Tax Equalization Solutions I Want My Equalization and I am Not a Railroad (So I Can’t Hide Behind the 4R Act) A Review of Equalization and Ratio Practices Mike Connolly, North Carolina Department of Revenue Bill Wilkes, Tax Equalization Solutions, LLC Shawn Pittman, Duke Energy Tax Equalization Solutions

Equalizations 101: Who, What, When, and How Shawn Pittman, Duke Energy Shawn.Pittman@duke-energy.com (704) 382-1119

Who Can Get Equalization? Equalization can be done to equalize assessed values within a class of property and/or equalize classes of property. Generally the classes of property are residential real, commercial real, industrial real, personal, agriculture, and/or state assessed/public utilities. Most taxing jurisdictions assume that personal property and or state assessed/public utilities are assessed at fair market value because of the fact that they are assessed annually.

Who Does the Equalization/Ratio Study? Most Commonly a Taxing Jurisdiction collects data. Then the State Prepares and Certifies a Ratio Study per State Law and generally using I.A.A.O. “Standard on Ratio Studies”. State Law generally trumps I.A.A.O. guidelines. A Taxpayer or a Group of Taxpayers can engage a consultant to perform their own Ratio Study.

What is Equalization? Define in the April 2013 edition of the International Association of Assessing Officers “Standard of Ratio Studies” The process by which an appropriate governmental body attempts to ensure that property under its jurisdiction is assessed at the same assessment ratio or at the ratio or ratios required by law. Equalization can be undertaken at many different levels. Equalization among use classes (such as agricultural and industrial property) can be undertaken at the local level, among properties a school district and a transportation district; equalization among counties is usually undertaken by the state to ensure that its aid payments are distributed fairly.

When is Equalization Important to State Assessed/Utilities? During periods of economic growth that occur in between reassessment cycles within a jurisdiction. During periods of normal growth if the taxing jurisdiction has a long period in between reassessment cycles.

How is Equalization Protected for State Assessed/Utilities? Statutorily required (State Code or State Administrative Code) Best Protection State Constitution (Fair and Equitable Taxation) Second Best Protection Federally Required per The Railroad Revitalization and Regulatory Reform Act or 4R Act for Railroads Very Good for Railroads, Offers No Protection for Non-Railroads Direct or Indirect. If no state statute and no protection in the State Constitution the Fourteenth Amendment to the United States Constitution – “ shall not deny any person within its jurisdiction the equal protection from the law” – Perhaps a Last Hope.

What is the 4R Act? A federal statute passed by Congress in 1976 with the purpose of restoring the financial sustainability of the nations railroads. The property tax relevant part of the statute reads A Taxing Jurisdiction Can NOT: Assess rail transportation property at a value that has a higher ratio to the true market value of the rail transportation property than the ratio that the assessed value of other commercial and industrial property in the same assessment jurisdiction has to the true market value of the other commercial and industrial property. Levy or collect an ad valorem property tax on rail transportation property at a tax rate that exceeds the tax rate applicable to commercial and industrial property in the same assessment jurisdiction. Impose another tax that discriminates.

Equalization Protection for State Assessed/Utilities Mixed Appeal/Court Results. Some states fair and equitable treatment trumps correctly valued assessed value and other states correctly valued assessed value trumps fair and equitable treatment. Before going forward on any issue research should be done to determine pros and cons of the taxing jurisdiction’s law and appeal/court precedence.

Basics of a Sales Ratio study Michael Connolly, North Carolina Department of Revenue Michael.Connolly@dornc.com (919) 814-1133

What is a sales ratio? The ratio between the Assessed Value and Selling price of a piece of property. 11/15/2018 Sales Ratio Workshop

Sales Ratio basics (median) 11/15/2018 Sales Ratio Workshop

IAAO Standards on SARS IAAO publishes standards on Sales Assessment Ratio Studies. (most current is the 2013 version) “…the median is the preferred measure of central tendency for evaluating appraisal performance…”

Sales ratio basics (mean) 11/15/2018 Sales Ratio Workshop

Sales ratio basics (cod) 11/15/2018 Sales Ratio Workshop

Sales ratio basics (cod) Coefficient of Dispersion (COD) – Measures the uniformity of assessment. The Lower the COD, represents a more uniform assessment. The Higher the COD, represents a less uniform assessment. 11/15/2018 Sales Ratio Workshop

Conducting a Study (Basics) Step 1 - Start with a Random Sample NC (500 – 1,500 deeds in random sample) Some Counties/Municipalities may have to use all sales

Conducting a Study (Basics) Step 2 - Select the appropriate deed Removing / Rejecting sales that are not valid sales. Looking for Arms Length Transactions. Making changes to sales price if needed.

Conducting a Study (Basics) Step 3 - Choose the appropriate value Make sure the value of the property represents what sold. Make sure you are using the full value (not an exempted value). Step 4 - Perform the required statistics Median, Mean, COD, Weighted Mean, etc. Confidence Intervals

Confidence Intervals Confidence Interval consists of two numbers (upper and lower limits) that bracket a calculated measure of central tendency for the sample … (IAAO Standards on Sales Ratio). Upper Limit Central Tendency Lower Limit

Who is conducting the Sales ratio study? Most states are the legal authority of the Sales Assessment Ratio Study. But, most states don’t do all the work by themselves. Many states allow the local jurisdictions to conduct the study, and the state reviews and finalizes the study.

Why is it important to know who is doing the study? If equalization of centrally assessed companies occurs in your state ask yourself this: Who benefits – The Public Service Company Who loses – The local government. Who is conducting the study – The local government. Sales chasing, targeting certain sales, etc needs to be monitored.

Equalization/Ratio Study: An Example Bill Wilkes, Tax Equalization Solutions, LLC Taxeqsol15@att.net (919) 365-3959

I want to pay my fair share. Am I paying more???? Two components in determining your “fair share”: Assessed Value Equalization

Uses of Ratio/Equalization Studies State aid for school funding A tool that measures and evaluates uniformity in the mass appraisal model Provides feedback to local jurisdictions Assist local jurisdictions in determining advancement or postponement of their next reappraisal Public Utilities and Railroads assessed values are equalized

Steps to Perform a Ratio/Equalization Study Define the purpose of the study Generate an acceptable sample size Collect and prepare market data (data gathering) Match appraisal data and market data Analyze and stratify the data

The Ratio/Equalization Study is Complete. Now What? Are there any questions/concerns about the study? The sampling and selecting process (“boots on the ground”) Appraised values/Sale price (“apples to apples”) Is the local taxing unit “sales chasing”? Uniformity by property location and property type

Judgment Day Computing the Level of Appraisal How many sales are in the study? What is the mean? What is the median? What is the coefficient of dispersion? What is the confidence level?

Assessment Level A ratio/equalization study measures how close appraisals are to market value Appraised Value $80,000 Market Value $100,000 Ratio Percentage 80%

ABC Telephone Co. vs. Locally Assessed Building Tax Year ABC Telephone (Public Utility) Locally Assessed Office Building 2010 500,000,000 10,000,000 2011 525,000,000 (5%) 2012 540,000,000 (3%) 2013 580,000,000 (7%) 2014 610,000,000 (5%) 2015 650,000,000 (7%) 2016 680,000,000 (5%) 2017 700,000,000 (3%)

ABC Telephone vs. Locally Assessed Building 40% increase in Appraised over 8 years Office Building (Locally Assessed) 0% increase over the same 8 year period

ABC Telephone (Actual) $4,875,000,000 Cumulative Assessed Value from 2010-2017 X $1.20 Tax Rate $58,500,000 Cumulative Tax Paid from 2010-2017 ABC Telephone (Without Annual Appraisal) $4,000,000,000 Cumulative Assessed Value from 2010-2017 X $1.20 Tax Rate $48,000,000 Cumulative Tax Paid from 2010-2017

ABC Telephone Appraisal Conclusion $10,500,000 Difference in Property Tax Paid

ABC Telephone vs. Locally Assessed Building Tax Year ABC Telephone Locally Assessed Real Property 2018 (County Reappraisal) 720,000,000 12,700,000

Locally Assessed Building (Actual) $80,000,000 Cumulative Assessed Value from 2010-2017 X $1.20 Tax Rate $960,000 Cumulative Tax Paid from 2010-2017 Locally Assessed Building (With Annual Reappraisal) Assuming appreciation of 3% each year $89,000,000 Cumulative Assessed Value from 2010-2017 X $1.20 Tax Rate $1,068,000 Cumulative Tax Paid from 2010-2017

Local Assessed Building Appraisal Conclusion $108,000 Difference in Property Tax Paid

Conclusion It’s imperative to ensure that your company is appraised at market value. It’s just as important to ensure if a state’s statutory language allows equalization, you should strongly consider verifying that the assessment level is correct.

Mecklenburg county vs. ncdor Michael Connolly, North Carolina Department of Revenue Bill Wilkes, Tax Equalization Solutions, LLC

2015 Stats In 2015 Mecklenburg County had close to 4 Billion dollars of value from the Public Service Companies. If their ratio for 2015 was below 90% they could lose upwards of $10,000,000 over the next (3) years.

Brief Education of NC Laws Per NCGS 105-284, the system value of the Public Service Companies will be equalized based on the median of the annual sales ratio study conducted by the NC Department of Revenue. Key years are the reappraisal Year and the 4th & 7th years after the reappraisal. The trigger point is 90%. All counties must reappraise once every (8) years.

Example of NC’s Equalization

Mecklenburg County vs NCDOR April 2015 we certified a ratio of 89.62 to Mecklenburg County. This was their 4th year after their reappraisal. After a few months & multiple meetings, Mecklenburg County decided to appeal the NCDOR ratio by appealing to the Property Tax Commission (PTC). AT&T intervened as well so we had (3) parties at the Property Tax Commission.

Mecklenburg County’s Argument No issue with how the NCDOR conducted the study (did we select the correct sales, etc). Instead – they fought us on the confidence interval and statistics. The confidence interval showed the upper limit slightly above 90%.

Key Points - Mecklenburg Mecklenburg argued that NCDOR was wrong for not adopting the IAAO Standards on Sales Ratios. NCGS 105-289(h) says NCDOR should conduct studies in accordance to generally accepted principles and procedures. IAAO says not to equalize if the upper limit is above the trigger point. Another words, since the upper limit was above 90%, no equalization should be given. There is a slight chance (in our case very, very very slight chance that the actual median would be above 90%.

Key Points – NCDOR & AT&T From the cover of the 2013 version of the IAAO Standards for Sales Ratio.

Key Points – NCDOR & AT&T Our statutes clearly state to equalize if the median is below 90%. If NCDOR accepted Mecklenburg’s argument the trigger point would always be either 90% or the upper limit of the confidence interval (which ever is higher) 89.12 89.62 90.06 90.00

One Final Argument Mecklenburg also stated we should had used a larger sample. Initial sample was about 600 which resulted in 517 qualified sales Even AT&T’s expert said NCDOR should had used a larger sample. He also noted that you won’t know this until after you run all statistics. Since then we have raised our sample size to 1,500. FYI - When all qualified sales were run, it resulted in a ratio lower than 90%.

PTC Final Decision The PTC ruled in favor of the NCDOR. Mecklenburg County decided not to appeal to the Court of Appeals.

IAAO & Survey monkey Michael Connolly, North Carolina Department of Revenue Bill Wilkes, Tax Equalization Solutions, LLC Shawn Pittman, Duke Energy

IAAO & Survey Monkey Is your State statutorily required to perform Assessment/Sales Ratio Studies?

Does your State equalize centrally assessed companies based upon the results of the Assessment/Sales Ratio Study?

Does your State equalize based on the 4R Act?

Do centrally assessed companies have the statutory right to appeal the assessment/sales ratio results?

Does your State’s Constitution require equal, fair, equitable and/or uniform taxation?

If your State’s Constitution requires equal, fair, equitable and/or uniform taxation has a taxpayer requested equalization siting the Constitution?

How does your State verify the sale price of real property used in Assessment/Sales Ratio Studies?

Does your State follow 100% of the suggested guidelines prescribed by the IAAO in conducting your Assessment/Sales Ratio Study?

Questions?