is located.

In establishing unit value, Rule 8100 calls for an equal weighting of the cost and income approaches. If the Commissioner concludes “the market indicator can be quantified, is reliable, and is indicative of value for a company,” she may include it, but its weight cannot exceed five percent. The Commissioner is also able to make weighting adjustments for obsolescence and other indicators of value, so long as she “state[s] in writing the findings that necessitate deviation from the default weightings. . . .” The allocation equation, however, relies primarily on cost factors. In addition to allowing for discretion in the elements of the valuation formula, the Rule also includes a general reservation of the right for the Commissioner “to exercise discretion whenever the circumstances of a valuation estimate dictate the need for it.”

The Supreme Court observed that Rule 8100 is binding on the Tax Court, which is not free to ignore it. In this case, the Tax Court erroneously concluded that it “was not bound by Rule 8100 in determining market value,” for two reasons. First, the Tax Court implied that the formula provided by Rule 8100—the use of which, the Tax Court noted, was made necessary by the Commissioner’s “limited staff and limited expertise” and the statutory time constraints under which the Commissioner must assess pipeline property—was likely to lead to an incorrect valuation, whereas the Tax Court’s proceedings, which it asserted are free of such constraints, would not. Second, the Tax Court concluded that, because the text of Rule 8100 is “directed solely to the Commissioner” rather than to the Tax Court, it “cannot make Rule 8100 applicable to the Tax Court simply by substituting ‘Tax Court’ for ‘Commissioner,’ at least not without violating the principles of statutory interpretation.”

The Supreme Court observed that it had rejected the Tax Court’s first reason in a prior decision. The Tax Court’s second reason, said the Court, misapprehends the role of the Tax Court. It is true that the Rule as promulgated by the Commissioner speaks of actions the Commissioner must take in fulfilling her duty to determine market value. If a taxpayer objects to the Commissioner’s valuation, it is the duty of the Tax Court to determine whether the Commissioner has correctly valued property pursuant to the relevant statutes and rules. If the Tax Court concludes that the Commissioner has not correctly valued the property, the Tax Court must then do so itself, pursuant to those same statutes and rules. Rule 8100 applies not only to the Commissioner but also—“by extension”—to the Tax Court. Accordingly, said the Court, the Tax Court is bound by Rule 8100, and it erred by concluding otherwise.

Commissioner of Revenue v. Enbridge Energy, LP, , 923 N.W.2d 17 (Minn. Sup. Ct., Feb. 13, 2019).

ARIZONA – Court of Appeals holds that unless the Legislature indicates otherwise, the law governing the valuation method and classification of property for property tax purposes is the law in effect on the valuation date

Siete Solar and several other companies operate electric generation facilities in Arizona that use renewable energy equipment. As part of the American Recovery and Reinvestment Act of 2009, they received either an investment tax credit or a cash grant in lieu of the credit for a portion of the costs to build their respective facilities.

On or before August 31 of each year, the Department of Revenue must determine the final valuation of taxable renewable energy equipment as it existed on January 1 of the same year, the “valuation date.” The final valuation is then used to assess the tax for the upcoming year, the “tax year.” In February of each year, the Department provides a form to facility owners requesting information necessary for the valuation of the property. The Department then calculates the value of renewable energy equipment pursuant to A.R.S. § 42-14155 and A.R.S. § 42-14156. Before an amendment in 2014, A.R.S. § 42-14155(B) directed the Department to value renewable energy equipment at “twenty per cent of the depreciated cost of the equipment,” but provided no definition of “cost.”

In 2013, Siete Solar and the other companies each submitted an annual report to the Department for the 2014 tax year reporting the cost of their facilities. Their respective reports calculated the cost of the energy equipment by subtracting the amount received in tax incentives from the actual cost. However, the Department disallowed the deducted tax-incentive amounts before applying the valuation method to determine the properties’ full cash value. The Department’s refusal to deduct the tax-incentive amounts from the actual cost increased the taxpayers’ tax liability. They appealed to the State Board of Equalization, which upheld the Department’s final valuation. They then appealed the Board’s decision to the Tax Court.

In 2014, while their appeals were pending, the Arizona legislature enacted an amendment to A.R.S. § 42-14155 that altered the valuation method by specifically allowing taxpayers to deduct tax incentives from the cost of renewable energy equipment. Because the 2014 Amendment did not contain an emergency provision or a retroactivity clause, it became effective on July 24, 2014, the general effective date for legislation enacted during the 2014 session. Eventually, the 2014 tax year dispute resulted in an appeal to the Court of Appeals. On appeal, Siete Solar and the other companies argued that the 2014 Amendment should apply to their 2014 tax year appeal because it became effective before the taxes in question were actually assessed.

In August 2014, while the dispute over the 2014 tax year valuations continued, the Department issued the final valuations for the 2015 tax year. Siete Solar and the other companies had again reported their cost as the actual cost minus the tax incentives. The Department, applying the pre-amended version of A.R.S. § 42-14155, disallowed the tax incentive amounts to be deducted from the actual costs before computing the taxpayers’ final valuations. They appealed the 2015 final valuations and moved for summary judgment, asserting the Department was obligated to use the valuation method prescribed in the 2014 Amendment for their final valuations. The Tax Court dismissed the taxpayers’ appeal of the final valuations for the 2014 tax year on the basis of a related decision in a prior case and denied the taxpayers’ motion for summary judgment on their challenge to the final valuations for the 2015 tax year.

On appeal, Siete Solar and the other companies contended that the Tax Court misapplied the law by refusing to apply the 2014 Amendment to the final valuations for the 2015 tax year. They claimed that the Legislature intended for the 2014 Amendment to apply to the 2015 tax year, and that the principles of retroactivity need not apply because the 2014 Amendment was enacted before the Department set the final valuations for the 2015 tax year. They argued that A.R.S. § 42-14153(C) “merely fixed the date the parties must use to determine full cash value.” According to them, the Legislature may change the valuation method at any time during the valuation year and the application of the new valuation method to property—as it existed on the valuation date—is not a retroactive application of the law. The Court of Appeals disagreed, affirming the Tax Court’s decision and holding that unless the Legislature indicates otherwise, the law governing the valuation method and classification of property for property tax purposes is the law in effect on the valuation date.

Siete Solar, LLC v. Arizona Department of Revenue, 2246 Ariz. 146, 435 P.3d 1052 (Ariz. Ct. App., Jan. 29, 2019).

NORTH CAROLINA – Equipment used “directly and exclusively for the conversion of solar energy to electricity” was tax exempt under N.C. General Statutes § 105-275(45), even though under construction

Following hearings before the Alamance County Board of Commissioners, Snow Camp and eight other solar energy providers received notice that the decision of the Board was to deny their requests for 2016 tax exemptions on solar energy electric equipment. They appealed the decisions to the North Carolina Property Tax Commission, and the appeals were consolidated.

The taxpayer solar companies and the Counties filed cross motions for summary judgment. The Property Tax Commission, sitting as the State Board of Equalization and Review, granted summary judgment in favor of solar companies, giving partial tax-exempt status to partially constructed solar energy equipment. The order was predicated on the conclusion that the partially constructed equipment satisfied the statutory definition for tax exemption set forth in General Statutes § 105-275 (granting a property tax exclusion for “equipment used directly and exclusively for the conversion of solar energy to electricity”). The Counties appealed.

Both the taxpayers and the Counties acknowledged before the Property Tax Commission that construction of the respective solar energy systems was completed during the 2016 calendar year. But on the tax assessment date, January 1, 2016, the taxpayers’ respective solar energy systems were all under construction. The Counties contended that because the taxpayers’ solar energy systems were under construction on January 1, 2016, they were not “used” for the conversion of solar energy to electricity on the assessment date, and thus, the taxpayers’ solar energy systems were not eligible for tax exemption under N.C. Gen. Stat. § 105-275(45). The Court of Appeals agreed with the taxpayers. Relying on Seminary, Inc. v. Wake Cty., 251 N.C. 775, 782, 112 S.E.2d 528, 533 (1960), which held that real property on which a cafeteria was being constructed for the benefit of an adjacent seminary was exempt from taxation, the Court of Appeals affirmed the Property Tax Commission’s decision.

Matter of Snow Camp LLC, 821 S.E.2d 489 (N.C. Ct. App., Nov. 20, 2018).

OREGON – “New property” exception to Article XI § 11 of the Oregon Constitution, which provides that the assessed value of a unit of property in any given year cannot exceed the previous year’s assessed value by more than three percent, does not apply to property previously subject to, but not subjected to, central assessment

DISH, a satellite television provider, filed complaints against the Oregon Department of Revenue, objecting to the switch from local assessment to central assessment of its property, which resulted in a 100 percent increase over the prior year’s assessment. The Department of Revenue maintained that central assessment was required because DISH was using its property in a “communication” business, citing ORS § 308.515(1)(h), which states that property used in certain businesses, including “communication” businesses, shall be centrally assessed by the Department of Revenue. Although DISH was forced to concede defeat on that issue based on an intervening decision by the Oregon Supreme Court in DIRECTV, Inc. v. Dept. of Rev., 360 Or. 21, 377 P.3d 568 (2016), DISH further claimed that the drastic increase in the assessed value of its property starting in the 2009-10 tax year violated “Measure 50” (Article XI § 11 of the Oregon Constitution, which provides that the assessed value of a unit of property in any given year cannot exceed the previous year’s assessed value by more than three percent). The Department argued that because DISH’s property had been newly added to the central assessment rolls in 2009, the property fell into an exception to the three-percent cap on increases in assessed value for “new property or new improvements to property” (Or. Const., Art. XI § 11(1)(c)(A)). The statutes implementing the constitutional provision define “new property or new improvements” to include “the addition of . . . property to the property tax account” (ORS § 308.149(5)(a)(C)). The Tax Court rejected the Department’s “new property” theory and held that the Department’s assessments of DISH’s property in the tax years after 2008-09 were unconstitutional.

The Department appealed that decision on the basis that the “new property” exception applies, and the Supreme Court agreed. The Court framed the issue as a potential conflict between two legal constructs—the statutory requirement that certain types of businesses be centrally assessed under ORS §§ 308.505 to 308.665, and the limitations on the assessed value of property set out in Article XI § 11 of the Oregon Constitution and its implementing statutes. The Court said the primary question was whether a taxpayer’s property that is moved from local to central assessment falls into the exception for “new property or new improvements to property” set out in Measure 50 and its implementing statutes. That is, does the term “new property or new improvements” in those contexts refer only to property that was created or acquired by a taxpayer in the year before the current assessment year, or can it refer to property that is new to an assessment roll (or to a property tax account on an assessment roll), based on a decision by the taxing authority?

After examining the statutory scheme and the intent of the framers of Measure 50, the Court concluded that, for purposes of both ORS Chapter 308 and Measure 50, the exception for “new property or new improvements” pertains when an assessor lawfully adds real or personal property that has not previously been assessed to a property tax account, as well as when the Department adds property previously assessed under a different account to a new account on the central assessment roll. The Court agreed with the Department that when a company’s property is first subjected to central assessment and unit valuation, the entire unit of property should be considered “new property.” Even if some component parts have been subjected to local assessment, the unit as a whole, which is “categorically different” from its parts, has not.

Dish Network Corporation v. Department of Revenue, 364 Or. 254, 434 P.3d 379 (Or. Sup. Ct., Jan. 25, 2019).

OREGON – Department of Revenue erroneously relied on power purchase agreement that provided biomass cogeneration facility with revenues significantly in excess of what a purchaser of the property on the assessment dates would have been able to negotiate for electricity, capacity, and renewable energy credits, and erroneously considered intangible assets by valuing taxpayer’s entire property and business under the income approach, subtracting only an amount for working capital

In 2009, Seneca Sustainable Energy began construction of a biomass cogeneration facility on property that it owns outside of Eugene, Oregon. The cogeneration facility would generate electricity by burning wood waste produced by Seneca’s nearby sawmill. Around that time, Seneca also negotiated a long-term power purchase agreement, under which it would sell the electricity generated at the cogeneration facility to the Eugene Water and Electric Board (“EWEB”). Among other things, the agreement set the rates that EWEB would pay for electricity, capacity, and renewable energy credits.

Seneca’s facility was located in an area designated as an “enterprise zone,” which allowed the facility to be exempted from property tax on its improvements during the first three years it was in operation. Seneca’s exemption was subject to a condition that Seneca pay a public benefit contribution for each year that it failed to meet certain economic development and employment goals. The public benefit contribution would be a percentage of the amount of property tax that Seneca would have had to pay in the relevant year without its exemption. The amount of property tax that Seneca would have had to pay, in turn, would be based on the Department’s determination of the real market value of the structures, machinery, and equipment that constitute Seneca’s industrial property.

Seneca’s cogeneration facility was completed and became operational in April 2011. The Department of Revenue determined that the real market value of Seneca’s exempt industrial property was $62,065,350. Because of the enterprise zone exemption, no property tax was assessed against most of Seneca’s industrial property for that or subsequent tax years, including 2013-14. However, for each tax year, a portion of Seneca’s property was not tax exempt. Seneca paid property taxes on the real market value of its nonexempt industrial property for both the 2012-13 and 2013-14 tax years.

Seneca failed to meet its economic and development goals for tax years 2012-13 and 2013-2014. The enterprise zone sponsors therefore imposed a public benefit contribution under the enterprise zone contract provisions. Using the Department’s real market value determination for Seneca’s exempt industrial property, as noted on the assessment roll by the County Assessor, the enterprise zone sponsors calculated the public benefit contribution by first determining the amount of tax on the industrial property that Seneca would have owed had that property not been exempt, and then multiplying that amount by the percentage set out in the enterprise zone contract. Seneca objected to the valuation of its property by the Department and appealed to the Tax Court.

The Tax Court rejected the Department’s appraisal as fundamentally flawed in numerous respects, generally agreed with Seneca’s appraiser’s conclusions, and set the real market value of Seneca’s cogeneration facility at $38.2 million as of January 1, 2012, and $19.1 million as of January 1, 2013. The Department appealed, arguing that the Tax Court erred in determining the real market value of Seneca’s industrial property without reference to the terms of Seneca’s power purchase agreement with EWEB.

On appeal, the Supreme Court observed that the Department’s appraiser based his determination of real market value on his understanding that the rates set out in Seneca’s power purchase agreement with EWEB were rates that a purchaser of the facility could expect to receive for electricity, capacity, and renewable energy credits during the tax years at issue and on into the future. Building upon that premise, the Department’s appraiser used the rates that EWEB was obligated to pay Seneca under the power purchase agreement to project future income for the cogeneration facility. He determined that the real market value of Seneca’s property under the income approach was $59.9 million. Seneca, by contrast, presented evidence that, as of the assessment dates, the power purchase agreement resulted in revenues significantly above what a purchaser of the property on the assessment dates could have obtained. Additionally, Seneca presented evidence that, although the power purchase agreement included substantial payments for capacity, it was unusual in the Northwest for utilities buying from cogeneration facilities to pay for capacity due to the constant availability of hydroelectric power. For that reason, such payments would not have been available to a purchaser of the biomass facility on the assessment dates. Similarly, Seneca demonstrated that a purchaser of the biomass facility could have expected little, if any, revenue from renewable energy credits on the assessment dates, because the biggest market for the credits—California—had essentially become closed to Oregon renewable energy generators after a change in California law.

The Supreme Court agreed with the Tax Court’s conclusion that to the extent that the power purchase agreement produced premium returns to Seneca in excess of those obtainable in the market for electricity, capacity, and renewable energy credits as of the assessment dates, it constituted an intangible, so any value attributable to that premium could be taken into account. The Department’s arguments were predicated on its contention that its appraiser correctly determined that Seneca’s power purchase agreement with EWEB reflected market rates on the assessment date. The Tax Court found that predicate to be incorrect and to seriously undermine the Department’s appraiser’s determination of the real market value of Seneca’s property. The Supreme Court affirmed.

Seneca Sustainable Energy, LLC v. Department of Revenue, 363 Or. 782, 429 P.3d 360 (Or. Sup. Ct., Nov. 8, 2018).