North Carolina Property Tax Update Archive

UPDATED SEPTEMBER 2014

In the Matter of the Appeal of Interstate Outdoor Incorporated, September 16, 2014, COA 14-223

North Carolina Court of Appeals has affirmed a decision of the NC Property Tax Commission sustaining an assessment of billboards in Johnston County, NC.

The NC Department of Revenue promulgates a Billboard Structures Valuation Guide for use by counties in the assessment of billboards. (The billboards are assessed as personal property, and not as fixtures to real estate that are incorporated in the assessment of the underlying realty.)

The taxpayer’s burden in NC is to produce substantial evidence that the assessment was arbitrary or illegal and that the assessment was substantially in excess of fair market value. The taxpayer attempted to prove that the assessment was arbitrary or illegal by the use of estimates of construction costs for billboards it deemed comparable, but which were not actually estimates of the replacement costs of the individual billboards the assessments of which were under appeal.

In affirming the use of the billboard valuation guide, the Court of Appeals held that the use of such guides was appropriate and the fact that independent valuations of each piece of personalty might be more accurate did not render the use of the guide arbitrary. It noted that the estimates were of “similar” signs but were not appraisals of the signs at issue. The court pointed out that the estimates were of signs of different sizes and that there was substantial reason to doubt that the estimates reflected the true value of the billboards. “Interstate has failed to show that the method prescribed by the Billboard Guide produces a value significantly higher than the true value.”

Despite the development of recent NC case law making it clear what the taxpayer’s burden of persuasion is to rebut the presumption of correctness afforded an assessment, what the county must do once that burden is met, and how the PTC should analyze the evidence presented, it remains clear under NC law that the taxpayer must carry its burden if it is to prevail. In this case, the taxpayer did not produce substantial evidence that the assessment was arbitrary or that the assessment methodology failed to produce a value higher than true value.

Charles B. Neely, Jr.
Williams Mullen
American Property Tax Counsel (APTC)

UPDATED SEPTEMBER 2011

North Carolina Court of Appeals Affirms Shopping Center Valuation by PTC

In a case decided on August 2, 2011, In re Appeal of Blue Ridge Mall LLC, No. COA10-1487 (August 2, 2011), the Court of Appeals, in affirming the decision of the North Carolina Property Tax Commission lowering the assessed value of a regional mall, comprehensively summarized the law of North Carolina relating to the assessment of income producing properties, the burden of production and proof, and the review of a PTC decision by an appellate court under a whole record review.

Although the Court did not break new ground in reaching its decision, it reiterated prior holdings of the court on the taxpayer's burden of production, and rejected the County's contention that merely following its schedule of values was sufficient to show that the taxpayer had failed to rebut the presumption of correctness afforded an assessment.

The Court limited the application of the Supreme Court's holding in In re Appeal of Allred, 351 N.C. 1, 519 S.E.2d 52 (1999), that a taxpayer's appraisal must correlate to the County's schedule of values, stating that the Allred ruling was applicable only to appeals for years in which a general reappraisal was not made. The Allred rule did not apply in this case because the taxpayer was appealing from the County's general reappraisal of its property.

In determining a value for the property that was lower than the County's assessed value and higher than the taxpayer's appraiser's value, the PTC had applied a direct capitalization rate of 10.5 percent, a rate lower than the rate the taxpayer's appraiser had used in performing his appraisal. Both the taxpayer and the County appealed the use by the Commission of a rate for which there was no supporting direct testimony in the record. Applying the whole record test, the Court held that the capitalization rate determined by the PTC was supported by the evidence. The Court noted that the PTC's capitalization rate fell within the range of capitalization rates relied upon by the appraiser, and that the PTC was free to adjust the capitalization rate used by the taxpayer's appraiser based on its finding that, in determining his capitalization rate, the appraiser had relied most heavily on the rate indicated by the sale of a mall that was substantially older than the subject property.

UPDATED March 2011

Property Tax Commission Recognizes Utility of Cost Approach in Newly Constructed Owner Occupied Properties

In a decision released on November 23, 2010, the North Carolina Property Tax Commission reduced the assessment of a Super Target store in Kannapolis, NC from id="mce_marker"9,214,550 to id="mce_marker" 4 million, ruling that the county's schedule of values had been misapplied by the assessor. 

In reaching its decision, the PTC relied on several different factors, including:

1) The store was constructed a little over a year before the assessment date at a cost of around id="mce_marker"1 million and, because the store was newly constructed, the cost approach was the best approach; and

2) The store was designed and built as a Super Target discount store. The PTC found that owner occupied stores such as the Super Target in question are not primarily built for their income producing capability and that the income and comparable sales approaches are of limited utility. The PTC found that …" the capitalization rates indicated by these sales (sales of developers to third parties) are reflective of the low risk due to the creditworthiness of the tenant, the long term nature of the lease, the absolute net structure of the lease, and the very limited management required."

The case offers a potentially useful precedent for the valuation of retail properties designed for their occupants which are leased to third parties where the sales price of the property is inflated due to the creditworthiness of the tenant.

UPDATED March 2010

NC Court of Appeals restates law on situs of personal property for property taxation

In the Matter of Appeal of Amusements of Rochester Inc, COA 09-234, the NC Court of Appeals held that the situs of personal property of the Taxpayer was properly in NC. The carnival equipment in question, while subject to being transported around the mid eastern US for carnivals, was maintained and stored in Pender County, NC for 6 months each year. Taxpayer, a New York corporation, argued that situs was properly in New York. The court observed that the burden of proof was on taxpayer, and that although it was a NY corporation, it had established Pender County as its domicile in NC., where its principal place of business in NC was located. The property was in NC on January 1 of each year at its NC location, where maintenance personnel were located. The court placed considerable weight on the fact that the Taxpayer did not pay taxes on the equipment in any other state. The court held that the Taxpayer was a resident of NC under GS 105-304(c)(2) and that it had failed to establish tax situs elsewhere.

UPDATED December 2009

Personal Property Valuation Appeals

The North Carolina Court of Appeals, in a significant taxpayer victory, has just given further instructions to the North Carolina Property Tax Commission ("PTC") as to how personal property valuation appeals should be handled. See In the Matter of Appeal of: IBM Credit Corporation, COA 08-1514 (N.C. App. Dec. 8, 2009). While the case involved the valuation of computer equipment, the decision also has significance for real estate appeals, as it relates to how the PTC should weigh the evidence and support its decision once the taxpayer has met its burden of proof at trial and the burden of persuasion has shifted to the County.

In the first appeal of this case, the Court of Appeals held that the PTC had wrongly applied the law on burden of proof, reversing and remanding the PTC decision in favor of Durham County with instructions that the PTC apply the correct burden of proof framework. The PTC again ruled in favor of the County on remand. The taxpayer again appealed, and the Court of Appeals again reversed, stating that the PTC's failure "to explicitly make these findings (as to burden of proof) is problematic for this Court on review."

The Court of Appeals held that because the PTC final decision had failed to adequately address key issues necessary to arrive at the ultimate decision about the fair market value of the property being appraised, these omissions "result in conclusions which lack evidentiary support and are therefore arbitrary and capricious."

The court then proceeded to outline the deficiencies in the PTC final decision, giving explicit guidance to the Commission as to how it should deal with the case on remand.

The case is of importance in personal property appeals in that it requires counties in future cases to support their generally blind adherence to State-promulgated trending and depreciation tables with better evidence. Its greater significance, however, lies in its direction to the PTC to provide detailed support for its decisions once the taxpayer has met its burden of proof and the burden of persuasion has shifted to the county. In recent years, the PTC has tended to write relatively terse decisions, with little analysis and support for its conclusions.

If followed by the PTC, the IBM Credit Corp. decision should result in better reasoned opinions of the PTC and an opportunity for more thoughtful review on appeal by the Court of Appeals.

UPDATED SEPTEMBER 2009

Property Tax Commission ruling makes appeal of assessed value of industrial plants more challenging

The North Carolina Property Tax Commission recently handed down a decision in In the Matter of: the Appeal of Kimberly-Clark Corporation, 07 PTC 298, which may make challenges to the assessments of operating industrial plants more difficult. The PTC ruled, in a decision which was not appealed to the Court of Appeals, that the use by the taxpayer's appraiser, as comparables in his comparable sales approach, of sales of plants which were not operating, was improper. The PTC held that such properties were not comparable to the subject property since the subject property was in operation on the assessment date.

The authors agree that sales of non-operating plants may not always be comparable sales due, in particular, to special features in the comparables or the subject . Nevertheless, the authors believe mere fact that a plant is not in operation should not be sufficient to disqualify the sale of that plant as a comparable. In fact, there are features in all industrial plants that add or detract from the value of the plant. In using the sales of these plants as comparables, it is important to account for those factors, as well as other distinguishing factors.

The cost approach is frequently not appropriate for older industrial plants, and the income approach is generally inadequate due to the absence of rental data for industrial plants. The PTC's ruling now threatens also to undermine use of the comparable sales approach.

Taxpayer's counsel will need to give careful thought as to how to contend with the PTC ruling in Kimberly-Clark when litigating industrial plant assessments.

UPDATED March 2009

Business Personal Property Taxation

Business personal property is subject to assessment at 100% of fair market value as of January 1 of each year in North Carolina. Business personal property includes machinery and equipment, furniture and fixtures, and computers and some forms of software. Listings, which must be filed by January 31 or the extended filing date if an extension is filed, must also include construction in progress, supplies and other forms of assessable property.

Personalty is generally assessed using trending and depreciation tables published by the NC Department of Revenue on an annual basis. The state's tables are based upon IRS class lives and BLS indexes. While generally adequate for mass appraisal purposes, the state's schedules do not reflect extraordinary obsolescence - whether functional or external - and may therefore produce values in excess of market.

Counties must either notify taxpayers of the proposed assessed value and give them 30 days to appeal or the notice is given when tax bills are mailed and the taxpayer has 30 days to appeal at that time.

Careful attention must be given to tax office notices to avoid losing appeal rights.

UPDATED June 2008

Supreme Court Affirms Court of Appeals Decision on Burden of Proof

The December 2007 reported on a recent decision by the North Carolina Court of Appeals that reinforced the framework for the shifting burden of proof at the Property Tax Commission. The North Carolina Supreme Court has affirmed the decision of the Court of Appeals without comment. In Re Appeal of IBM Credit Corp., 362 N.C. 228, 657 S.E.2d 355 (Mar. 7, 2008). The holding affirms that the taxpayer only has the burden to produce competent, material and substantial evidence that tends to show that the assessment is incorrect in order to shift the burden to the county to persuade the Commission that its methods would produce true values. Thereafter, the Commission weighs the evidence and issues its decision.

UPDATED March 2008

True Lease vs. Conditional Sale

Lessors and lessees of personal property should be aware that whether the transaction is a true lease or is a conditional sale may determine which entity must list the property for property tax purposes in states which assess personal property. Agreements that are denominated as "leases" may be conditional sales if they are for a definite term and there is an option to purchase the property at the end of a lease that is small enough to be considered nominal.

In North Carolina, the question of which entity must list the property is governed by N.C. Gen. Stat. § 105-306. Whether a transaction is a conditional sale or a lease may be determined with reference to the UCC approach under N.C. Gen. Stat. § 25-1-203, as well as Financial Accounting Standards Board Standard No. 13. Counties may issue discovery assessments for transactions that lessors have treated as conditional sales if the option purchase price is too high or the transaction otherwise bears indicia of being a lease.

UPDATED December 2007

Law, Accounting and information technology intersect... Implications for Property Taxation

North Carolina imposes its property tax on business personal property - principally machinery and equipment, computers, furniture and fixtures and motor vehicles. The tax is imposed broadly, but is subject to various exemptions. Intangible personal property is generally exempt from tax, with the exception of leasehold interests in exempt real property and capitalized software purchased from unrelated third parties, both of which are assessable. See N.C.G.S. 105-275 (40).

Recently, several counties (e.g. Wilkes, Guilford and Forsyth) have begun to audit taxpayers' books and have been discovering for assessment "capitalized salaries" associated with software. The capitalized salaries accounts of taxpayers may include compensation paid to third parties, such as consulting firms engaged to work on packages such as SAP, or may be the salaries of other independent contractors or of the taxpayers' own employees.

These amounts are capitalized pursuant to the requirements of SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, published by the Accounting Standards Executive Committee, American Institute of Certified Public Accountants.

This is an area where law, accounting and information technology intersect, with predictably controversial and complex implications for property taxation. Clearly, not all amounts included in the capitalized salary accounts are assessable; equally clearly, some portions of these accounts related to the installation of software purchased from third parties may be assessable. Deciding what is assessable and what is not is a team effort involving in-house tax, accounting and IT personnel as well as analysis by experienced property tax counsel.