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State Income Tax Article 

The Stars Might Lie, but the Numbers Never Do

Posted on May 16, 2024

Written by
Janette M. Lohman CMI, CCIP, CPA, Esq.  

 

Read Time: 5 minutes

Back in the Dark Ages (pre-Wynne17), when I used to teach state and local tax law at the Saint Louis University School of Law, my students and I grappled with the issue of whether a state should have the right to tax 100 percent of its residents’ income, given that the state has substantial nexus over the person, but not necessarily any nexus at all over 100 percent of that resident’s income if the person worked in another state.

That states are required by the Constitution to give to their residents a credit for income taxes paid to another state (up to the amount of the resident state’s income tax) on the same income seems to be an imperfect solution to the “double tax” issue, because the poor resident taxpayer is always stuck with paying an amount equal to the higher of the two taxes. If the resident state’s rates are lower, the taxpayer will pay the higher tax on the earned income, but the lower residence tax on unearned income (and vice versa).

Many of my students, however, liked better the concept of both types of income acquired by an individual being taxable by only one state — that is, the earned income would only be subject to state tax in the employment state, and the unearned income would only be subject to state tax in the residence state. This concept seems to resolve the nexus issue, because each state would only be able to tax income that was rightfully sitused within its jurisdiction, and each type of income would only be subject to the appropriate rate, and only once. In situations in which the residence state’s rate is higher, the taxpayer would pay the employment state’s lower rate on earned income, and in situations in which the residence state’s rate is lower, the taxpayer would pay the employment state’s higher rates on the earned income. Fair is fair, and my students thought that was as it should be. Besides, although taxpayers working and residing in different states would still have to file two returns, those returns would be less complicated without the difficult and often confusing “credits for taxes paid” calculations.

Diane Zilka’s situation, however, further exacerbates the complicated “credits for taxes paid” issue. Because Ms. Zilka resided in Philadelphia, she had to report 100 percent of her Wilmington, Delaware, earnings to two state and two local taxing jurisdictions. The combined Delaware SALT rate on wages was 6.25 percent, and the combined Pennsylvania SALT rate on wages was 6.99 percent. The Delaware rate was higher than the Pennsylvania rate, so Pennsylvania gave Ms. Zilka a full credit, with some left over. Unfortunately, however, the Wilmington rate was lower than the Philadelphia rate, and although Ms. Zilka got a full credit against Philadelphia tax for the Wilmington tax she paid, Philadelphia flatly refused to give Ms. Zilka credit for the excess Delaware taxes she paid against her Philadelphia tax. So, using $1,000 as her hypothetical income, (and assuming no unearned income) how much tax should she have paid, and how much did she actually pay?

  • If we adopted my student’s “nexus” computation in Ms. Zilka’s situation — EUREKA — we would have achieved total parity! That is, if she had only had to report income earned in Wilmington, Delaware, to Wilmington and Delaware, and assuming she only had earned income of $1,000, Ms. Zilka only would have been subject to a 5 percent Delaware state tax and a 1.25 percent Wilmington tax, or a total tax of 6.25 percent (which is, at least according to my students, as it should have been), regardless of the aggregation rules. Applying my students’ proposal, she would have paid a total of $62.50 to the jurisdictions in which the income had been earned, and Philadelphia and Pennsylvania would not have been involved at all.
  • Under the “acceptable” credit rules —and with that parity being all that Ms. Zilka is requesting — if we assume the state and city taxes are aggregated in both Pennsylvania and Delaware, Ms. Zilka still would have to pay the higher of the two taxes (or a total tax of 6.99 percent (5 percent to Delaware, 1.25 percent to Wilmington, and 0.74 percent to Philadelphia)). Philadelphia’s haul is a windfall, given that the income was earned in Wilmington. In the relief that she seeks, however, Ms. Zilka only wants to pay this higher of the two combined rates, for $69.90 total.
  • By not aggregating the state and local tax rates, however, Philadelphia gets a super windfall of a whopping 1.93 percent tax on income that was earned in Wilmington. Under the Pennsylvania court’s decision, Ms. Zilka had to pay $50 to Delaware, $12.50 to Wilmington, and a staggering $19.30 to Philadelphia, for a total of $89.20. (Gulp.)

Poor Ms. Zilka! Let us assume that her officemate is earning exactly the same salary as she does and is a Wilmington resident. The officemate will only pay $62.50 of combined SALT on the identical amount of income earned from the same employer in the same city and state. Ms. Zilka would have to move to Wilmington, Delaware (which, obviously, the Pennsylvania courts are encouraging her to do) to achieve SALT parity with her colleague. Ms. Zilka’s Philadelphia neighbor, whom (we assume) is earning exactly the same salary as she does, but who works in Philadelphia, will pay $69.90 of combined state and local tax on the identical amount of earned income. As a reminder, all Ms. Zilka wants is to NOT pay more combined SALT on the same amount of earned income as her Philadelphia neighbor pays. I am certain that my distinguished board member colleagues will continue to vet all the scholarly constitutional arguments defending why the Pennsylvania and Philadelphia taxes must be aggregated, how Philadelphia’s actions (and Pennsylvania’s acquiescence) are clearly in violation of Wynne, how similarly situated courts in other jurisdictions are upholding the aggregation mandated by Wynne and who, accordingly, would give Ms. Zilka the “half a loaf” she is requesting, thus causing a split among the circuits, and so forth . . . but isn’t what’s wrong with this situation quite obvious? Who are the Pennsylvania courts trying to kid? Where could Philadelphia get the legal authority to enact and enforce wage taxes but from the express municipal enabling laws of the Commonwealth of Pennsylvania? For the Pennsylvania courts to deny Pennsylvania’s responsibility for the Philadelphia wage tax is analogous to situations in which parents deny responsibility for the acts of their wayward minor children. Philadelphia was already benefiting from the “credit for taxes paid” structure by “legally” getting to tax a comparatively “little bit” of income earned somewhere else, but that was not enough. Philadelphia got greedy — and Pennsylvania let Philadelphia get away with it. Or will Philadelphia get away with it? My only other concern is whether the U.S. Supreme Court will put a stop to this injustice and affirmatively answer the aggregation issue (again) in favor of Ms. Zilka. Oh, please!


This article is republished with permission Tax Notes State.

 

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16 May 2024State Income Tax
The Stars Might Lie, but the Numbers Never Do
Back in the Dark Ages (pre-Wynne17), when I used to teach state and local tax law at the Saint Louis University School of Law,
IPT Member News

Scholarships for IPT's Advanced Property Tax Schools Now Available

The Application Deadline is June 15th

Announcing a New Scholarship Opportunity - Advanced Property Tax School Scholarships

IPT is pleased to announce a unique opportunity for its corporate members—a chance to secure one of two scholarships, each valued at up to $3,000, to attend one of the prestigious Advanced Property Tax Schools.

This exclusive offering includes one scholarship for the Real Property Tax School and another for the Personal Property Tax School. It is important to note that while the scholarships cover a substantial portion of the overall school expenses, some costs, such as registration fees, hotel accommodations, and associated travel, may not be fully covered.

This outstanding opportunity is exclusively available to corporate IPT members, and the application deadline is June 15, 2024.

These schools are essential components for individuals aspiring to attain the CMI-Property Tax Designation and candidates are encouraged to visit the Property Tax CMI Professional Designation page for more information.

Seize this chance to elevate your expertise and advance your career in property taxation! To be considered for a scholarship, applicants must supply:

  • Completed Application form.
  • A short statement describing their interest in ad valorem taxation.
  • A letter of recommendation provided by their supervisor with contact information for verification.

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19 Apr 2024IPT Member News
Scholarships for IPT's Advanced Property Tax Schools Now Available
IPT is offering scholarships to attend the Advanced Property Tax Schools.
Property Tax News

What is the Texas Circuit Breaker?

 

Posted on April 18, 2024

Written by Paul Pennington and Melinda Blackwell 

Read Time: 5 minutes

(Sec. 23.231. Circuit Breaker Limitation on Appraised Value of Real Property, Texas Property Tax Code)

Texans do not have an income tax, but they pay some of the highest property taxes in the country. This point is driven home by elected officials every legislative session. Each chance they get, they attempt to pass some sort of property tax relief to taxpayers, especially homeowners.

For example, in 2019 Texas Governor Greg Abbott signed into law Senate Bill 2. This Bill, among other things, limited the growth of tax rates for counties and cities to a maximum of 3.5% without a popular referendum. It also included $5.1 billion to buy down the school tax rates. During the subsequent 2021 session the Legislature passed various changes to the Texas Property Code including an increase to the homestead exemption for school taxes from $25,000 to $40,000. Moving into the 2023 legislative session, the Texas Comptroller told lawmakers they would have a historic budget surplus of $33 billion. Upon hearing this news, calls for property tax cuts were thrust into the forefront of priorities for the Governor and those in the legislature.

As the session began, the House and Senate produced their own plans. Both agreed to continue and increase the buy down of school tax rates, but each had their additional, competing tax reduction plans. The House plan included a 5% cap on all real property along with the buy down of school tax rates moving forward. The Senate plan proposed to raise the school homestead exemption from $40,000 to $100,000 with that amount increasing to $110,000 for homeowners aged over sixty-five.

The Texas legislature wrestled with these two opposing plans through the regular session and two special sessions. In the end, both the House and Senate agreed to spend $5.3 billion to increase homestead exemptions, make changes to Appraisal Review Boards, the Appraisal Districts’ Boards of Directors, allocate $12.6 billion to buy down school tax rates (by 10.7 cents) and to create a pilot program called the “Circuit Breaker.”

The new Texas “circuit breaker” applies a 20% taxable value cap placed on all real property with a value of $5 million or less, with exception for homesteaded properties, special appraisal land (1-d-1 appraisal), and business personal property accounts. Unlike the circuit breaker legislation in other states, the Texas version is not based on the taxpayer’s ability to pay their taxes, rather it is applied universally (with the exceptions noted). The biggest misconception about the new law is that it is applied to individual properties or economic units. Contrary to this belief, the law is applied to individual parcels. Therefore, one economic unit could be comprised of several accounts, some that could fall under the umbrella of the Circuit Breaker, and other accounts that will not enjoy that protection.

According to the Texas Comptroller’s Office, if the “circuit breaker” had been applied in the 2023 tax year, it would have impacted 84.1% of all multifamily, 94.96% of all commercial property, and 87.90% of all industrial parcels.  Now that 2024 value notices are being issued, Texas taxpayers will have questions about the mechanics and application of the “circuit breaker”.

A summary of the pertinent provisions of the statute is set forth below:
  • For the first year in place (2024), the provision only applies to real property with an appraised value of not more than $5 million.
  • For those properties, their value is capped at an increase of 20 percent. The value limitation is recalculated each year by the Comptroller’s Office based on the Consumer Price Index.
  • It does not apply to a residence homestead or agricultural special use properties or personal property.
  • New improvements are taxable and are not included in the calculation of the cap. A new improvement does not include repairs to or ordinary maintenance of an existing structure or the grounds or another feature of the property.
  • The capped value of a property is removed when the property sells. If the property qualifies, the new owner must re-establish the capped value.

  • In essence, starting with the 2024 tax year, this provision limits the amount of annual value increase to the appraised value of real property which was valued in 2023 at $5 million or less (excepting homesteads and special use type properties like agricultural land, timberland, recreational, park and scenic land, etc.).  For example, if a property was valued at $4 million in 2023, then this value is used to determine the capped value for the 2024 tax year. If the property’s market value for 2024 is increased to $5 million, the “circuit breaker” comes into play. The capped value is $4.8 million (20% of $4 million) and it is that value which is used to calculate the amount of taxes due (rather than the $5 million market value). The value cap does not “run” with the property. Once a property sells, the new owner does not get to retain the capped value already in place on the property. Rather, the new owner will have to establish a new cap on the property as of January 1 of the year following the first year of ownership (assuming the value of the property still qualifies). After the 2024 tax year, the Comptroller determines the value of property that qualifies for the “circuit breaker” protection. The calculation requires consideration of the consumer price index. The Comptroller is required to publish the qualifying value. Currently, the “circuit breaker” provision is set to expire at the end of 2026. However, the Legislature meets again in 2025. At that time, the Legislature could extend the date the “Circuit Breaker” ends beyond 2026 or simply allow it to expire.

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    18 Apr 2024Property Tax
    What is the Texas Circuit Breaker?
    Texans don???t have an income tax, but they pay some of the highest property taxes in the country.
    IPT Member News

    IPT Sponsored Research 

    Big Box Valuation Methodology, Sale Transaction Analysis, and Market Participant Survey

    In 2017, the Institute for Professionals in Taxation ® commissioned the highly regarded appraisal firm Situs RERC to produce a sponsored research paper that would provide IPT members and the broader property tax and appraisal industries with an independent and objective review of generally accepted appraisal methods regarding the valuation of big box properties, as well as a comprehensive survey of these sale transactions across the nation. After more than two years of research and analysis, IPT’s Sponsored Research Report on the Valuation of Big Box Retail is now final and available for its members.

    Situs RERC meticulously researched nearly 1,000 sale transactions across the country and surveyed the appraisal arena on key concepts and valuation principles with the purpose to provide clarity regarding how the market actually interprets these transactions and determine an understanding of the sale price variances between leased and unleased properties. The complete analysis and final conclusions by Situs RERC are summarized in this report, which is available to IPT members by clicking the “View the Report” icon below.

    The IPT membership thanks Arthur R. Rosen, Esq., Chair of the IPT Sponsored Research Committee and IPT Second Vice President Mark S. Hutcheson, CMI, Esq., CRE, Chair of the Ad Hoc Committee on the Valuation of Freestanding Retail, and his committee for their countless hours and dedication to this important project. IPT also thanks Situs RERC, which accepted this project with great enthusiasm and scholarship.

    Read the Survey 

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    01 Apr 2024IPT Member News
    IPT Sponsored Research
    Read IPT's Sponsored Research on Big Box Methodology.
    State Income Tax News

    Update: Remote Workers and Local Taxes

     

    Posted on March 18, 2024

    Written by Mark Nachbar and Mary Bernard 

    Read Time: 10 minutes

    Because of the conditions imposed by the pandemic beginning in 2020, many states announced waivers to companies impacted by mandatory work-from-home pronouncements. Some states used emergency powers to expand taxation to encompass work-from-home employees in localities other than their normal work location. Ohio, Missouri, and Pennsylvania have all addressed the issue recently.

    Ohio

    Schaad v. Adler1 was one of the five cases filed in the Ohio Supreme Court by the Buckeye Institute challenging the constitutionality of Ohio’s emergency-based local income tax system that extended municipal taxing authority.2 The question in these cases was: Is it constitutional for the work of employees, who were forced to work from home by state orders, to be deemed to be working and taxed in a city other than where the work is performed?
    Prior to the pandemic, Josh Schaad of Blue Ash, Ohio, worked offsite for his employer and, in years past, had requested and received proportional refunds for his work performed outside the city limits of Cincinnati. When House Bill 197 was passed by the Legislature, all work performed elsewhere because of the health emergency was deemed to have been performed at the employee’s principal place of work for the purposes of levying income taxes. This change resulted in Mr. Schaad’s municipal income taxes increasing even though he had spent less time at his main office location in Cincinnati. 

    In 2021, the Ohio Legislature enacted House Bill 110 (HB 110), which sunset the temporary withholding provisions after December 31, 2021, and allowed employees working remotely to claim refunds of tax paid to the principal-place-of-work municipalities, including tax that was withheld by their employers, for days that the employee worked elsewhere during 2021.  HB 110, however, did not expressly apply the refund provisions for employee personal income tax to 2020.
    The Buckeye Institute filed a lawsuit on behalf of Mr. Schaad requesting a refund of 2020 taxes and challenging House Bill 197, Ohio’s emergency-based income tax system that deemed work he performed at his home to have been performed in the higher-taxed office location of Cincinnati for the purposes of taxation.

    After being rejected at trial court and appellate court, Schaad’s appeal was accepted by the Ohio Supreme Court on the following three propositions of law: 

    [1.] Section 29 of HB 197 is incompatible with Due Process and this Court’s Angell-Willacy line of decisions interpreting the Due Process requirements for municipal taxation. 
    [2.] The General Assembly cannot authorize municipalities to engage in extraterritorial taxation. 
    [3.] The General Assembly’s authority to pass “Emergency Laws” under Article II, Section 1d of the Ohio Constitution does not expand its substantive constitutional powers.

    In a split decision,3 the majority opinion rejected the taxpayer's primary argument that Section 29 of HB 197 violated the Due Process Clause of the US Constitution, finding that the federal constitutional provisions govern interstate taxation and not intrastate taxation.  It was also noted that the United States Supreme Court has never applied federal constitutional limitations to purely intrastate taxation.  The majority also concluded that Section 29 of HB 197 did not violate the Home Rule provision of the Ohio Constitution. This provision limited the employees’ cities of residence from taxing the same income taxed by the primary workplace cities for employees working remotely. 

    It was stated in the dissent, however, that, “The General Assembly lacks the power to compel Cincinnati to collect taxes on income earned or received by a nonresident while working outside the city limits.” Another dissenting opinion stated that the United States Supreme Court has never ruled on whether Due Process protections apply when a city tax is extended beyond the city's boundaries. The second dissent also expressed the view that “this court has recognized that there is a role for federal due process to play in matters of municipal taxation.” 

    Missouri

    On another local tax front, beginning on September 30, 2024, proposed Missouri House Bill 1516 specifies that the City of St. Louis shall not continue to impose an earnings tax on any work or services performed or rendered through telecommuting or otherwise performed or rendered remotely, unless the location where such remote work or services are performed is located in the city. The bill creates a cause of action for a taxpayer who is denied a refund for taxes paid for work or services not performed or rendered in the city. This bill is similar to last year’s House Bill 589, but with more time to consider the bill this year, it might just pass the Senate.  Opponents of the bill note that the city earnings tax accounts for approximately one-third of the city’s general fund revenue and may be difficult to replace.

    Pennsylvania
    Pennsylvania passed Act 32 that provided for withholding rates for earned income tax (EIT) purposes.  The withholding rate is determined by comparing the employee’s resident EIT rate to the employee’s work location EIT rate and withholding at the higher rate. Philadelphia, however, is not covered under Act 32 and applies a ”convenience of employer” rule. If employees of Philadelphia-based employers choose to work from home outside the city, their wages for work performed remotely are subject to Philadelphia wage tax.
    There are some circumstances where remote work will not be subject to Philadelphia wage tax:
    ⦁If the employee is merely assigned to the Philadelphia location but reports there less than twice per year and does not have a dedicated workspace or the option to work at the location;
    ⦁If the employee is working remotely as an accommodation under the Americans with Disabilities Act; or
    ⦁If the employee is unable to find adequate childcare. 

    Other State Remote Worker Developments

    It is possible that New York’s neighbors—Connecticut and New Jersey—may mount a challenge to the New York “convenience of employer” rule that has plagued remote workers since the 1950s.  This rule requires remote workers in other states to be taxed on income in New York if they work out of state for New York employers, for their own convenience. This rule has been unsuccessfully challenged previously by a law professor who resided in Connecticut and worked remotely during the pandemic.  Now the two neighboring states are changing the rules by establishing tax credits to their residents for challenging New York on taxes required to be paid to their nonresident state.
    Although in the past, the US Supreme Court refused to review a case in the New Hampshire/Massachusetts dispute4 on the same issue, challengers believe that the only way to end this issue between the states is through the Supreme Court.

    Future Consequences

    Remote work will continue to pose challenges to employers and employees. The presence of employees working in states other than their office location presents several tax implications to employers now that many of the waivers issued during the pandemic have expired. Besides withholding tax issues, many employers might now be determined to be conducting business activities in new states, creating income and sales tax nexus. With the current shift towards flexible work locations, these issues could become more significant.
    1. Schaad v. Alder, 2022-Ohio-340.
    2. House Bill 197.
    3. Schaad v. Alder, Slip Opinion No. 2024-Ohio-525. Ohio Supreme Court, February 14, 2024.
    4. New Hampshire v. Massachusetts, Orig. No. 154.
    TECHNICAL INFORMATION CONTACTS:
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    Ryan
    630.515.0477
    mark.nachbar@ryan.com
    Mary Bernard
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    mary.bernard@ryan.com
    The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation.

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    18 Mar 2024State Income Tax
    Update: Remote Workers and Local Taxes
    Because of the conditions imposed by the pandemic beginning in 2020, many states announced waivers to companies impacted by mandatory work-from-home pronouncements.
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    15 Jan 2024IPT Member News
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    Property Tax News

    Will a Recession Lower Your Property Taxes?

    Posted on March 15, 2023 

    Written by Rachel Dick and Nick Machan 

    Read Time: 5 minutes

    As interest rates rise to combat inflation, recessionary pressure is the highest it’s been since 2009. Moving into 2023, shifting market conditions have pummeled real estate values, many of which had experienced dramatic upswings during the prior 18 months. With market uncertainty and recessionary conditions bearing down upon them, property owners across the country may hope to see some relief in property tax assessments.

    But does a recession equal falling property tax liability? To answer this question, it is essential to understand how a recession could influence assessed values of the various property types.

    How Recessions Impact Market Values

    During a recession, interest rates typically continue to climb. In commercial real estate, rising debt costs can translate to reduced transaction volume and price contraction as capitalization rates reflect buyers’ increased risk. Worsening job markets and weak consumer spending may impact the demand for various property types.

    Multifamily tends to be less sensitive than other property types to recessionary market conditions. During downturns, risk-averse individuals tend to prefer rental housing over homeownership. Additionally, inflationary costs can delay multifamily construction and limit supply, which helps avert supply surges that can lead to steep drops in rent and occupancy. To illustrate, while office, industrial, and retail rent fell between 14 percent and 17 percent during the last recession, multifamily rent only declined 8 percent overall.

    Retail property responses to a recession vary by type, but market growth rates will likely slow across all types. Brick-and-mortar stores were already facing a potential “retail apocalypse” prior to COVID-19 as consumers increasingly shopped online. Traditional shopping malls could be the most severely impacted retail properties in a recession. Many Class B and C malls already face closure, driving many owners to repurpose them into industrial, multifamily, distribution, and even healthcare space.

    Hospitality is among the most vulnerable property types in a recession, and hotel performance has been one of the most volatile over the last few years. Revenues for many properties cratered during the pandemic and some have been slower to recover than others. However, many hotels had recovered to near pre-pandemic levels in 2022, with some year-end 2022 revenues surpassing 2019 levels. Moving into a recession, pent-up leisure demand could help balance out the decline of business travel as businesses cut costs. Perhaps the biggest question marks in predicting the impact of a recession on hotel performance involve business travel volume and hotels’ ability to sustain high average daily rates they adopted to increase revenue per available room and combat falling occupancy.

    How Do Market Fundamentals Affect Assessed Values?

    Assessors in most jurisdictions base assessments on some variation of market value, which is fundamentally the value at which the property would transact on the open market. Assessors weigh cost, income, and sales data to determine their initial valuations. They must, however, also value thousands of properties quickly, and therefore rely on mass appraisal techniques that may omit factors affecting individual properties. Recessionary market conditions affect all three of the valuation approaches but will vary by property type, geographic area, and individual property metrics. For these reasons, a property owner’s first step after receiving their assessments should be to determine whether the valuation is reasonable based on the individual market factors impacting their property as of the valuation date. Assessors in most jurisdictions must also consider the equity of property values. Many states have laws protecting the equitable value of comparable properties, and assessors are generally intent upon making fair assessments.

    Tricky Tax Rates

    In addition to assessed value, the second piece of a property owner’s tax liability is the tax rate. Should 2023’s overall appraisal roll or tax base decline, property owners should not necessarily expect an equivalent decline in their tax liability.

    Most taxing entities set their rates separately from, and usually after, assessors’ determination of property values. Typically, there is an inverse relationship between a jurisdiction’s tax rates and the tax base. If total valuations fall significantly, it is possible—and maybe even likely—that tax rates will rise.

    As an example, imagine you own a small apartment building outside of Dallas, Texas. Due to market factors, your property’s value fell to $9 million as of the Jan. 1, 2023, valuation date, down 10 percent from $10 million a year earlier. Excited, you prepare to pay a correspondingly 10 percent smaller amount on your 2023 property taxes.

    The overall appraisal roll declined as well, however, and your applicable 2023 tax rate increased from 2.4 percent to 2.472 percent as a result. Instead of a 10 percent decrease, your liability shrinks 7.3 percent to $222,480, down from $240,000 the year before.

    No one can predict tax rates with certainty, but owners would be wise to budget conservatively for anticipated tax liabilities. A 40 percent decline in revenue may not translate to a 40 percent decline in the assessed property valuation or ultimate tax liability for the tax year ahead. Partnering with an experienced, local property tax advisor can give owners peace of mind as they navigate the shifting market in this tumultuous year.

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    15 Mar 2023Property Tax
    Will a Recession Lower Your Property Taxes?
    As interest rates rise to combat inflation, recessionary pressure is the highest it???s been since 2009.
    Property Tax News

    Florida Rules Rushmore Assessment Method Illegal

     

    Posted on July 15, 2020

    Written by William C. Coleman III

    Read Time: 10 minutes

    Florida assessors will have to fundamentally change the way they value hotels, golf courses, senior living facilities, and other franchised properties managed by third parties following a landmark ruling by Florida’s Fifth District Court of Appeal. In Singh vs. Walt Disney Parks and Resorts, the court found the so-called Rushmore appraisal method is illegal. Specifically, the appellate court concluded that the Rushmore method used by the Orange County Property Appraiser “violates Florida law because it does not remove the nontaxable, intangible business values from an assessment.”
    Background

    The dispute began in 2015, when the tax assessment on Disney’s Yacht & Beach Club property increased by 118% from the previous year. The property includes 65 acres of land, featuring 1197 guest rooms, a 70,000 square foot conference center, dining outlets, retail stores, a spa, and other recreational amenities. It is located adjacent to Epcot, on a lagoon, near several other hotels. The appraiser assessed the value of the property at $336,922,772 as of January 1, 2015. Disney challenged the assessment arguing that the assessment did not comply with Florida Statutes and professionally accepted appraisal practices because it exceeded market value and erroneously included the value of certain intangible property. At trial, the parties agreed that the income approach to value was a professionally accepted appraisal practice and provided the most reliable indicator of value, but they disputed the proper methodology for performing such an assessment.
    Appraiser’s Testimony

    The appraiser’s main witness was Richard Tuck, the senior valuation expert from appraiser’s office, who had performed the initial assessment of the property. Tuck testified that he used the income approach, also known as the Rushmore method. Tuck multiplied the potential room income by a 75% occupancy rate. He then calculated what he called “ancillary income,” which he testified was all income that is not from room revenue. Tuck added the effective room income and ancillary income, then deducted an 80% expense factor from that value, consisting of 70% hotel operation expenses, a 4% management fee expense, and 6% for the franchise fee expense. He explained that deducting a management and franchise fee removed the business-related income from the gross ancillary income figure. Tuck did not make adjustments to revenue for any amenities, or for the fact that the property is Disney-branded.
    Disney’s Rebuttal

    In its rebuttal case, Disney presented Dr. Henry Fishkind, an economist with experience in business valuation, who stated that the Rushmore method was inconsistent with economic theory and market behavior and that it underestimated business value, thereby overestimating the remaining value of the real estate. Dr. Fishkind said the Rushmore method ignored certain aspects of the hotel business, such as goodwill, loyal customers, and an assembled workforce. He gave examples of the Disney brand, Disney characters, ability to use the theme parks, character breakfasts, transportation, and high-quality service as some of the values not recognized by the Rushmore method. Disney’s appraisers, Todd Jones and Michael Mard, identified and quantified numerous intangible assets deemed nontaxable under Florida law. The court concluded that taxable value for retail and restaurant space within the resort should be predicated on proxy rents for comparable space in other hotels, and not on the business income reported in the property’s financial statements.
    Flawed Appraisal Method

    The Rushmore Method claimed to remove the value of intangibles from an income approach by simply deducting the franchise and management fees as operating expenses, explained Rob Kelley with the law firm Hill Ward Henderson, who represented Disney. The fallacy of this theory is that the deductions do not account for a return on those expenses, he said. “Under the Rushmore Method, a hotel owner would presumably enter into a franchise agreement and hire a management company expecting only to increase gross revenue by the exact cost of those services. The court concluded that made no economic sense. The owner would not reasonably undertake those extra expenses unless he/she thought revenues would increase greatly in excess of the expense,” Kelley said.
    Verdict

    The trial court found that appraiser improperly considered income from the business activities conducted on the property in establishing its assessed value. It also rejected the appraiser’s contention that the intangible assets identified by Disney did not qualify as intangible property saying the appraiser was “essentially asking this Court to unlawfully expand the statutory definition of ‘real property’ to include something other than land, buildings, fixtures, and other improvements to land.” Moreover, it ruled that even if the Rushmore method was a professionally accepted appraisal practice, it could still not be used in a manner that violated Florida law. The trial court found that the testimony demonstrated that the restaurants and retail spaces operate independently from the room rentals. Thus, it adopted the appraiser’s effective gross room income but used Disney’s figure for the value of the property based on the restaurant, retail, and spa spaces. It concluded that the just value of the property was $209,156,074. The Appeal Court decision states, “While we would have preferred drafting an opinion that would resolve the parties’ dispute, we find the record evidence is insufficient for us to do so. Accordingly, we reverse and remand to the trial court, with instructions that it remand to the appraiser for a reassessment of the property.” The controversial Rushmore Method has been used throughout the country by a number of assessors’ offices but has been judicially rejected in other states. Now the State of Florida is added to the list of states that consider Rushmore an improper valuation method for hotels and other properties with significant ancillary income.

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    15 Jul 2020Property Tax
    Florida Rules Rushmore Assessment Method Illegal
    The controversial Rushmore Method has been used throughout the country by a number of assessors??? offices but has been judicially rejected in other states.
    Property Tax News

    Stage Set for Pennsylvania Supreme Court to Step in to Correct Standard for Uniform Assessment

    Posted on May 15, 2020

    Written by Sharon Dipaolo 

    Read Time: 10 minutes

    While the taxpayer challenges were initiated in the wake of the Pennsylvania Supreme Court’s July 2017 decision in Valley Forge Towers Apartments N., LP v. Upper Merion Area Sch. Dist.,163 A.3d 962 (Pa. 2017), which held that the government must select properties for appeal in a constitutionally uniform manner, the underpinnings of the taxpayers’ arguments pre-date the Valley Forge decision. A common misconception and argument technique of government lawyers in Pennsylvania is to artificially limit taxpayer challenges as if they are grounded just in this one case and, secondly, to attempt to narrowly limit the Valley Forge holding to just the facts of that case and ignoring its broad policy-based pronouncements. The Pennsylvania Supreme Court has for more than 110 years consistently held that a government must assess its taxpayers in a uniform manner. During the years between Pennsylvania Supreme Court decisions, the lower courts in Pennsylvania tend to revert to the Pennsylvania statute that allows taxing districts to file increase assessment appeals and, on a case-by-case basis, approve the school district’s appeals. That is largely what has occurred in the lower courts post-Valley Forge, but with a series of seven recent decisions from Pennsylvania’s intermediate appellate court, four of which have pending taxpayer requests to be heard at the Pennsylvania Supreme Court, the stage is set for the Pennsylvania Supreme Court to step in and correct the situation.

    The Uniformity Clause of the Pennsylvania Constitution requires that every tax “operate alike on the classes of things or property subject to it.” Commonwealth v. Overholt & Co., 200 A. 849, 853 (Pa. 1938). With respect to real property taxes, the Pennsylvania Supreme Court has made clear that “real property is the classification.” Clifton v. Allegheny County, 969 A.2d 1197, 1212 (Pa. 2009) (emphasis in original); see also, In re Lower Merion Twp., 233 A.2d 273, 276 (Pa. 1967) (“real estate as a subject for taxation may not validly be divided into different classes”). Thus, all taxable real estate in a given jurisdiction must be treated as a “single class entitled to uniform treatment.” Clifton, 969 A.2d at 1212; see Valley Forge Towers Apartments N, LP v. Upper Merion Area Sch. Dist. & Keystone Realty Advisors LLC, 163 A.3d 962, 972 (Pa. 2017). “Each taxpayer, no matter how great or small, has a right to demand that his property shall be assessed upon the basis of a uniform valuation of other properties belonging to the same class and within the territorial limits of the authority levying the tax, and it is the duty of all the authorities dealing with this subject to administer the law in a spirit to produce as nearly as may be uniformity of result.” Delaware, L. & W. R. Co.’s Tax Assessment, 73 A. 429, 431, (Pa. 1909).

    It is common in Pennsylvania for school districts to file increase assessment appeals. Selection schemes vary, but tend to fall into the following categories: 1) properties with a recent sale price; 2) properties where the school district stands to gain at least a certain dollar amount of additional taxes in a successful appeal; or 3) properties where the school posits that the properties selected are undervalued by a certain dollar fair market value threshold (e.g., $1 Million under-assessed). In these latter two schemes, some school districts consult with a New Jersey based contingent fee consultant called Keystone Realty Consultants (“Keystone”), some consult with a local appraiser and in others the school business manager picks using a “I-know-it-when-I-see-it” approach without any bright line standard. The Pennsylvania Commonwealth Court has found all of these schemes to meet constitutional muster. As applied, the vast majority of properties selected for appeal by these schemes are commercial properties.

    Immediately following the Pennsylvania Supreme Court’s Valley Forge decision, taxpayers targeted by school districts for increase appeals began to 1) serve discovery on school districts, 2) move to bifurcate the case into two phases, so that the constitutional issue was the threshold issue and the valuation case was reached only if the school district’s scheme passed the constitutional test, and 3) move to dismiss school districts’ selection schemes. Trial courts across the state initially split on these issues. In the early days following Valley Forge, the split of decisions on these procedural issues were favoring taxpayers. Not surprisingly, in courts where taxpayers were winning these arguments, school districts -- facing the real possibility or even likelihood of having their entire selection scheme dismissed and losing all of the potential revenue from all of their appeals -- generally settled. In courts where the trial court’s procedural rulings favored the government, however, (no discovery, limited discovery, holding argument on motion to dismiss the same day as the valuation trial), government attorneys were bolder and less interested in settling. Accordingly, most of the first cases to go to trial and to reach the appellate court were cases where the trial court ruled in favor of the government. Five of the recent decisions from the Commonwealth Court had a posture where the trial court ruled that the school district’s selection scheme was constitutional. These cases, summarized below, are:  Martel, the two East Stroudsburg cases, Punxsutawney and Kennett. On appeal, the Commonwealth Court approved the school districts’ selection schemes in all five of these cases.

    In contrast, in the two cases where the trial court declared the school districts’ schemes to be unconstitutional – Philadelphia and Bethlehem – the Commonwealth Court reversed and remanded the cases back to the trial courts to take more evidence.

    Ordered chronologically by the date of the Commonwealth Court decisions, the seven cases are summarized as follows:

    • Martel v. Allegheny County, 216 A.3d 1165 (Pa. Commw. Ct. Aug. 14, 2019), appeal den., 222 A.3d 1128 (Pa. Jan. 7, 2020). Taxpayer challenged the City of Pittsburgh School District’s selection scheme based on properties that recently sold. Unlike all of the other cases, the City of Pittsburgh School District’s scheme did include residential taxpayers such as plaintiff. Taxpayer brought a class action in equity challenging the selection scheme on the basis that it violated the local administrative board’s rules. The trial court dismissed taxpayer’s case. In affirming the dismissal, the Commonwealth Court ruled that taxpayer failed to exhaust its administrative remedies. Taxpayer filed a petition for allowance of appeal with the Pennsylvania Supreme Court, but in a one-sentence ruling on January 7, 2020, the Court declined to hear the appeal. This case is of little precedential import – class actions are disfavored in Pennsylvania assessment law, the framing of the issue based on a local board rule was weak, the taxpayer ignored strong law directly on point, and the exhaustion of remedies rationale is directly contrary to the express holding of the Supreme Court in Valley Forge.
    • School District of Philadelphia v. Board of Revision of Taxes and Federal Realty Management, 217 A.3d 472 (Aug. 22, 2019). On the recommendation of contingent fee consultant Keystone, the City of Philadelphia School District appealed 105 properties within the City, which the School District believed would yield at least $7,500 in additional taxes. All 105 appeals were of commercial properties. Most of the taxpayers filed challenges to the School District’s selection scheme and filed motions to quash. At the consolidated argument on the motions to quash, the court accepted the School attorney’s oral admission as to the $7,500 monetary threshold and took judicial notice that there were residential properties within the City that would have met that threshold. On that basis, the trial court dismissed all 105 appeals citing the Valley Forge precedent. On August 22, 2019, the Commonwealth Court vacated the trial court’s order and remanded all appeals to the trial court with a direction to hold an evidentiary hearing on the School District’s selection scheme. The cases are now pending before the trial court and the evidentiary hearing is scheduled for June 12, 2020.
    • Paired cases East Stroudsburg Area School District v. Meadow Lake Plaza, LLC, 2019 Pa. Commw. Unpub. LEXIS 569, 219 A.3d 724 (Pa. Commw. Ct. October 17, 2019, unreported), petition for allowance of appeal filed with Pennsylvania Supreme Court at 723 MAL 2019 and East Stroudsburg Area School District v. Dallan Acquisitions, LLC, 2019 Pa. Commw. Unpub. LEXIS 568, 219 A.3d 725 (Pa. Commw. Ct. October 17, 2019, unreported). The East Stroudsburg Area School District consulted with contingent fee consultant Keystone to select properties for appeal using a threshold of $10,000 in additional taxes. Two sets of taxpayers challenged the School District’s selection scheme and adduced slightly different evidence in two separate evidentiary trials on two different days before the same trial judge. The trial judge completed the evidentiary hearing on the Meadow Lake case first, then incorporated that decision months later when it issued is decision in Dallan. The evidence was that the School District’s scheme was not in writing, was not passed by a resolution of the School Board, and that no calculations were done – whether by Keystone or by the School District - to ensure that the properties selected for appeal actually met the $10,000 threshold. The school selected 46 properties for appeal – all commercial. Using recent sale prices as a measure, Taxpayer’s expert produced evidence that had the School District applied its $10,000 threshold uniformly, there were 20 commercial properties and 10 residential properties that fit the $10,000 threshold, but which the School District did not appeal. The School Business Manager had no answer as to how these 30 properties were missed. The trial court ruled that the School District’s selection scheme was constitutional. While the two cases were not consolidated at the Commonwealth Court, they were scheduled back-to-back for argument and the Commonwealth Court’s decisions in each issued the same day. The Commonwealth Court affirmed the school’s selection scheme as constitutional. Of note, the court criticized the taxpayer’s expert’s reference to recent sale prices to test whether the School District uniformly applied its scheme as improper because the taxpayer’s expert “merely uses each property’s sale price as a “stand –in” for market value.” The Meadow Lake taxpayer filed a petition for allowance of appeal with the Pennsylvania Supreme Court; the Supreme Court has not yet ruled on the petition. The Dallan case was remanded to the trial court, where it is pending.
    • Punxsutawney Area School District v. Broadwing Timber, LLC, 2019 Pa. Commw. Unpub. LEXIS 593, ___ A.3d ___ (Pa. Commw. Ct. October 29, 2019 unreported). Punxsutawney Area School District had neither written policy nor any set monetary threshold for selecting properties for appeal. Rather, the School Business Manager “looked only for a sales price that could indicate an under-assessed property and a potential increase in tax revenue.” In operation, the School District filed only a few appeals – all on commercial properties. The trial court found the School District’s scheme to be constitutional. The Commonwealth Court affirmed, ruling that for the School District’s selection scheme to be uniform, the School was not required to have a formal policy, was not required to have specific criteria, and was not required to have a specific monetary threshold. Moreover, unlike in its Dallan decision issued less than two weeks early, the Commonwealth Court found no fault in the School Business Manager’s use of recent sale price as a stand-in for market value to indicate underassessment. Taxpayer filed a petition for allowance of appeal with the Pennsylvania Supreme Court; the Supreme Court has not yet ruled on the petition.
    • Bethlehem Area School District v. The Board of Revenue Appeals of Northampton County, 2020 Pa. Commw. LEXIS 71, ___ A.3d ___ (Pa. Commw. Ct. January 16, 2020). Since 2012, Bethlehem Area School District, in consultation with contingent fee consultant, selected properties for appeal using a threshold of $10,000 of additional taxes. In operation and effect, applying this scheme the School District never appealed any residential properties. Taxpayer challenged the School District’s selection scheme as unconstitutional. Because the facts set forth above were all admitted, there were no disputed issues of material fact and, thus, rather than hold an evidentiary hearing, the trial court took briefs and argument on summary judgment. After consideration, the trial court dismissed the School District’s appeals on the basis that its “nominally-neutral” scheme in operation and effect violated constitutional uniformity. On appeal, the Commonwealth Court reversed and remanded, determining that statements made in School meeting minutes were subject to varying interpretations, thus material issues of fact existed, and the trial court should have held an evidentiary hearing. The taxpayer filed a petition for allowance of appeal to the Pennsylvania Supreme Court at 67 MAL 2020; the Supreme Court has not yet ruled on the petition.
    • Kennett Consolidated School District v. Chester County Board of Assessment, 2020 Pa. Commw. LEXIS 194, ___ A.3d ___ (Pa. Commw. Ct. Feb. 28, 2020). Kennett Consolidated School District delegated to a commercial appraiser to develop a threshold and recommend properties for appeal. The appraiser recommended appeals on properties which he believed to be under-assessed by at least $1 Million fair market value. The appraiser recommended 13 properties for appeal – all commercial; the School District appealed 12 of the properties (one had been recently litigated). Taxpayer challenged the School District’s selection scheme as unconstitutional and moved to bifurcate the constitutionality issue so that issue could be fully litigated before forcing the taxpayer to defend on valuation. The trial court denied the motion to bifurcate, which meant that taxpayer’s motion to quash was argued in the opening moments of the day reserved for the valuation trial. The trial court took argument from the taxpayer and denied the motion to quash without even taking argument from the School attorney. Of note, the School District utilized as its expert witness the same appraiser who had selected the properties for appeal; his final valuation opinion in the subject appeal was that the property was under-assessed by approximately $900,000 – in other words, it did not meet his own selection criteria. Taxpayer appealed to the Commonwealth Court – the case was argued November 12, 2019, two weeks after the Commonwealth Court’s decision in Punxsutawney. After reviewing its decisions in the East Stroudsburg Punxsutawney cases, the court held the School District’s selection scheme to be constitutional. The taxpayer filed a petition for allowance of appeal to the Pennsylvania Supreme Court at 150 MAL 2020; the Supreme Court has not yet ruled on the petition.

    Four taxpayer challenges are now pending before the Pennsylvania Supreme Court requesting that the Court agree to hear the appeals. The synthesized holdings of the seven back-to-back Commonwealth Court decisions favoring the government stand for the proposition that so long as a school district’s selection scheme – written or not, formal or not, applied consistently or not – is stated in facially neutral language, the school selection scheme will stand as constitutional. Under this standard, short of a taxpayer producing a smoking gun admission that the school district intentionally targeted commercial properties only for appeal, the school selection scheme will always be allowed to stand. It is hoped that the Supreme Court will recognize that the Commonwealth Court’s standard does not comport with the Court’s precedent that requires a government’s selection scheme to be not just facially neutral, but also uniform in its operation and effect.

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    15 May 2020Property Tax
    Stage Set for Pennsylvania Supreme Court to Step in to Correct Standard for Uniform Assessment
    In the last six months, the Pennsylvania???s intermediate appellate court, the Commonwealth Court, issued an unbroken series of seven pro-government decisions.

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