Understanding State-Assessed Property Tax and Appeals for Energy Industries

Ferris wheel at sunset

Paying real estate taxes is familiar and expected. Typically, this obligation applies to residential property, vacant land, and all types and classifications of commercial property. In a handful of states, local assessment authorities can also value industries such as gas, electric, water transmissions companies, electric generation facilities, rural electric cooperatives, pipeline companies, airlines, telecommunications companies, and railroads.

In most states, these complex properties and industries are state or centrally assessed, meaning the local assessors and appraisers have no jurisdiction or responsibility to value such property. Instead, these properties are valued by state appraisers assigned to value specific complex industries within their state.

Understanding this state-level assessment process, how it applies to your organization, and how to navigate the appeal process can generate significant tax savings.

Approaches to State-Assessed Values

Assessing property tax on energy entities varies from state to state. Below is a summary of the most common approaches.

Cost Approach

The cost approach to value assessment method involves taxpayers self-reporting assets which the central assessment authorities use to calculate obsolescence ultimately determining value.

Unit Approach

The unit approach to assessment considers not only the cost approach to value, but also an income approach, and on rare occasions, a stock and debt approach to value. This approach is most frequently used in western states.

Unit Valuation Scenario

A typical unit value scenario involves the taxpayer filing a return, generally in the spring, listing taxable assets. The state determines a value based on this cost approach to value, generally relying on the company’s reported cost information and applying appropriate measures of accrued depreciation and obsolescence.

The state also reviews the entity’s income, often for a three-to-five-year period, using a weighted average and applying a cap rate to the net operating income which determines a property tax value based on an income approach to value.

The state then determines a weighting of percentages to be given to the cost approach and the income approach to ultimately arrive at taxable value.

Valuation Models Discrepancies

Many companies have assets that cross multiple state boundaries. In these instances, states determine a unit value, representing the total taxable value of the company’s owned assets and apportion the appropriate value percentage to the assets that represent the assessor’s state value.

Appealing Property Tax Assessments

Just as locally assessed taxpayers have the right to question or appeal assessed values if they believe the assessments are excessive, state or centrally assessed taxpayers have the right to appeal if values are deemed incorrect. Most states offer an informal process allowing discussion around how values are established, and whether there is an opportunity to settle disputes with an amended value. The most common discrepancy is overvaluation of the property.

If a settlement isn’t possible through informal negotiations, a formal appeal and hearing process is available in each state.

Position Your Entity for Appeal Success

Launching and winning a property tax appeal can be a complex process. From valuation methods to identifying and quantifying errors in the income and cost indicators to ensuring that allocations and adjustments are properly applied to a reconciled unit value, each state requires adhering to its own appeals process.

Set your organization up for success by:

  • Tracking all Notices of Value and tax bills received.
  • Reviewing workpapers from the assessment authority or requesting additional data from the assessor to ensure the taxable value is not excessive.
  • Filing appropriate appeals in a timely manner to ensure appeal rights are preserved and protected.
  • Taking advantage of informal negotiation timeframes with the assessor to settle excessive assessed values.

We’re Here to Help

To learn more about state-assessed property tax and how it impacts your business, contact your Moss Adams professional.

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