Interstate allocation

Interstate Allocation topics Interstate Allocation Overview Interstate Allocation for Vessels and Watercraft Interstate Allocation for Rolling Stock Interstate Allocation for Aircraft Interstate Allocation for Motor Vehicles Allocation Application Forms Types of Supporting Documentation

Overview There are five sections of the code that address interstate allocation. Section 21.03 is a general description of Interstate Allocation and it states - “If personal property that is taxable by a taxing unit is used continually outside this state whether regularly or irregularly, the appraisal office shall allocate to this state the portion of the total market value of the property that fairly reflects its use in this state.” It has been on the books since 1982.

Overview Then there are four sections of the code that address allocation methodology for specific types of personal property: 21.031 – Vessels and Watercraft 21.04 – Railroad Rolling Stock 21.05 – Commercial Aircraft 21.055 – Business Aircraft There is no section that specifically addresses allocation of motor vehicles.

Vessels and Watercraft Section 21.031 – lays out what is considered to be out of state. (international waters and beyond the Gulfward boundary of this state, and provides allocation methods for different types of vessels.

Vessels and Watercraft Continued The two basic allocation methodologies are: A vessel or watercraft that is used as an instrumentality of commerce can be allocated by multiplying the market value times a ratio of miles traveled in state divided by total miles traveled. This is for vessels used to transport cargo, equipment, or passengers for hire. A special-purpose vessel not used as an instrumentality of commerce can be allocated by the market value times a ratio of days in state to total days in the year (365). This section is for something like a drilling platform or a dredging operation.

Railroad rolling stock Section 21.04 only applies to rolling stock that is owned or leased by a railroad. Railroad rolling stock receives interstate allocation based on miles traveled in state and out of state. Then that value is further allocated between each county that the railroad travels in, based on the miles of track owned by the railroad in that county, divided by the total miles of track owned by the railroad in Texas. Chapter 24 Subchapter B has 11 sections laying out how the railroad rolling stock apportionment works.

Railroad rolling stock continued Railroad rolling stock is the only type of personal property in Texas that receives intrastate allocation. Railroad rolling stock is only taxed by the counties where the railroad has track. Cities, schools, and special districts don’t assess railroad rolling stock.

Rolling Stock Rolling stock can be owned or leased by a company that is not a railroad. This rolling stock is assessed where it normally returns or the company’s principal place of business in Texas, and is subject to taxation by all taxing entities at that location. This type of rolling stock just receives interstate allocation based on miles traveled in state and out of state.

Aircraft allocation section 21.05 Sections 21.05 and 21.055 of the Property Tax Code apply directly to the application of interstate allocation for aircraft. Before 2000 only 21.05 was on the books and was intended for airlines and cargo haulers. The first requirement is that the operator has to be a certificated air carrier. Section 21.05 has a novel formula for calculating the allocated market value. It is the market value of the plane multiplied by the fraction - (1.5 times the number of Texas revenue departures in the preceding year divided by the number of hours in a year “8,760”).

Aircraft allocation section 21.055 Starting in tax year 2000 section 21.055 was added to the property tax code, which provided a specific formula for calculating the allocation for business aircraft. The 21.055 allocation formula is simple – It is the market value of the plane times (Texas departures divided by all departures from the preceding year). The Himont Case for rolling stock from 1991 and the law of unintended consequences. The SLW Aviation case in 2003 reversed Himont.

Aircraft allocation continued Not long after the addition of section 21.055, business aircraft owners began to apply for interstate allocation under 21.05. The formula under 21.05 was intended for airlines whose planes depart hundreds of times a year. When the formula is applied to a typical business aircraft with only a few departures the plane’s allocated market value is negligible. Litigation ensued. Today, many business class aircraft in Dallas County are being operated by certificated air carriers.

Aircraft allocation continued When can an aircraft owner claim 21.05 commercial allocation? Must be operated by a certificated air carrier, who may or may not be the aircraft owner. The air carrier’s certificate will list all aircraft that are being operated under the charter The flights are typically under FAA part 135 rules, but non commercial flights may also be listed under part 91 rules. If the part 91 flights exceed part 135 revenue flights may be considered as a business aircraft, not commercial.

Aircraft allocation continued An aircraft being operated by a certificated air carrier is held to higher maintenance, safety, and crew standards, than a private or business aircraft. The owner turns over considerable control to the certificated air carrier, and the plane can only be flown by pilots that work for the carrier. Maintenance costs increase, but the aircraft may generate some income, and the property tax goes to nearly zero.

Aircraft allocation calculation examples Example of applying 21.055 vs. 21.05 to a $10 million dollar commercial airliner with 1000 departures from Texas out of 2,000 total departures last year. 21.055 - $10,000,000 x 1000/2,000 = $5,000,000 21.05 - $10,000,000 x [(1.5x1000)/8,760] = $1,712,300

Aircraft allocation calculation examples Example of applying 21.055 vs. 21.05 to a $10 million dollar business jet with 25 departures from Texas out of 50 total departures last year. 21.055 - $10,000,000 x 25/50 = $5,000,000 21.05 - $10,000,000 x [(1.5x25)/8,760] = $42,810

Interstate allocation as it applies to aircraft Confirm the part 91 and part 135 flights for an aircraft, you may be able to argue that with less than 50% commercial flights, the plane should be valued under 21.055. Per the code the plane is to be primarily engaged in the transport of cargo, passengers, or equipment for others for consideration.

Interstate allocation for motor vehicles The code does not have a specific section that applies to motor vehicles involved in interstate travel. So section 21.03 that covers general interstate allocation applies. For vehicles, the formula is mileage in state divided by total mileage. The comptroller must establish formulas, and the current application requests mileage.

Interstate allocation for motor vehicles Interstate allocation for motor vehicles includes tractors, trailers, and equipment that is on a truck like GPS tracking systems. It could also be a fleet of buses, passenger cars, or vans that meet the requirement of being used continually outside of Texas.

Interstate Allocation property type summary Under 21.03, any personal property that is used continually outside of the state regularly or irregularly could qualify for interstate allocation. The typical recipients of interstate allocation are vessels and watercraft, rolling stock, aircraft, and motor vehicles. The code has specific sections that detail methods for calculating allocation for all of these recipients, but motor vehicles.

Changes during the 83rd legislative session (2013) Sections 21.09 and 21.10 are added to specifically to address the allocation applications going into effect in June of 2013. Filing an interstate allocation application annually becomes mandatory. (21.09) A rendition does not have to be filed in order to receive an application. (21.09) Late applications are addressed (21.10)

Impact of the Legislative Changes Procedure changes start with the 2014 appraisal year. Additional staffing requirements. Programming changes. Tracking late applications for the taxing entities.

Interstate Application requirements If a owner believes that they have property that qualifies for interstate allocation, they must file an application prior to May 1. The state form is 50-147, and it covers every type of interstate allocation except for railroad rolling stock. The form can be filed late, up until the day before the ARB approves the appraisal records.

Interstate Application requirements For new companies, they have an additional 45 days from the receipt of the notice to file their application without penalty. For good cause shown the chief appraiser shall extend the application deadline up to 60 days. The penalty for existing companies that file after April 30th, or new companies that miss the 45 day extension is 10 percent of the tax that would have been imposed on the out of state portion of the allocation.

Interstate Application requirements What is on the interstate allocation application form is prescribed by the comptroller. The Dallas CAD added an interstate allocation flag to the CAMA system that identifies accounts that either received interstate allocation the prior year, or have been identified as a company that may be eligible. If the flag is checked, a preprinted application form is mailed along with the rendition form each year. The forms mirror the state forms 50-147 and 50-145 All aircraft accounts receive the preprinted interstate allocation application each year, along with a rendition form.

Vessels and Watercraft – Documentation requirements to support an interstate allocation application Vessels and Watercraft – Supporting documentation, could be gps maps showing where a vessel traveled in the previous year. Contract dates for drilling or research operations at a specific latitude and longitude.

Documentation requirements to support an interstate allocation application Rolling Stock A list of all rolling stock, both cars and engines. If the rolling stock is being leased, then lease agreements. Track charts showing in state and out of state mileage. Other documentation that provides miles traveled by state.

Documentation requirements to support an interstate allocation application Aircraft Flight Logs from the previous year. Many aircraft operators will summarize the departures but it’s always a good idea to check their numbers. Someone will have to decipher the airport codes to determine if they are in Texas or not. Can be some argument about test hops. The 2016 market value for just over 580 aircraft in Dallas County was $1.8 billion. The taxable value was $521 million. This value does not include airlines such as Southwest.

Documentation requirements to support an interstate allocation application Motor Vehicles In state and total mileage for each vehicle Previous year’s quarterly International Fuel Tax Agreement (IFTA) reports. This report can be used to verify the mileage information being provided for the individual trucks. A trucking company may have more than 1 trailer per tractor. Typically, only the tractor mileages are maintained. The 2016 market value for the 192 truck fleets in Dallas County was just over $4 billion, with a taxable value of $473 million.

Wrap up Questions?