Member News

Property Tax Update from IPTI: September 2017

American Views

New York State–

FIBER OPTIC CABLE—IS IT REAL PROPERTY?

The majority of jurisdictions the United States have some form of tax on what is known as tangible personal property. The
definition of personal property for tax purposes in the US covers a broad range, including anything from motor vehicles and boats to items such as office computer and telephone systems, and even office carpeting and furniture.

It is in those jurisdictions that do not levy a personal property tax that the greatest arguments arise, because if something cannot be firmly included within the definition of real property, then for all intents and purposes it will legally escape that form of taxation.

New York State is one such jurisdiction in which these conflicts have arisen over the years. The state’s real property tax law, beyond the obvious “land and building”, seeks to pull into its orbit items such as boiler, elevators, certain energy and power generating apparatus, certain installations and equipment of electrical, telephone, gas and other utility companies, equipment of and railroad companies, and in more recent times, certain telecommunication, data and voice company equipment.

Part of the problem for taxing authorities, courts and assessors is that technology is changing and evolving at lighting speed, and both the legal and tax systems are insufficiently fleet of foot—or perhaps not flexible enough—to keep pace with such developments. Also, the courts will increasingly find themselves in new territory when it comes to identifying what is and is not taxable property, given that many tax laws have their underpinnings in much simpler less technologically-laden times.

Just such a question arose in a case we reported about last year, that of Level 3 Communications vs. Clinton Count. In, the plaintiff telecommunications company sought a declaration from the court that its fiber optic installations were not taxable as real property. The lower court ruled that such installations were taxable real property under New York State law. The lower court also ruled that even if plaintiff prevailed on the issue of taxability, it was not entitled to tax refunds because it had paid the taxes voluntary.

The telecom company appealed. The Appellate Division of the New York State court system reversed on the issue of taxability, finding that while fiber optic cables “undeniably transmit light”, they do not “distribute” it, as was required by state law for inclusion in the category of taxable real property.

The Appellate Division went on to opine that since the state legislature was aware of fiber optic technology when the specific tax law was amended, it would have included fiber optic transmission lines as taxable had it desired to do so. Despite this reversal on the seminal question of what is and is not real property, the denial of tax refunds was upheld, on the rationale that appropriate legal notice had not been given to the government and that the taxes were not paid under protest.
Now this month (September 2017), the high court of New York—the Court of Appeals—denied permission to appeal and Level 3 is now “good law”. With the never-ending forward march of technology, we should fully expect many more such cases around the US (and one would assume globally as well), seeking to push the envelope even further, be it from the government side or the private sector. Hopefully, the courts and legislatures will be able to fairly and cogently respond.
Around the U.S.-

HAWAII—OMITTED ASSESSMENTS:

What happens when the assessor fails to assess? And claims it to have been a mistake? Can they claw back?

Local property tax laws and practices vary as to whether a jurisdiction has the legal right to retroactively assess taxes in those situations where they claimed to have not done so due to mistake or oversight. These so-called “omitted assessments” can occur due to a computer glitch, a mistaken listing of property as exempt when in fact it was not, or even the assessor’s office completely overlooking an entire tract of land.

There are all variety of “correction-of-error” provisions in property tax statutes around the country, which can deal with most situations, but when the stakes are high enough, litigation can and will ensue.

In Maui County, Hawaii, a court ordered the county to refund $10,700,000 in property taxes to two time-share owners’ associations that were in litigation with the county over what the associations deemed to be an unfair classification of time shares into the highest property tax rates.

To be clear, the classification litigation, commenced in 2013, sought about the return of about $30,000,000 in back taxes. In 2016, while that case was pending, the county retroactively re-assessed the associations for additional property taxes back to 2006-2008. The county claimed that while preparing for the classification litigation, they discovered that due to assessment backlogs, they had overlooked levying taxes against the individual condominium properties. The county claimed that the owners had received a windfall by its omission, and that therefore it had to correct the error by assessment the additional $10,700,000.

The associations countered that the 10-year retroactive levy was a scheme to offset the $30,000,000 in taxes that were at stake in the classification litigation. The court found on the associations’ favour and ordered the retroactive levy to be refunded, stating that the county had abused its power. Maui County officials were obviously none too pleased with this ruling, and as of this writing, the underlying litigation is still pending.

WISCONSIN—DARK STORE DANGER:

Local officials in the State of Wisconsin are urging the State legislature to pass tax laws making it more difficult for owners of large big-box retail properties to obtain property tax reductions based on “dark store theory”.

As has been widely reported here and elsewhere, the dark store theory has been sweeping and—depending upon one’s point of view—haunting courts, legislators and local governments, especially in heartland states such as Indiana, Michigan and Wisconsin.

Proponents of the dark store method of taxation essentially argue that big-box retail properties are purpose-built for the specific user (for example: Home Depot, Walmart, Sam’s Club), and that by virtue of their extreme size (often exceeding 100,000 square feet on one level), layout, amenities and infrastructure, they only have top value to those users for which were built. Given that, and the fact that when these properties do come up for sale, it is sometimes because the occupant could no longer “make a go of it” in that market, the argument is that these properties have little if any value to anyone else.

Therefore, the argument goes these stores should be valued for tax purposes as if “dark” and unrentable, not as thriving going concerns.

Obviously, this is of great concern to local taxing authorities who have relied to a sometimes very high degree on the property tax revenue—not to mention sales tax—from these big boxes. Responses have been varied. Some courts have agreed with the theory and some have not, and some state legislatures (such as those of Indiana and Michigan) have passed measures to prevent vacant or dark stores from being used as the basis for tax valuation for occupied, fully operating property. On the other hand, some people argue that value for tax purposes, being intrinsically a measure of what the market will bear, should remain the province of appraisers and other market experts, and not be subject to rigidly prescribed laws governing the approach to valuation.

TEXAS, FLORIDA AND BEYOND:

The tragic hurricanes that have ripped through the states of Texas and Florida recently, as well as the US commonwealth of Puerto Rico, and the islands of Dominica, Barbuda, St. Martin and the US Virgin Islands, have caused catastrophic loss of life. And let us not overlook the tragic recent earthquake in Mexico City.

These natural disasters have also damaged or in some cases completely destroyed local economies, infrastructure and property, and in sums not as yet capable to full calculation.

While the current focus is and must be on rescue and recovery of human life to the greatest extent possible, at some point an economic reckoning will be necessary. The story it tells may be most painful to those places that hitherto have relied so heavily on real estate (such as the tourisms islands in the Caribbean)—and/or real estate tax (such as Texas and Florida)—for their major source of operating revenue.
Texas and Florida are among just a handful of US states that have no state income tax, making the significant loss of property taxes for the foreseeable future particularly acute. These are jurisdictions that will still have to provide the traditional services of schools, police and fire protection, and infrastructure maintenance. Now, with massive rebuilding on the horizon and a shrunken property tax base, governmental priorities will have to be revisited and reshuffled.

Federal financial assistance and private insurance cannot supply everything that will be needed. It will be interesting to see how this unfolds, and what creative ideas for non-property tax revenue sources come about when the property tax base is so severely impacted.

European Views

The EACC, in partnership with the International Property Tax Institute (IPTI), wants to keep members up to date with the latest developments in property taxes both in the USA and Europe.

IPTI has put together a selection of brief reports from articles contained in IPTI Xtracts which can be found on its website (www.ipti.org).

As far as Europe is concerned, this month’s report includes articles on France, Greece, Ireland, Portugal, and the United Kingdom. There is a separate IPTI report on the United States, with a focus on New York.

France: Wealth Tax Property Valuation Rejected

a couple who sought to reduce their French wealth tax bill by a low valuation of their home face an additional tax bill of €250K.

The couple were owners of a luxurious 1,000m2 villa situated on an elevated site in the commune of Roquebrune-sur-Argens, in the department of Var on the Cote-d’Azur. 

The property enjoyed a panoramic view overlooking the bay of Saint-Raphaël, widely regarded as one of the most beautiful bays in the world.

At stake for the couple was a substantial increase in their wealth tax bill for the three years 2008-2010, imposed by the tax authority in 2011 following a tax inspection, which resulted in a re-valuation of their home. 

The additional bill presented to the couple amounted to over €250,000, a sum which included penalties and interest.

In their wealth tax (Impôt de solidarité sur la fortune – ISF) declarations for the three years in question, the couple had declared the value of their home in 2008 at €1,030m and €740,000 for 2009 and 2010.

As part of the proceedings they obtained independent valuations, which ranged from €1,487,000m to €3,290,000, valuations that were not accepted by the court as the elements of comparison used were considered to be deficient.

The tax authority estimated the value of the property at around €6million – €5,940,000 for 2008, €6,072,000 for 2009 and €6,231,000 for 2010.

In arriving at their valuation, the tax authority used comparisons from neighbouring communes, which they justified on the grounds that that there was no comparable property in proximity to the villa, an approach the couple contested.

The tax authority also produced evidence of an advertisement for the sale of the property on a website, with a sale price of €6,800,000, describing it as ‘une propriété d’exception’.

The couple argued that in coming to their valuation the tax authority had ignored the presence of a mobile telephone mast located at the rear of the property, which they considered depreciated the value of the property.

The court rejected any discount for the mast as it was barely visible from the property and did not affect the panoramic view of the bay

Greece: Syriza Orders Property Seizures if ENFIA Tax Unpaid

Already buried under an avalanche of tax hikes imposed by the ruling Radical Left SYRIZA-led coalition – which promised tax cuts – Greek property owners were hit with another 3.15 billion euros ($3.79 billion) in the ENFIA property tax surcharge the government swore to end.

Any of the 7.4 million property owners who are not able to meet the charge face the prospect of confiscation, the newspaper Kathimerini said. SYRIZA’s coalition, which includes the pro-austerity, marginal, jingoistic Independent Greeks (ANEL) also allowed banks to foreclose on homes of people who can’t pay mortgages because of big pay cuts, tax hikes, slashed pensions and worker firings, reneging on another pledge.

Making it even worse, the ENFIA bills were based on valuations for properties far higher than they are, the newspaper said, in a bid to maximize revenues even from buildings that have little value or can’t be rented.

The bills were sent electronically through taxpayers’ accounts. Greece requires all tax filings be done online.

The tax extends all the way down to those who are required to pay because of income standards, which means one million people will receive bills under 50 euros ($60.20) although 66,000 taxpayers are exempt and another 1.2 million will receive a 50 percent discount for similar reasons. The tax can be paid in five monthly installments, starting in September.

The major rival New Democracy lashed out at the ENFIA bills that Prime Minister Alexis Tsipras said he would cease, but kept going on orders of the country’s international creditors to whom he surrendered.

“Our fellow citizens, who are already exhausted from paying taxes, now have to pay another 3.1 billion euros for ENFIA,” said New Democracy spokesman Vassilis Kikilias, pointing out Tsipras’ promise two years ago to scrap the tax and after that fell through, to reduce it.

Conservative leader Kyriakos Mitsotakis, who has taken big leads in polls, has pledged to reduce ENFIA by 30 percent during his first two years in power although SYRIZA noted the tax was first imposed under a New Democracy-led coalition.

The government also argued that it had reduced charges for those on lower incomes and accused New Democracy of “lacking the political courage” to admit that it was wrong to vote against it.

Ireland: Property tax must be based on new valuations, think tank says

Freezing current valuations could prompt constitutional challenge, Public Policy says

It is “critical” that local property tax be based on up-to-date valuations from 2019, a think tank has said – even if it is to lead to increases of as much as 125 per cent for some homeowners.

Public Policy, an independent think tank chaired by Prof Frank Convery and funded by Atlantic Philanthropies, says in a new paper that using up-to-date valuations is “important in sustaining public support for the property tax”, noting that the anomalies which arose from the failure to use up-to-date valuations for houses for purposes of rates was a significant contributory factor to the abolition of rates on houses in 1978.

Moreover, freezing current valuations, which are based on 2013 prices, could potentially expose the tax to constitutional challenge, as occurred in 1982 with local authority rates on agricultural land.

“Implementing a revaluation is politically difficult. The longer it is postponed the more difficult it becomes” Public Policy said.

In 2015, the then minister for finance, Michael Noonan, decided to delay the revaluation date from November 1st, 2016, until November 2019, with the new valuations taking effect from 2020.

However, given the sharp rise in house prices since, the fear is that opting for another valuation could lead to some homeowners in areas where property prices have rocketed paying significantly higher increases than others. A report in this newspaper, for example, found that if the Government sought to impose new valuations based on market prices, some homeowners could see increases of as much as 125 per cent in their annual bill – while others would see only marginal increases.

To address this, Public Policy said that one approach could be to reduce and vary the national rate of tax in each local authority if necessary if it is desired to avoid a substantial increase in liabilities. The tax is currently levied at a rate of 0.18 per cent, but local authorities have the discretion of increasing or decreasing this by 15 per cent.

Ireland: populism trumps public interest

Millions of euros that might be used for housing adaptation grants, public facilities or homeless services voted away

The concepts of solidarity and social justice receive only lip service in this State. A person’s wealth, housing and income tend to influence their treatment by both politicians and officials. The homeless and those in need of social housing rarely vote and are pushed to the back of the queue. People seeking affordable homes do better. But committed voters who live in private accommodation receive maximum political attention.

In the teeth of social hardship and a growing housing shortage, councillors in all four Dublin districts have voted since 2013 to cut property taxes by the limit of 15 per cent. They did this in spite of warnings by local managers that the loss of income would damage services for the general public. Millions of euro that might otherwise have been used for housing adaptation grants, public facilities or homeless services were voted away.

It continues to happen. Elected representatives in Dún Laoghaire Rathdown voted this week to cut the property tax by 15 per cent for 2018, in spite of official warnings that this may lead to increases in council rents, commercial rates, other fees and reductions in services. Fingal councillors were more restrained. Following similar warnings, they decided to cut charges by 10, rather than 15 per cent. Dublin City and Dublin South councillors will vote in the coming weeks. Councillors complain regularly about inadequate government funding for special projects, even as they curry favour with homeowners by cutting charges. The populist nature of the exercise is evident when parties that might be expected to favour taxes on wealth and property – such as Solidarity and Sinn Féin – lead the charge in favour of maximum tax concessions.

We have become a highly stratified society. A fierce determination exists among the residents of leafy suburbs to protect their status and property values. The provision of Traveller accommodation nearby is often regarded with hostility. The housing of homeless families is resisted. And the social mix in planned housing estates, involving social, affordable and private homes, generates such friction that the local authority element can shrink to 10 per cent. With a social housing waiting list of more than 10 years in Dún Laoghaire Rathdown, the wealthiest Dublin council, that is an untenable situation.

Since domestic rates were abolished almost 40 years ago, councillors have had little say on fundraising. The property tax has changed that. But some councillors have yet to accept that this is not a mechanism for securing their re-election but an invitation to provide better community services. House values will be revised after 2019 and Taoiseach Leo Varadkar has suggested local authorities might be given greater flexibility in varying the property tax. Councillors should first begin to take their responsibility seriously.

Portugal: Warns Couples To Register, To Pay Less Property Tax

Couples who live together in Portugal are being encouraged to report such to the tax authority, to be eligible for a lower bill under the country’s new municipal property tax.

The municipal property tax (IMI) was introduced in January 2017. It is charged at a rate of 0.7 percent for properties worth more than EUR600,000 (USD715,912), with a one percent rate applying to the value of a property beyond EUR1m. A number of other rules apply.

For couples, one of the benefits of the new tax is they access an exempt threshold that is double that for individuals. Instead of the EUR600,000 allowance for individuals, couples become liable to IMI for properties valued over EUR1.2m, but they are also jointly and severally liable for the tax due.

In addition, for couples, the one percent rate is levied on the portion of the property value above EUR2m, rather than EUR1m (for individuals).

The tax authority is allowing taxpayers until the end of this month to make a declaration. The deadline had been May 31.

UK: One company owner every week facing jail for unpaid business rates

At least one small business owner a week is facing prison for failing to pay their business rate bills, new research has revealed.

Courts in England and Wales handed down 54 prison sentences of up to 90 days on business owners for non-payment of rates in the year to the end of March, up from 52 the previous year, according to figures compiled for the Press Association by business rent and rates specialists CVS.

The figures come as businesses struggling with crippling rate bill hikes since the controversial recent revaluation in April are being warned to pay up or face prison.

One local authority – Hambleton District Council in North Yorkshire – said last month it was launching legal proceedings for committal to prison for business owners with a rates debt who fail to pay.

CVS, which uncovered the figures on prison sentences through a Freedom of Information request to the Ministry of Justice, said sole traders and self-employed business owners are most at risk of a “disproportionate financial and legal burden” from falling behind with debt payments.

While limited companies can be placed in administration if they are unable to pay debts such as business rates, sole traders and self-employed business owners can ultimately face prison.

The recent business rates revamp has seen firms across the UK hit with soaring bills after the value of properties has rocketed since the last overhaul seven years ago.

Swathes of businesses are appealing against their revaluation, but must still pay their bills or face enforcement action through the courts while waiting for a decision.

The Government has pledged a £300 million relief fund, but there has been mounting anger as delays have meant that just two out of almost 100 local councils had paid out as of last month.

Mark Rigby, chief executive of CVS, said: “It is the only tax not related to the ability to pay, so it places both a disproportionate financial and legal burden on sole traders.”

The collapse of retailer Jaeger earlier this year highlighted the protection offered to companies against debts such as rates bills.

It owed trade creditors £4.96 million when it went into administration, of which just over £2 million related to unpaid business rates to 39 separate councils. They are expected to receive less than 2p in the pound.

UK: Scotland – Time to act now on business rates 

Hospitality and catering is a vital contributor to Scotland’s economy. It not only sustains our capital city throughout the year but is also a life-saver for many of our rural communities in the Borders and Highlands. 

Overall, its 8,400 businesses account for 10 per cent of all employment. And that contribution is especially important when other sectors such as manufacturing are, as now, under pressure. 

But it has had to bear a disproportionate burden of business rates – and for a sector comprising many small, family-owned and run firms, this burden is acute. 

Scottish Parliament research reveals that non-domestic rates for companies in the hotels and food services sector now amount to an average 11.6 per cent of operating profit – more than three times the figure across the whole of the economy. 

Protests have been rising since hotels found themselves facing increases in their annual rates bills of 37 per cent. As a labour-intensive, people-focused industry it also faces cost pressures from the introduction of the National Living Wage and calls for a tourism tax. The case for change here is now compelling. 

The Scottish government recognised as much when it set up a flagship business rates review under the chairmanship of former RBS banker Ken Barclay. And earlier this year Finance Secretary Derek Mackay was forced to provide emergency relief for firms in the catering sector when he announced a cap on 2017-18 bill increases at 12.5 per cent through a new national relief scheme.

But the package was dismissed by retailers as “another sticking plaster on the suppurating wound” of an unreformed business rates system.

Pressure has continued to grow from small business and hospitality lobbies. Their chief concern is that the relief will only last one year and will not stop the proposed rateable value increases. Rates bills are set to rise substantially from 2018 onwards. Businesses have been advised to have their rates assessments reviewed as failure to submit an appeal by the end of next month will lead to a loss of right to challenge any future rates bills, potentially resulting in excessive rates bills until 2022.

Sector representatives have also questioned the Scottish assessors’ valuation methodology – which in many cases results in excessive rates assessments. Mr Mackay should delay reform no longer.