PEPennington & Co Property Tax News

Business personal property renditions are due on or before April 15^th.  Late filing or no filing penalties are 10% of the annual taxes.  Extensions are available if addressed in writing.  Contact your local appraisal district or the Texas Comptroller’s office for further details.

April 30^th is the deadline to apply for many types of total exemptions. Additionally it is also the deadline to file a Freeport inventory exemption application.

 May 31 is generally the deadline for filing written protests to the ARB (or by the 30th day after a notice of value is mailed to the property owner, whichever is later).

August 1   Last day to apply for September 1 alternate assessment date for inventory appraisal (Sec 23.12).  October 1-31, tax bills are usually mailed during this month.

January 31 is the last day to pay property taxes without penalty and interest.

The Texas Property Tax code is clear on that a property is located in a Foreign Trade Zone (FTZ) is exempt from property taxation.  We had an appeal in late 2011 in which the taxpayer was able to obtain a FTZ status in late 2010 through application process with a federal agency.  They filed a rendition for the property and noted that the property had obtained a FTZ status.  Unfortunately they filed their rendition late.   A 2011 notice of value was issued and the taxpayer did not file a timely appeal.  After the 2011 tax roll was certified the taxpayer discovered that they had not been granted FTZ exemption.  The taxpayer contacted the appraisal district and over the course of months convinced the staff that they were entitled to FTZ exemption.  The appraisal district (district) decided that since they had already certified the 2011 tax roll to the taxing entities they could not move forward with the exemption.  We appealed to the appraisal review board (ARB) claiming that we were never notified of a rejection of the FTZ exemption which the district had earlier acknowledged in writing that the property did qualify for FTZ exemption.  The ARB ruled in favor of district and the taxpayer filed suit in district court.  A settlement was reach in litigation and the taxpayer agreed to pay a 10% penalty on the original proposed value plus a token amount on returned and damaged inventory which had been returned to the property owner prior to 1/1/12.

There is a clear and important lesson to be learned from the case:

• File renditions timely.
• After receiving a notice of value take action and do not assume anything.
• If a taxpayer obtains or is attempting to gain an exemption notify the district in writhing.
• Document all communications with a district.

How to calculate the 1/3 over-assessed qualification in a 25.25(d) Hearing.

There are two methodologies that allow you to judge whether a value meets the 1/3 over-assessed rule:

1) Using the Current Assessed Value:

Calculation:
**Current Assessed Value X 75% = Threshold for Corrected Value

Ex. Current Assessment: $100,000
$100,000 x 75% = $75,000 Threshold for Corrected Value

In order for the appeal to qualify under section 25.25(d), the Appraisal Review Board must determine that the value of the property in question has a market value of $75,000 or less.

Simplification:

Current Assessment = $100K Threshold for Corrected Value = $75K

As you can see, 25% of the Current Assessment equals 33.33% of the Threshold Value. This illustrates that the ARB must reduce the Current Assessment to $75,000 or it does not qualify. Thus, if the ARB ruling is $75,000 of lower, the property qualifies as overvalued.

2) Based on the Corrected Value (ARB Ruling):

Calculation:
**(Corrected Value X 1/3) + (Corrected Value) = Threshold for Current Assessed Value
Or
**Corrected Value / 75% = Threshold for Current Assessed Value

Ex. Corrected Value = $75,000
($75,000 x 1/3) + $75,000 = $100,000 Threshold for Current Assessed Value
Or
$25,000 + $75,000 = $100,000 Threshold for Current Assessed Value

In order for the appeal to qualify under section 25.25(d), the Assessed Value must be more than $100,000.

Simplification:

Corrected Value (aka ARB Ruling) = $75K Threshold for Assessed Value = $100K
If the ARB ruled that the Corrected Value for a property is $75k, then you would increase the Corrected Value by 1/3. In this case you would increase the Corrected Value by $25,000, giving you a Threshold for Assessed Value of $100,000. If the property is assessed for $100,000 or greater, then the ARB ruling meets the qualification of being over-assessed by 1/3.

On a macro basis today we see the European crisis worsening and to add insult to injury news is arriving that a slowdown in China might be occurring. The conventional thinking is that a worldwide recession could be brewing. However at this particular moment in time we see commercial real estate values generally strengthening as compared to their decline during 2008-2009. With this said I believe Texas appraisal districts will be raising values on all major types of commercial real estate in 2012. Counties, cities and schools district want to see their tax rolls increase to pay for goods and services they provide.
The three most important thing commercial taxpayers should do are:
1. Plan their appeal strategy well in advance of the May 31, 2012 appeal deadline.
2. Utilizing a property tax consultant to ensure the appeal(s) are filed and pursued timely is extremely important. Providing evidence and arguments to the appraisal district staff and / or appraisal review board (ARB) is also essential.
3. Protecting of your rights for either arbitration, litigation or a SOAH Hearing after receipt of an ARB hearing notification.

There are four things to consider in projecting tax liabilities for future years.

1. Estimate the timing of future revaluations and appeals.

2. Projected increases in future tax rates.

3. Legislative changes.

4. National Economy.

It is very important to forecast county reappraisals due to up-ticks in sales activity, market rents and occupancies. Additionally based on historic trends predict if tax rates will decline, remain flat or increase.

Any tax estimate must ask two very important questions:

1. • Will the property owner use tax consultants to exhaust their Administrative Remedy?
2. • Will the taxpayer seek further relief through Judicial Review?

The last two factors are very difficult to predict:

Legislative changes: The Texas Legislative is and has been under great pressure to pass legislation modeled after California’s Proposition 13. The “Cap Legislation” would revamp the manner in which property taxes are administered in Texas. Essentially this procedure would cap valuation increase at 2% per year and revaluation would be limited to when properties are sold. In my opinion one may give some weight to this possibility in the future.

National Economy: Obviously any changes in the national economy would affect future valuations. The latest example of this would be the 2008 recession where we saw values generally decline in 2009 and 2010.

• The First most important step is to make sure that you have filed a timely appeal with the appeal district.
• With an appeal on file most appraisal districts will give you the opportunity meet informally with a staff appraiser to discuss the current valuation.
• Most appeals are resolve at this point in the appeal process.
• If a valuation agreement is not reached the taxpayer is entitled to a formal hearing before the appraisal review board.
• When you prepare for your ARB hearing remember several important points:
• File a request with the appraisal district for a copy any and all evidence they plan to present at your hearing. This must be done 14 days before your hearing.
• Prepare an outline with the relevant facts and follow it during your presentation.
• Provide copies of your evidence for the ARB members and the staff appraiser.
• You will have a short period of time to explain you’re the nature of your protest.
• What relief are you asking for?
• Therefore make your presentation short and concise.
• Be prepared to rebut the appraisal district evidence.
• I have attached a link to the Texas Comptrollers web site.
• This particular link is used to train ARB members.
• http://www.window.state.tx.us/taxinfo/proptax/arbslides/2011_comprehensive_training.pdf
• This link will explain to you;
• The role of the ARB
• Hearing procedures
• The rules of evidence
• Remember if you do agree with an ARB ruling you have three options.
• File suit in district court
• File for bidding arbitration
• File for a hearing before a State Office of Administrative Hearing or SOAH.

First of all, a taxpayer should understand the nature of property taxes in Texas. Property taxes are the primary financial resource for the operation of governmental entities in Texas. This is largely based on the fact that Texas has no state income tax. Annual valuations are determined by local appraisal districts and taxes are generally levied and collected by counties, cities and school districts.
The Texas Constitution sets out five basic rules in regards to property taxes:
• Taxation must be fair and equitable.
• All tangible property must be taxed based on its current market value. The exceptions to this rule are properties receiving exemptions and agricultural valuations.
• All property is taxable unless exempted by state and federal law.
• Taxpayers have a right to reasonable notice of increases in the appraised value.
• Each property in a county must have a single appraised value
Generally speaking filing a property tax appeal involves the taxpayer’s disagreement with an action taken by the appraisal district. The taxpayer may be challenging the appraisal district for the following reasons:

• Disagreement over the appraisal district’s opinion of market value.

• The appraisal district’s denial of an exemption or special valuation.

• The property owner feels that their property is not assessed fairly and equitably by the appraisal district.

• Appraisal district did not send the notice of appraised value to the correct property owner, (failure to give notice).

• The appraisal district’s records contain an error, i.e.: a clerical error, multiple appraisals of a property, and the inclusion of property that does not exist in the form or at the location described in the appraisal roll.

When filing a protest a taxpayer should be aware of the four phases in the property tax process. The Texas Property Calendar is divided into four sections:
January-May (1/1-5/15): The Appraisal Phase.
• The appraisal district collects information to appraise properties for the current tax year.
• Administer exemptions and special appraisals.
• Update property records.
• Taxpayers file personal property renditions and appraisal districts set valuations based on those filings.
• Notices of appraised values are mailed to taxpayers.
May-July (5/15-7/25): The Equalization Phase (The Administrative Remedy).
• The tax roll is submitted to the Appraisal Review Board (ARB).
• Taxpayers file protests.
• The informal and formal appeal process begins.
• After the appeal hearings the ARB approves and certifies the tax roll on or about July 25.
July-September (7/25-10/1): The Assessment Phase.
• Taxing entities receive the certified tax rolls.
• Local jurisdictions adopt budgets.
• Tax rates are adopted.
• Taxes statements are mailed to taxpayers.
• Some taxpayers dispute their ARB rulings and appeal their appraised values to district court for Judicial Review.
October-January (10/1-1/31): Current Collection Phase.
• Taxes are collected by local jurisdictions.
• Taxes become delinquent 2/1
Generally speaking, filing a protest in Texas should be done on or before May 31 of the current tax year or after receipt of a Notice of Appraised Value from the appraisal district. All protest should be executed protest forms provided by the appraisal district or those forms provided by the Texas comptroller’s Property Tax Division. The forms distributed by appraisal districts and the Comptroller’s office allow the taxpayer to denote the reason for their appeal.
In most Texas Counties the taxpayer and / or the representative are allowed the opportunity to have an informal hearing with the appraisal district staff. If the taxpayer does not come to a resolution of their appeal they are entitled to a hearing before the Appraisal Review Board (ARB). Additionally, the taxpayer has the right to seek relief from Judicial Review if the ruling of the ARB is not acceptable to the taxpayer.

Office owners and managers should know that in Texas the second largest operating expense after debt service are property taxes.  Additionally, since the majority of property taxes are generally passed through to the tenant it is extremely important to control them in today’s competitive market.

Texas tax rates are high due to the nature of our property tax system. Since we have no state income tax, property taxes is the primary financial resource for the operation of governmental entities in Texas. Annual valuations are determined by local appraisal districts and taxes are levied and collected by counties, cities and school districts.

Since tax valuations can be contested annually, property owners and managers should know that the Texas Constitution sets out five basic rights in regards to property taxation:

1.   Taxation must be fair and equitable.

2.   All tangible property must be taxed based on its current market value.  The exceptions to this rule are properties receiving exemptions and agricultural valuations.

3.   All property is taxable unless exempted by state and federal law.

4.   Taxpayers have a right to reasonable notice of increases in the appraised value.

5.   Each property in a county must have a single appraised value.

Although these five basic rules are very important, a building owner or manager should be aware and understand the meanings of fair and equitable taxation and the concept of market value for property tax purposes.Through court decisions and legislation the issue of fair and equal taxation, also known as uniform and equal appraisal, has been determined to mean that a taxpayer’s property should be assessed at the median level of appraisal in relation to other like and comparable properties.  For example, if an office property sold and an appraisal district raises the property’s value up to the sales price, while leaving surrounding comparable properties at sustainably lower values, this would necessitate the filing of an appeal based on uniform and equal appraisal.

With the exception of a recent sale or a property under construction, the Market Value on office buildings is generally determined by using the income approach to value.  Typically, a market pro-forma is used to determine market rental rates, vacancies, operating expenses and capitalization rates.  Court rulings and the Texas Property Tax Code are very clear stating that current market information is to be used in this process not historical data.  In-other-words, a single or multi-tenanted property with high historical rental rates are not to be utilized.  Rather it should be based on current market rental rates.  By using current market data the appraisal district and or the taxpayer will determine the property’s current Fee Simple Market Value which is required by the Texas Property Tax Code.When appealing a property valuation it should be understood that based on our current tax system a taxpayer is entitled to the lower of uniform and equal appraisal or market value. Owners and managers should also be aware of the four phases in the property tax process.  The Texas Property Tax Calendar is divided into four sections:

January-May (1/1-5/15): The Appraisal Phase.  ·       The appraisal district collects information to appraise properties for the current tax year.·       Administer exemptions and special appraisals.·       Update property records.·       Taxpayers file personal property renditions and appraisal districts set valuations based on those filings.·       Notices of appraised values are mailed to taxpayers.May-July (5/15-7/25): The Equalization Phase (The Administrative Remedy).       The tax roll is submitted to the Appraisal Review Board (ARB).·       Taxpayers file protests.·       The informal and formal appeal process begins.·       After the appeal hearings the ARB approves and certifies the tax roll on or about July 25.July-September (7/25-10/1): The Assessment Phase.·       Taxing entities receive the certified tax rolls.·       Local jurisdictions adopt budgets.·       Tax rates are adopted.·       Taxes statements are mailed to taxpayers.·       Some taxpayers dispute their ARB rulings and appeal their appraised values to district court for Judicial Review.October-January (10/1-1/31): Current Collection Phase.       Taxes are collected by local jurisdictions.·       Taxes become delinquent 2/1.Generally speaking; filing a protest in Texas should be done on or before May 31 of the current tax year or after receipt of a Notice of Appraised Value from the appraisal district.  All protests should be executed on protest forms provided by the appraisal district or those provided by the Texas Comptroller’s Property Tax Division.  The forms distributed by appraisal districts and the Comptroller’s office allow the taxpayer to denote the reason for their appeal.In most Texas Counties the taxpayer and or the representative are allowed the opportunity to have an informal hearing with the appraisal district staff.  If the taxpayer does not come to a resolution of their appeal with the staff, they are entitled to a hearing before the Appraisal Review Board (ARB).  The ARB is made up citizens who are charged with the task of settling disputes between the taxpayer and the appraisal district.If a taxpayer disagrees with the ruling of the ARB they have three avenues of further appeals which they can pursue:·         A taxpayer has the right to seek relief from Judicial Review (litigation). ·         In commercial cases with valuation at $1,000,000 or less the taxpayer has the right to file for a binding arbitration hearing which is substantially less costly than filing suit.·         During the 2009 Texas Legislative Session was created a pilot program as an alternative to property tax litigation.  The program gives taxpayers the right to appeal to the State Office of Administrative Hearings (SOAH).  This new level of appeal is established for Bexar, Cameron, El Paso, Harris, Tarrant and Travis counties.

A Bill has been introduced this session (S.B. No. 474) which seems to be modeled after California’s Proposition 13 passed in the late 70′s.  Some hope to pass a provision which would limit the amount that a valuation can be increased to no more than 10% each year on commercial and industrial properties.  This same provision currently exist for Texas  homeowners. 

In California Proposition 13 was passed and promised to limit the amount a property tax valuation could be raised each year.  The results were as follows:

1. The concept of uniform and equal treatment between comparable property owners does not exist in California.  If the property owner does not sale their property, their valuation are limited to 2% per year.  If a property is sold the new owner is assessed at current market value and surrounding comparable properties remain at the lower value.

2. Local governments had their funding cut dramatically and made up the difference by creating user fees to make up the difference.  The goods and services that were covered by property tax funding are now supplemented with new sales and use taxes.

3. There is a transference of power from local municipalities and to the State of California.

4. Appraisal caps created reduced funding for schools, hospitals, and other special districts.

5. Numerous publications and experts the effects of Proposition 13 on California.

When a state is facing a deficit and they have the compounding effect of a Proposition 13 you create what you have in California, which is a state on the brink of a financial  disaster.

We in Texas are facing tough decisions relating to our Budget shortfall.  Do we really want to pass a California styled piece of legislation to supposedly cure our problems.  Do Texans want new sales and use taxes, a state income tax (which California has)?  Centralization of power to the State and away from local municipalities?  In my opinion the answer is no.

Overvaluation of Business Personal Property by Appraisal Districts

 

Why are valuations of business personal property assessments by assessing jurisdictions not reflective of their actual market value?  The main reason behind this discrepancy is that appraisal districts value these assets based on a mass appraisal depreciation cost schedule with no ties to actual market value.  So how does one change this overvaluation of these assets?  The answer to this question is to take additional steps in promoting change in the current system in order to lower assessments to a more realistic market value.  Keep in mind there are three approaches to value; cost, income, and the sales comparable approach.  The most accurate method for the valuation of business personal property would be the sales comparison approach not the appraisal districts cost approach.

 

Appraisal Districts are charged to value business personal property at market value as of January 1.  In their attempt to do this, based on the large number of individual accounts and the little manpower given to the districts, they traditionally fall upon the mass appraisal cost method of appraisal.  This method is the most efficient method for appraisal districts; however it is most often the least accurate method of appraising the actual market value of these assets. 

 

Appraisal District’s cost depreciation schedule is based on acquisition cost including sales tax, installation, and delivery fees.  The district will reduce the assessment based on a broad depreciation schedule indicating the asset is at a percent good based on their certain life schedules.   For example, if you a taxpayer bought a new refrigerator for the purchase price of $2,500 before delivery, installation and sales tax.   The total cost will be depreciated based on a percentage for the year of acquisition around 10% for the first year of ownership.  This means that the $2,500 purchase price will be assessed around the same price after you consider the increased in cost based on sales tax, installation, & delivery.  This method of valuation clearly overstates the value of your used asset.

 

A more accurate value of your restaurant equipment is most likely some number between what a restaurant equipment reseller would pay for your used equipment and what they would sell it to a used equipment buyer.  The used equipment market exist the same as the buying and selling of used vehicles.  However to date, most appraisal districts are unwilling to not use their cost approach.   It is the owner’s property tax consultant’s responsibility to push other methods of appraisal onto the appraisal district to allow for a more accurate measure of appraisal. 

 

With this being said, why do appraisal districts get away with sticking to their mass appraisal cost schedule?  I believe that it is because owners do not take a strong enough stance with the appraisal districts.  Owners need to present stronger cases to both the appraisal districts and the appraisal review boards that they are valuing your assets over their market value.  If taxpayers render their assets as normal, no changes will occur in the system.

 

I would recommend the following methods for presenting a stronger case to the taxing jurisdictions. First I would recommend getting a personal property appraisal by a qualified personal property appraiser with the ASA national recognized designation.  The appraiser will specifically address the market value of your assets on the assessment date.  Second, I would have a resell store come out and give a bid for your assets.   This will give a clear picture that their cost schedule does not match what the market will bear for your assets.  Third, I would bring in examples items for sale or sold that show that the districts cost schedule is inaccurate.  If I bought a refrigerator and saw that same refrigerator selling for less than my assessment, I would present the information to show that my market value is too high.  The reduction you get from the appraisal districts will most likely be tied to how much documentation you can show that their method of valuations is inaccurate. 

 

To be fair to the appraisal districts, I would not wish the job of valuing all commercial personal property within a county to my worst enemy.  The job is underfunded and unrealistic to do accurately.  Because of their challenges, I feel that personal property departments are more concerned about valuing uniformly based on a cost schedule than realistically valuating the market value of your assets.  Because of this, restaurant owners and tax consultants need to make valuing your assets a priority over a schedule that is not tied to the market value of the assets.