"In point of fact, industrial property owners will save themselves time and trouble if they retain a knowledgeable property tax expert to help sort out the most defensible method for categorizing the various machinery, apparatus and equipment in their plants. At the same time, the New Jersey legislature would serve constituents well by clarifying once and for all the language defining what is and is not industrial machinery and equipment for property taxes purposes."
Amazingly, every possibility exists that the major equipment in a New Jersey industrial plant is taxed as real property if the owner's case lands before one judge, but if a different judge hears the case, the equipment is not taxed as real property. How did New Jersey put industrial owners in this kind of dilemma and what can be done about it?
In 1990, the Tax Court heard the case of Texas Eastern v. Director, Div. Of Taxation, a case dealing with Texas Easter's gas pipeline distribution facility in New Jersey. The Court determined that the vast majority of the contested property was real property subject to local taxation. Based on the finding, Tax Eastern appealed.
In 1991, relying in part on Texas Eastern, the New Jersey Tax Court decided in the General Motors case that most of the major equipment in the case was real property subject to local taxation. Both this and the Texas Eastern decisions seemed at odds with legislative history-as far back as 1966, New Jersey sought to exclude business personal property (machinery, apparatus and equipment) from taxation as real property. No real property tax assessment can be levied on business personal property, thus, the more such property is defined as business personal property, to lower the real property tax assessment. As a result of these decision and others, in 1992, the legislature passed the Business Retention Act (BRA) to clarify what industrial equipment should be taxed as business personal property and which as real property. Despite BRA and the Appeals Court remanding the original General Motors case for retrial, the second General Motors trial, decided in 2002, resulted in a new judge ruling the same way the first judge had ruled in the original case.
As the original General Motors case, the Appeals Court remanded the Texas Eastern case to different judge for retrial. BRA, passed after both cases had been appealed, attempted to remind taxing authorities that business machinery, apparatus and equipment should not be taxed as real property but rather as personal business property. The Appeals Court appeared to understand the legislature's intent in BRA and remanded both cases to the original court for reconsideration. The new judge in Texas Eastern reconsidered the original court ruling in 2006 and concluded that none of the property was subject to taxation as real property. Much of the machinery and equipment in he Texas Eastern facility was comparable in size and quality to that in the General Motors plant. Despite the similarity, the Texas Eastern Court rendered a decision diametrically opposed to both decisions of the court in the General Motors case.
In Texas Eastern, the court stated that BRA sought more broadly to exclude from local property taxation personal property used or held for use in business. The Act came as a response to the prior decisions in General Motors and Texas Eastern and to cases like this where business equipment is taxed as real property rather than as personal property. The conflicting opinions in the General Motors case in 2002and Texas Eastern in 2006 create an anomalous situation for industrial taxpayers. Two directly opposite Tax Court decisions regarding BRA put taxpayers in a quandary. Do they account for equipment and machinery as business personal property or as real property? One judge ruled one way and another a different way. Since categorizing these assets as business personal property will reduce real property taxes, many taxpayers will, without too much thought, attempt to argue non-taxability as route to lower taxes. While simple on its face, this alterative could put some taxpayers at risk.
In point of fact, industrial property owners will save themselves time and trouble if they retain a knowledgeable property tax expert to help sort out the most defensible method for categorizing the various machinery, apparatus and equipment in their plants. At the same time, the New Jersey legislature would serve constituents well by clarifying once and for all the language defining what is and is not industrial machinery and equipment for property taxes purposes. The state needs stability in this critical area. Conflicting options on the tax law disadvantage any taxpayer that needs to make cogent decisions about investment and taxes in this state.