Opinion ID: 1397358
Heading Depth: 1
Heading Rank: 1

Heading: ad valorem property taxes generally

Text: U.C.A., 1953, § 59-5-4.5 (Supp. 1981) and § 59-5-109 (Supp. 1981) were enacted in 1981, Laws of Utah 1981, ch. 231, § 1. [1] Section 59-5-4.5 provides: Assessor to recognize certain expenses in valuing property  percentage limitation. When the county assessor uses the comparable sales or cost appraisal method in valuing taxable property for assessment purposes, the assessor is required to recognize that various fees, services, closing costs, and other expenses related to the transaction lessen the actual amount that may be received in the transaction. The county assessor, shall, therefore, take 80% of the value based on comparable sales or cost appraisal of the property as its reasonable fair cash value for purposes of assessment. Section 59-5-109 provides: All locally-assessed taxable real property shall be appraised at current fair market value and the value of such property rolled back to its January 1, 1978, level as such level is determined by the state tax commission. In the trial court, the plaintiffs sued for a refund of that portion of their 1981 property taxes which they contend should have been paid by county-assessed property owners in San Juan County who were underassessed pursuant to the above statutes. On a motion for partial summary judgment, §§ 59-5-4.5 and 59-5-109 were attacked as being facially unconstitutional. Plaintiffs adduced no evidence of actual nonuniformity in the tax assessments of state-assessed properties as compared with county-assessed properties. Plaintiffs' argument was that county-assessed properties were not assessed at current market value, and therefore the assessments were unconstitutional as a matter of law. Defendants opposed the motion in part on the ground that the issues could not be adjudicated by summary judgment because of the existence of issues of fact. Defendants submitted evidence indicating that state-assessed properties were undervalued and that the statutes in question were intended by the Legislature to redress a substantial and discriminatory shift of property taxes from state-assessed properties to county-assessed properties. The trial court ruled against the plaintiffs on the motion and held the statutes constitutional. The court held that the statutes were enacted pursuant to the state's constitutional authority to classify property and to establish different methods for valuing different types of property. The constitutional attack on §§ 59-5-4.5 and 59-5-109 focuses primarily on §§ 2 and 3 of Article XIII of the Utah Constitution. Section 2 of that article as it read in 1981 provided: All tangible property in the state ... shall be taxed in proportion to its value, to be ascertained as provided by law. [Emphasis added.] Section 3 of Article XIII provides: The legislature shall provide by law a uniform and equal rate of assessment and taxation on all tangible property in the state, according to its value in money, and shall prescribe by law such regulations as shall secure a just valuation for taxation of such property so that every person and corporation shall pay a tax in proportion to the value of his, her, or its tangible property... . [Emphasis added.] Two other constitutional provisions also deal with the assessment of ad valorem property taxes and are pertinent to this case. Section 4 of Article XIII deals with the taxation of mines and mining claims: All metalliferous mines or mining claims, both placer and rock in place, shall be assessed as the Legislature shall provide; provided, the basis and multiple now used in determining the value of metalliferous mines for taxation purposes and the additional assessed value of $5.00 per acre thereof shall not be changed before January 1, 1935, nor thereafter until otherwise provided by law. All other mines or mining claims and other valuable mineral deposits, including lands containing coal or hydrocarbons and all machinery used in mining and all property or surface improvements upon or appurtenant to mines or mining claims, and the value of any surface use made of mining claims, or mining property for other than mining purposes, shall be assessed as other tangible property. Section 11 of Article XIII provides that the State Tax Commission shall administer and supervise the tax laws of the state. It shall assess mines and public utilities... . It shall have such other powers of original assessment as the Legislature may provide. Pursuant to § 59-5-3 (Supp. 1983), the Legislature has directed the Commission to assess the following properties: Pipelines, power lines and plants, canals and irrigation works, bridges and ferries, and the property of car and transportation companies, when they are operated as a unit in more than one county; all property of public utilities whether operated within one county or more; all mines and mining claims, and the value of metalliferous mines based on two times the annual net proceeds thereof as provided in section 59-5-57, and all other mines and mining claims and other valuable deposits, including lands containing coal or hydrocarbons, nonmetalliferous minerals underlying land the surface of which is owned by a person other than the owner of such minerals, all machinery used in mining and all property or surface improvements upon or appurtenant to mines or mining claims and the value of any surface use made of nonmetalliferous mining claims or mining property for other than mining purposes; must be assessed by the state tax commission as hereinafter provided; except that property assessed by the unitary method, not necessary to the conduct and which does not contribute to the income of the business shall be assessed separately. All taxable property not required by the Constitution or by law to be assessed by the state tax commission must be assessed by the county assessor of the several counties in which the same is situated. For the purposes of taxation all mills, reduction works and smelters used exclusively for the purpose of reducing or smelting the ores from a mine or mining claim by the owner thereof shall be deemed to be appurtenant to such mine or mining claim though the same is not upon such mine or mining claim. Under this section and its antecedent, the State Tax Commission has assessed the tangible properties of the plaintiffs in this action. Under Article XIII, § 3, the property taxes paid on each property are required to have a uniform proportion to the value of the property. Although the objective is easily stated, its attainment is more difficult. Because of the many different kinds of property and the various factors that affect their values, the determination of what constitutes equal in proportion to the value of his, her or its tangible property, under Article XIII, § 3, cannot be made by application of any single formula. Of primary importance is the determination of what valuation methods should be utilized, and that depends on the nature of the properties to be taxed. Residential, commercial, transportation, mining, and public utilities, etc., must be treated differently because of the economic conditions that give value to such properties. Some properties are income-producing; some are not. Some types of property sell frequently in an open market and have a market value that may be reasonably estimated on the basis of comparable market sales; some types of property are rarely sold and have no ascertainable market value based on comparable sales. The value of some properties may be strongly influenced by general economic or market conditions, while others are not. Some may be wasting asset type properties (such as mines and oil and gas properties), while most are not. Indeed, some properties may have a value that is peculiar to the owner and to no one else. See Kennecott Copper Corp. v. Salt Lake County, 122 Utah 431, 250 P.2d 938 (1952) (where the issue was the valuation of a mine dump). The constitution and laws of the state divide the responsibility for valuation of tangible properties between the State Tax Commission and the county assessors of the respective counties. Article XIII, §§ 5 and 11. County-assessed properties, such as residences and farmland, are assessed on the basis of cost or comparable sales, and commercial enterprises that are county-assessed are usually assessed on a capitalized income method. The Tax Commission utilizes a wide variety of assessment methods and formulae. The basic valuation methods utilized by the Commission are cost, income, and stock and debt. A number of variations of these methods and often substantial discretion are used to modify the basic methods. The cost method values property on the basis of net book value, which equals original cost less depreciation. That method gives very little effect to the impact of inflation in the assessment process. Valuations are also made on the income approach. However, its application in a given case may vary. The valuation of large growth companies under this formula, for example, is generally done on the basis of a five-year average of the ratio of the value of assets to net income. The ratios used involve a variety of measures of the value of assets and may include current book value, current net book value, average book value over five years, and average net book value over five years. Different levels of income are used for other companies, and the number of years utilized in the formula may also vary. The decision as to which ratios and how many years to use is based upon the discretion of the appraiser utilizing the approach or the Commission itself. The stock and debt method is based on the equity and liabilities of the company as shown on its balance sheet. It is applied to value state-assessed properties that are sold so infrequently that the comparable sales method cannot be used. Again, substantial discretion may be exercised by the appraiser in valuing a company on this basis. In addition, the Commission may use the correlated value method, which is mentioned below. Properties owned by utilities are valued by a weighted average of the three basic methods. For example, the properties owned by Utah Power & Light Company and Mountain Fuel Company thus are valued by a formula using 50 percent cost, 45 percent income, and 5 percent stock and debt. The Commission also uses a variant of this formula called the correlated value method, by which each of the above factors is given such weight as the judgment of the Tax Commission dictates. State appraisers, acting under the general direction of the State Tax Commission or a Commissioner, have considerable discretion in determining which method should be utilized in assessing a particular property and the weight to be given to each indicator of value. Pursuant to U.C.A., 1953, § 59-5-57, the Legislature has provided that metalliferous mines are to be valued at two times the average net annual proceeds for the preceding three calendar years. Nonmetalliferous mines are presently valued by capitalizing net income, using a five-year average, and negative values are taken into consideration. See Utah Tax Commission Regulation A12-4-12. Under Tax Commission Property Tax Regulation No. A12-4-10, oil and gas properties are valued in an amount equal to 80% of the gross realization from the sale of oil or gas which was produced from each such property during the calendar year prior to the date of assessment. In sum, the Tax Commission uses a variety of formulae to value properties. However, the formulae used are generally not very sensitive to inflation, especially those formulae based in whole or in part on book value. Because of the methods used to assess county-assessed properties  especially cost of reproduction and comparable sales, which are highly sensitive to inflation  and because of recent high rates of inflation and the statewide reassessment of county-assessed properties during the 1970s, the assessed valuation of county-assessed properties, especially residential properties, has become disproportionately high to state-assessed properties. From 1971 to 1981, the value of county-assessed properties increased 245 percent, a multiple of slightly less than 3 1/2. During the same time, the value of state-assessed properties increased approximately only 45 percent. Although the total increase in the value of county-assessed properties was undoubtedly not entirely attributable to general inflation, it is a fair inference that a significant part of the increase was. The comparatively small increase in the value of state-assessed properties was no doubt a reflection in part of valuation formulae that gave little effect to inflation. The differences in the effects accorded inflation by the assessment formulae were no doubt substantial factors in producing the disparity between the increases in the value of county-assessed and state-assessed properties. That disparity was the basis for the Legislature's enacting the statutes in question. In partial support of their position on summary judgment, the defendants submitted the unrebutted affidavit of a deputy Salt Lake County auditor, which stated: [O]ver the period from 1971 to 1981 there is demonstrated a trend that shows the continuing disparity in the growth in value of locally assessed property as compared to state assessed property. This disparity and trend has continued in spite of the legislative attempt to curb the trend by enacting Sections 59-5-4.5 and 59-5-109, Utah Code Annotated, 1953, as amended, 1981. Does the trend result from the regulations, procedures and assessment practices of the Tax Commission? These statistics, on comparison, fail to illustrate any of the contentions put forth by the Plaintiffs as being disadvantaged by the challenged legislation.