TEXAS PROPERTY TAX CASE LAW IN REVIEW

Transcription

1 TEXAS PROPERTY TAX CASE LAW IN REVIEW (Cases and opinions current through March 2, 2018) (c) 2018 John Brusniak, Jr.1 and Michael P. Moore (All rights reserved. Reprinted with permission.) TEXAS SUPREME COURT A PARTY SEEKING TO OVERTURN A TAX STATUTE HAS THE HEAVY BURDEN OF PROVING THAT A TAX STATUTE IS UNREASONABLE ARBITRARY OR CAPRICIOUS; ARTICLE VIII, 1 OF THE TEXAS CONSTITUTION DOES NOT REQUIRE TAX VALUE TO BE MARKET VALUE; THE LEGISLATURE IS GIVEN DISCRETION AS TO DETERMINE HOW PROPERTY SHOULD BE VALUED; DIFFERENCES IN VALUATION OF SIMILAR ITEMS DO NOT VIOLATE THE CONSTITUTION S REQUIREMENT OF EQUAL AND UNIFORM TAXATION, PROVIDED THAT THE ITEMS ARE IN DIFFERENT CLASSES; THE SUBSTANCE OF TAX PROVISIONS MUST BE EXAMINED TO DETERMINE WHERE THE PROPER TAX SITUS FOR PROPERTY IS SITUATED; THE INCLUSION OF RENTAL COMPRESSORS IN THE HEAVY EQUIPMENT STATUTE IS NOT UNCONSTITUTIONAL. EXLP Leasing, LLC v. Galveston Central Appraisal District, No (Tex., March 2, 2018). Appraisal district challenged the constitutionality of an amendment to the Property Tax Code that included leased gas field compressors into the formula for valuing heavy equipment. The practical effect of the revision was to change the individual value of a compressor from its full value to 1/12 of its annual lease payments. They contended that this resulted in unequal treatment when those compressors were compared to those individually owned. They also contended that the compressors should be taxed where they were situated by using the tax situs provisions of the Tax Code. The Supreme Court disagreed with the appraisal district on all points. It ruled that a party seeking to find a tax statute unconstitutional has the heavy burden of proving that the statute is unreasonable, arbitrary or capricious. It held that the term value in Article VIII, 1 of the constitution is not the equivalent of market value notwithstanding the court s use of the term in prior opinions. It said that the legislature is given broad discretion in determining how value for tax purposes should be calculated. Just because a change in a statute causes wide variances in tax collections and values does not alone demonstrate 1 John Brusniak, Jr. is a partner in Brusniak Law, PLLC, located at Noel Road, Suite 1850, Dallas, Texas 75240, (972) , at john@txtax.com. He tweets regularly on property tax The law firm s practice is limited to the representation of taxpayers with state tax and property tax disputes. Mr. Brusniak has been engaged in the representation of property taxpayers for 38 years. He is past Chair of the State Bar of Texas Property Tax Committee, past Chair of the American Bar Association's Property Tax Committee and past Chair of the State Bar of Texas, Section of Taxation. He has been named by his peers as a Texas Super Lawyer, one of the Best Lawyers in America, and is President of the National Association of Property Tax Attorneys. He writes a regular column on property tax matters for the State Bar of Texas Taxation Section Newsletter and the Section of Real Property Newsletter and is the author of Brusniak s Texas Property Tax Digest and Texas Property Tax Practice Insights published by LEXIS-NEXIS. He is a frequent speaker on property tax matters.

2 constitutional infirmity and wide differences in value for like items are not proof of unconstitutionality if the properties are located in different classes (e.g., individually owned versus part of an inventory). The Supreme Court rejected the use of the tax situs provisions included in the Tax Code for heavy equipment, finding that the statutory scheme demonstrated that the inventory should be valued at one location or a number of locations from which it is rented. To conclude otherwise would be irrational. UNDER THE COMMERCE CLAUSE, NO SEPARATE ANALYSIS NEEDS TO BE PERFORMED AS TO WHETHER A PROPERTY IS IN THE STREAM OF INTERSTATE COMMERCE SINCE THAT DETERMINATION IS INTERWOVEN WITH THE NEXUS REQUIREMENT OF THE COMPLETE AUTO TEST; IN DETERMINING NEXUS, THE LINK BETWEEN THE PROPERTY AND THE STATE IS THE RELEVANT CONSIDERATION; IN ANALYZING THE FAIR APPORTIONMENT OF A TAX ON PROPERTY IN INTERSTATE COMMERCE, A COURT MUST ASSUME THAT ALL OTHER STATES WOULD IMPOSE AN IDENTICAL TAX ON PROPERTY LOCATED IN THEIR BOUNDARIES ON JANUARY 1; IN DETERMINING WHETHER A TAX ON PROPERTY MOVING IN INTERSTATE COMMERCE IS DISCRIMINATORY, ITS INTENDED DESTINATION IS IRRELEVANT; IN DETERMINING WHETHER A TAX ON PROPERTY MOVING IN INTERSTATE COMMERCE IS IN REASONABLE RELATIONSHIP WITH THE ACTIVITY BEING TAXED, IT IS REASONABLE TO USE THE VALUE OF THE PRODUCT IN MAKING THE COMPARISON. ETC Marketing, Ltd. v. Harris County Appraisal District, 528 S.W.3d 70 (Tex. 2017), cert. denied, 138 S. Ct. 557 (2017) A buyer and seller of natural gas purchased gas at a hub located in Harris County, Texas. It entrusted the gas to an affiliated pipeline company authorized by the Federal Energy Regulatory Commission. The pipeline company did not own any lines outside of Texas but it did connect to lines which ran outside the state. Upon instructions from the owner, the company stored gas starting in April and then sold off the gas during periods of peak demand during the winter to out-of-state consumers. The appraisal district appraised 33 billion cubic feet of gas for taxation. Taxpayer objected claiming the gas was exempt from taxation because it was in the stream of interstate commerce. In analyzing the case, the Texas Supreme Court cited the U.S. Supreme Court s decision in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) as the most recent authority on the subject. However, it disregarded the two step manner which most courts have followed since Complete Auto which was to determine: (1) whether the property is in the stream of interstate commerce; and then (2) whether the tax is allowable under the four prong analysis of Complete Auto (a) does the tax apply to an activity with a substantial nexus with the taxing state; (b) is the tax fairly apportioned; (c) is the tax nondiscriminatory between interstate commerce and other activities; and (d) is the tax fairly related to the services provided by the state? The Texas Supreme Court ruled that the first step was unnecessary because that answer was inextricably interwoven with the answer to the first prong of the second step. Because the tax in issue was a property tax, the Court ruled that [w]hen dealing with ad valorem taxation... the link between the property and the state is the relevant consideration. In doing so, it rejected the analysis of Peoples Gas, Light and Coke Co. v. Harrison Central Appraisal District, 270 S.W.3d 208 (Tex. App. Texarkana pet.

3 denied), which found that nexus required a connection between a person owning the property and the state and used the traditional interstate commerce analysis to determine the gas was detained in the state for the benefit of the owner rather than merely passing through the state. The Court based its holding on the grounds that the owner was using its discretion and detaining the gas until market prices were higher during the winter. It rejected arguments that this was the method by which natural gas had to be produced and that FERC rules regarded storage as part of interstate transportation. It held that a fair apportionment test violation could occur only if the tax was structured in such a manner that if every state were to impose an identical tax, multiple taxation would occur, and that the analysis must be done under the assumption that other states would impose an identical tax-likewise only reaching property located in their jurisdictions on the first of January. It found no discrimination against interstate commerce because property located in the state and property moving out of state was treated in the same manner, and no attention was paid as to a property s intended destination. Finally, it ruled that no weight is given to the tax paid by the pipeline company s property versus the amount paid on the cushion gas itself in determining whether the tax bore a reasonable relationship to the services provided. The taxes paid by the pipeline company were paid to protect their property and the gas being stored needed to similarly pay for its protection. TEXAS COURTS OF APPEALS UNDER ARTICLE VIII, 2 OF THE TEXAS CONSTITUTION AND THE TAX CODE, LEASING A PORTION OF A PUBLIC PROPERTY DOES NOT NECESSARILY NEGATE A GOVERNMENTAL EXEMPTION BECAUSE THERE IS NO REQUIREMENT FOR EXCLUSIVE USE UNDER THOSE PROVISIONS. Tarrant Appraisal District v. Tarrant Regional Water District, No CV (Tex. App. Fort Worth, January 25, 2017, no pet. h.) (to be published) A regional water district built and leased a restaurant to a private party to be operated alongside a public trail on the Trinity River. The restaurant paid a percentage of its gross sales in rent to the water district. The restaurant provided free outdoor concerts, free water and Gatorade to persons using the trail, free outdoor games to the public and made its restrooms available to the public. Prior to development of the restaurant, the property was exempt from taxation. After the restaurant opened, the appraisal district appraised the restaurant and its adjoining parking lot for taxation contending that the property no longer qualified for a governmental exemption because it was no longer being used exclusively for public purposes. The court of appeals granted the exemption finding that: (1) unlike other exemptions, there is no requirement for exclusive use by the government in Article VIII, 2; and (2) the lease was within the water authority s prescribed statutory mission of operating and maintaining recreational facilities and promoting economic development. REQUIRING SECURITY DEPOSITS AND SOME PAYMENT DOES NOT BAR A HOUSING CHARITY FROM QUALIFYING FOR EXEMPTION. National Church Residences of Alief, TX v. Harris County Appraisal District, No CV, (Tex. App. Houston [1 st Dist.] December 12, 2017, no pet. h.)

4 Appraisal district revoked an exemption previously granted to a taxpayer, a nonprofit corporation, which operated a HUD subsidized apartment complex for elderly or disabled persons strictly in accordance with HUD guidelines. The parties filed cross-motions for summary judgment. The appraisal district contended that no exemption was allowable because all tenants were required to pay a security deposit, pay a portion of each month s rent, and could be evicted for nonpayment of their rent. The court disagreed that requiring prospective tenants to make a refundable security deposit intended to pay for potential damage to a unit established that the owner was not providing residential services without regard to their ability to pay. It similarly rejected the monthly rental payment requirements citing a previous case which held, [a]n organization... is not to be denied a tax exemption merely because some, or even a majority, of its patients are able to pay for their own care. The Court also rejected the eviction provision in the leases, finding that there was no requirement that lessees utilize their own funds to pay their portion of the monthly rent and there was no evidence that the charity had evicted anyone for nonpayment of rent. The court found it irrelevant that the market rent for each of the units was $389 a month and that the taxpayer received $389 a month for each unit between the lessee s contribution and HUD s payment. It noted that the charity provided other amenities to the tenants such as a service contribution program, a library, an on-site laundry facility, an elevator, an emergency call system, and a community game room. The court found the charity to be entitled to the exemption. NOTWITHSTANDING THAT 11.31(M) OF THE TAX CODE STATES THE TCEQ SHALL GRANT IN WHOLE OR IN PART POLLUTION CONTROL EXEMPTIONS FOR DEVICES SPECIFICALLY LISTED IN THE SECTION, TCEQ HAS THE RIGHT TO FIND A NEGATIVE USE DETERMINATION AND TO GRANT NO TAX RELIEF. Brazos Electric Power Cooperative, Inc. v. Texas Commission on Environmental Quality, No CV (Tex. App. El Paso, September 15, 2017, pet. filed) (to be published) An electricity generating company filed a pollution control application with the Texas Commission on Environmental Quality for heat recovery steam generators that doubled the amount of power generated by burning the same amount of natural gas, while reducing pollution. TCEQ uses a formula to determine whether adding pollution control equipment costs more than it benefits the party installing the equipment. Because the economic benefit to this taxpayer exceeded the cost of the equipment, TCEQ issued a negative use determination, or $0 exemption. The taxpayer argued that the Tax Code requires TCEQ to issue some amount of exemption because heat recovery steam generators are specifically identified by statute as devices that are entitled to exemptions. A recently added provision states, that if a device is on the list, TCEQ not later than 30 days after receipt of the taxpayer s information shall determine that the... device... is used in whole or partly as a... device... for the control of... pollution.... The court of appeals disagreed and found that the purpose of the pollution control constitutional amendment and statute are to compensate taxpayers for the added cost incurred to curb pollution. When a device actually creates more benefit to a taxpayer than the cost of the device, no exemption can be granted. AN APPRAISAL DISTRICT IS NOT REQUIRED TO PROVIDE A SEPARATE NOTICE OF DENIAL OF EXEMPTION IF THE NOTICE OF APPRAISED VALUE IT MAILS SHOWS $0" UNDER THE EXEMPTION COLUMN.

5 Vitol, Inc. v. Harris County Appraisal District, 529 S.W.3d 159 (Tex. App. Houston [14 th Dist.] 2017, no pet.) A taxpayer rendered its inventory for taxation at a value of $15,224,054. Although it was not required to by law, it also concurrently filed a form with the appraisal district claiming that a portion of its property qualified for an Interstate or Foreign Commerce exemption. The appraisal district delivered a notice to the taxpayer valuing the property at its rendered value but listed $0 under the exemptions heading. The taxpayer continued negotiation by phone with the appraisal district regarding the exemption until all periods for appeals had expired. At that point, an appraisal district employee sent the taxpayer an informing the taxpayer that it was too late for anything to be done because the taxpayer had failed to file a timely appeal. The taxpayer filed suit, but the suit was dismissed due to the trial court s lack of jurisdiction. The Court of Appeals upheld the dismissal, finding: (1) there was no requirement in the Tax Code for a separate notification of an exemption s denial; and (2) the taxpayer should have realized that its exemption request was denied when it received a notice that listed $0 of exemption. The court also ruled that the taxpayer could not establish jurisdiction for an appeal by claiming that it had been tricked into not filing a timely appeal by the continuing discussions with the appraisal district s personnel. Taxpayers are required to be aware of all legal deadlines and to timely exhaust their administrative remedies. UPON TRANSFER BETWEEN LEGAL ENTITIES, A NEW APPLICATION TO OPERATE A FOREIGN TRADE ZONE MUST BE FILED; A MONTH-TO-MONTH EXTENSION FOR THE OPERATION OF A ZONE WHILE PAPERWORK IS BEING HANDLED DOES NOT ALLOW FOR THE PROPERTY TAX EXEMPTION TO BE GRANTED IF THE OPERATOR IS NOT APPROVED; EXEMPTIONS GRANTED UNDER THESE CIRCUMSTANCES CAN BE RETROACTIVELY REMOVED. Harris County v. Harris County Appraisal District, No CV (Tex. App. Houston [1 st Dist.] June 22, 2017, no pet. h.) (to be published) To create and operate a foreign trade zone ( FTZ ), approval for the FTZ must be obtained from the Foreign Trade Zone Board. Thereafter, the U.S. Customs and Border Patrol must approve activation of the FTZ. The Border Patrol cannot do that until it obtains the approval of the owner of the land under the FTZ. Whenever a new operator for an FTZ appears, it must obtain permission from the Border Patrol before the FTZ can operate. In 1995, an FTZ was created for a refinery. The operator entered into an agreement with Harris County by which Harris County agreed not to oppose its being the operator of the FTZ. In 2005, the original operator sold its operations to a Delaware corporation. No one sought approval from Harris County but, because the landowner approved the transfer, the Border Patrol approved the new operator. A year later, through a series of internal mergers, the Delaware corporation ceased to exist and a Connecticut corporation took its place. Initially, the Connecticut corporation sought approval to operate the FTZ but, when it was told it needed to obtain the approval of Harris County, it reversed course and claimed that no approval was necessary because it was in essence the same entity that had been previously approved. The dispute over the need for approval of the new operator drug on until 2013 with the Board Patrol allowing month to month extensions of the operation of the FTZ by the Connecticut corporation but ultimately when the landowner notified the Board Patrol that it did not

6 approve of the new operator, the FTZ was deactivated. Thereafter, the appraisal district sought full taxation of all property located in the FTZ for the current year and the two prior years. The taxpayer disputed the taxation claiming no new application to become an operator was necessary due to the mergers and that the month-to-month approvals protected the FTZ from retroactive taxation. Citing federal law, the court found that the change in entities, even though by merger, required a new ownership application to be filed. It further held that the month to month extensions were meaningless because, without an approved owner, there was no legal FTZ. As a result, the retroactive taxation was appropriate. FAILURE TO TIMELY MAKE A TAX TENDER BARS ANY APPEAL OF A MOTION UNDER OF THE TAX CODE TO DISTRICT COURT. Advanced Powder Solutions, Inc. v. Harris County Appraisal District, 528 S.W.3d 779 (Tex. App. Houston [14 th Dist.] pet. filed.) Taxpayer began business operations in March A notice of appraised value was mailed to the business location with the address slightly incorrect. The business location was not the place where the taxpayer received its mail. As a result, the taxpayer never received notice and did not become aware that it owed anything until the sheriff showed up with a tax warrant to collect the overdue taxes. The taxpayer paid the bill in full. Thereafter, the taxpayer filed a motion under At the beginning of the appraisal review board hearing, the taxpayer was asked for proof that it had timely paid the taxes that were the subject of the motion. Because the taxpayer could not produce the proof, the appraisal review board dismissed the motion. Upon appeal, the district court dismissed the lawsuit ruling that it did not have jurisdiction over the case because the taxes had not been timely paid. The court of appeals upheld the dismissal finding that the failure to timely pay taxes not only deprived the appraisal review board of jurisdiction, it deprived the district court of jurisdiction as well. The court rebuffed arguments by the taxpayer that the Tax Code allowed appeals (notwithstanding lack of payment) of all orders of an appraisal review board and that, because the lack of tender would have been permissible under the payment requirements for litigation, they should be applied under these circumstances as well. TAXPAYERS MAY NOT RAISE LACK OF NOTICE AT A DELINQUENT TAX TRIAL; WITHOUT PLEADING IN WRITING CLAIMS OF PAYMENT OF TAX AND WAIVER BY THE GOVERNMENT, A TAXPAYER MAY NOT RAISE THE GROUNDS AT TRIAL. City of El Paso v. Mountain Vista Builders, Inc., No CV (Tex. App. El Paso, March 8, 2017, no pet.) (to be published) Taxpayer, a residential developer, was sued for collection of delinquent taxes on a number of tracts he had developed and sold. In response to the lawsuit, his attorney filed a general denial and raised no affirmative defenses. At trial, over the objection of taxing unit counsel, the taxpayer testified that a number of his bills and notices were sent to the wrong address, and that his policy was to always forward tax bills received to his accountant who had the title company verify any taxes that were due and collect them at closing upon the sale of the tracts. He also testified that the title company was defunct at the time of trial. The trial court ruled in his favor. The court of appeals reversed, ruling that claims of lack of notice of taxes and issues pertaining to waiver of interest and penalties were required to be presented to the appraisal review board before they could be raised in court. Because the taxpayer had

7 not presented these claims to the appraisal review board, he could not raise them in court. It further ruled that his claims of payment and claims of waiver or estoppel against the government were barred because the taxpayer s lawyer failed to present them in writing prior to trial. The general denial that was filed was insufficient to give notice to the taxing units of these claims of defense. TEXAS ATTORNEY GENERAL OPINIONS APPRAISAL DISTRICTS DO NOT HAVE THE AUTHORITY TO DETERMINE THE LEGAL BOUNDARIES OF SCHOOL DISTRICTS. Op. Tex. Att y Gen. No. KP-0175 (2017). An appraisal district s change to its records regarding the boundaries of two school districts based upon information provided by a third party was illegal. Appraisal districts have no authority to determine legal boundaries of school districts. Such boundaries may only be changed at the instance of the school districts involved. AN ELDERLY OR DISABLED PERSON DOES NOT LOSE HIS OR HER PROPERTY TAX HOMESTEAD EXEMPTION IF THEY ARE LOCATED TEMPORARILY IN AN ESTABLISHMENT SET UP TO ASSIST PERSONS WITH OVERCOMING ILLNESS OR INJURY, OR WITH NEEDS RELATED TO PHYSICAL OR MENTAL WEAKNESS OR GROWING OLD, THROUGH A WIDE RANGE OF ACTIVITIES, REGARDLESS OF WHETHER THE OWNER RECEIVES SUCH SERVICES. IT IS UNCLEAR IF TEMPORARILY RESIDING IN INDEPENDENT LIVING FACILITIES FOR THE ELDERLY QUALIFIES UNDER THE TAX CODE. Op. Tex. Att y Gen. No. KP-0147 (2017). An elderly or disabled person does not lose his or her property tax homestead exemption if they are located temporarily in an establishment set up to assist persons with overcoming illness or injury through a wide range of activities, or with needs related to physical or mental weakness or growing old regardless of whether the owner receives such services. It is unclear if temporarily residing in independent living facilities for the elderly qualifies under the Tax Code.