Whether a business is a seniors housing facility, a racetrack or other service-oriented operation - or even a manufacturing plant - part of the business’ value may be intangible and exempt from property tax. Recent court cases underscore this critical premise and provide valuable reference points for taxpayers struggling against unfair tax practices.
Local governments in all states have authority to impose property tax on the value of real estate. Local governments in all but seven states also impose property tax on the value of at least some tangible personal property, or property that can be moved, such as equipment.
But in most states, local authorities are prohibited from taxing any additional value of a business as a going concern, meaning value attributable to a brand, reputation for product quality, intensive management, licenses, contractual rights, proprietary technology, and other intangible assets.
For example, if a manufacturing plant receives additional revenue because it packages items with a well-known brand’s label instead of a generic one, that brand is an intangible asset. In numerous cases it has been seen that the value of intangible assets equal or exceed the value of the taxable property. Whatever the business, removing intangible assets from the property tax bill is key.
California tests intangibles
Some states provide clearer guidance than others on identifying and quantifying intangible assets. California, in particular, has been a hotbed of controversy over the treatment of intangibles in valuation for tax purposes lately.
Stephen Davis, a partner in the Los Angeles law firm of Cahill, Davis & O’Neall, summed up the latest developments during a presentation at the Seattle Chapter of the Appraisal Institute Fall Real Estate Conference in October by saying that major cases in the last two years capped two decades of controversy. He should know, since his firm was counsel of record in the SHC Half Moon Bay vs. County of San Mateo case, decided in May 2014. Davis commented that the result of this new case law has been “a few new controversies instead of a clean resolution,” but much was resolved favourably for taxpayers and provided helpful lessons that should apply anywhere in the nation.
The main takeaway from California’s recent cases is the importance of an appraisal of each intangible asset in order to deduct that value from the overall business value.
In SHC Half Moon Bay vs. County of San Mateo, the four-star Ritz Carlton Half Moon Bay Hotel proved that the assessor inappropriately included in the hotel’s taxable value approximately $2.8 million of exempt value attributable to its workforce and to contractual rights involving a parking lot and golf course. Granting a significant victory to taxpayers, the appeals court made clear that merely subtracting franchise fees from the value indicated by the income approach to value did not account for the value of the hotel’s franchise rights and other goodwill.
What does that mean for taxpayers? Under this case, an appraisal that provides evidence of the value of each intangible asset should result in removing those intangible values from property tax assessments. The reasoning espoused in this decision from California should apply in any state where intangible property is exempt from property tax.
For example, just last year the Montana Supreme Court declared invalid a Montana Department of Revenue regulation that attempted to narrow that state’s broad exemption for intangibles, such as by requiring valuation of goodwill only by the accounting method.
A growing volume of cases argues for valuing the intangible assets of a wide range of businesses by using generally accepted appraisal practices, bolstering the position of taxpayers defending themselves against unfair taxation of those assets.