Usual End of Session Tax Legislation Hodgepodge

19145168A few big bills filled with various tax provisions remain. Ones dealing primarily with property tax are SB 308 and HB 1290, and another affecting sales and income taxes is SB 309. Meanwhile, a couple bills – SB 323 and HB 1215 – call for important issues to be studied during the interim. And another bill cleans up last year’s “de minimus” legislation in HB 1169. All par for the course going into the final leg of the session.

Senate Bill 308, authored by Sen. Brandt Hershman (R-Buck Creek), and HB 1290 authored by Rep. Tim Brown (R-Crawfordsville), are intended to take another shot at the “big box” property assessment issue and will require the Senate Tax and Fiscal Policy Committee chair (Hershman) and the House Ways and Means Committee chair (Brown) to work out some differences in conference committee. There is much agreement on a new approach to incorporate the concept of market segmentation into the process, but disagreement on the need to include a provision concerning actual building construction costs (that was part of the legislation from last year that is being repealed and replaced with the market segmentation provisions).

The two chairmen will also have to sit down and sort through differences in SB 309 that gets into all kinds of other tax matters. This bill is the one that effectively overturns the Tax Court case regarding the taxation of materials used in construction projects (the Lowe’s case.) Senate Bill 323, also a Sen. Hershman bill, directs the Legislative Services Agency to study mandatory unitary combined reporting for apportioning Indiana’s corporate income tax. This is an issue of great significance and concern to the Chamber. The House amended this bill to add transfer pricing, a related issue, to the scope of the study. Transfer pricing was at the heart of the Tax Court cases that spurred Sen. Hershman to promote the idea of combined reporting.

Another bill, HB 1215, authored by Rep. Brown, asks for the study of the personal property audit process. The Chamber welcomes this initiative to take a closer look at how these audits are conducted by private consultants working for the county assessing officials.

And lastly, we are pleased to report the passage of HB 1169, introduced by Rep. Tom Saunders (R-Lewisville) to remove the notarization requirement attached to last year’s “de minimus” personal property tax exemption. Last week, the Senate took out the House’s reduction of the maximum county option fee; Rep. Saunders and the House concurred to that change and the legislation now moves to the Governor for signature.

Speculations on Tax Matters for the 2016 Session

What’s in store for 2016 relating to tax issues? Nothing is too clear just yet, but there are a couple significant areas of speculation:

Revisiting “Big Box” Commercial Assessment: This issue was addressed last session in SB 436. But most expect it to be brought back up again in some fashion in 2016. The Indiana Board of Tax Review (IBTR) has raised several legitimate questions about exactly how the changes in SB 436 should be interpreted. Ambiguities will make application of the new laws difficult for the IBTR. This has led some to conclude that a different approach may be better than what was passed last year.

The focus has remained on what is properly considered a “comparable sale” for appraisal/assessment purposes when evaluating a special-built commercial structure. The discussion has turned to an appraisal concept referred to as “market segmentation”, essentially a method for narrowing the field of sales that should be considered reflective of the value of these more limited purpose buildings. Other ideas revolve more around how the IBTR goes about its adjudicatory work and whether some additional procedural adjustment and guidance from the Legislature would be beneficial.

Push for Combined Reporting: Sen. Brandt Hershman (R-Buck Creek), chairman of the Tax and Fiscal Policy Committee, is apparently entertaining the idea of changing the requirements relating to how a corporation must report its income. Under current law, a corporation files its return based on the separate, independent status of each corporate entity, without regard to its affiliation or business relationship with other entities. Nevertheless, the Department of Revenue (DOR) is authorized to require a corporation to combine its income with that of an affiliated/related company in a “combined reporting” if there is such a connection between the companies that the DOR views them as having a unitary business purpose and believes they should be treated as one for taxation.

A good number of states make such combined reporting mandatory in all cases, and the speculation is that Sen. Hershman is thinking about putting Indiana in that category. But this would be a very controversial move and is fraught with a myriad of economic, political and practical issues. Not the kind of matter typically taken on in a non-budget year; perhaps he wants to float it this year to spur discussion. The Indiana Chamber has a long-standing position against combined reporting.

Property Tax Assessment Appeal Issues Continue

Last session, county officials sought drastic changes to Indiana’s property tax assessment methodology in reaction to two decisions from the Indiana Board of Tax Review (IBTR) involving “big-box” retail stores (e.g., a Meijer and a Kohl’s store). Officials complained that assessment appeals were being wrongly decided because the IBTR allowed the consideration of the sale price of like buildings that had been closed and were vacant at the time of the transaction as evidence of the value of the operating stores. Assessing officials called these transactions “dark sales” and contended such sales should be precluded from being considered in determining the assessment of like structures that remain open and occupied by large retail entities. The legislative result was something of a standoff between county officials and affected taxpayers. The ultimate legislation (SB 436) left a lot to be desired since the interested parties maintained such disparate viewpoints. They were – and remain – fundamentally divided on how real estate should be valued under Indiana law.

The issue came to the forefront again last month when the IBTR issued another decision that resulted in a significant reduction to a large commercial entity; this time, a CVS Pharmacy store in Bloomington. Interestingly enough, this case did not involve a “big-box” and was not based on the application of “dark sales” (even though you would have thought so from the way it was being publicly described by many.) Nevertheless, it was cited as another case where the IBTR had somehow gotten it wrong and was making a bad decision.

The situation essentially reveals: Assessors and county officials believe that large national chains should be taxed more because they are large national chains (and refuse to acknowledge the state of the law which just doesn’t support their higher assessments.) The IBTR has merely been doing its job, applying case law that has developed from Tax Court decisions issued since 2010 and before.

What’s more, assessors and county officials do not want to assess the property based on its fair market value, they want to assess it based on the value of the business operations that take place on the property — what I call “value to the user.” Property tax is supposed to be a tax on the value of real estate, not a tax on the investment value that real estate has to the owner. This debate arises out of the statutory and administrative rule definitions that govern our assessment system. Indiana defines true tax value as something different than the market value-in-exchange (what the property could sell for); instead it creates a hybrid standard referred to as “market value-in-use”. This hybrid was created to protect some properties from higher taxes. The best example is when a highly valuable piece of prime commercial real estate is actually used for agricultural or residential purposes.

But now there is a movement to interpret market value-in-use as a means for taxing the value the property has to its specific user, i.e., the national retail chain owner. This is not only subjective, unfair and inequitable; it is unworkable. It would result in nearly identical buildings being assessed at widely differing values based on the financial status and circumstances of the particular owner. Such a standard is contrary to our Indiana Constitution and would effectively undermine the integrity of our entire assessment system.

It is an important issue and appears it is going to be taken back up next month by the Interim Committee on Fiscal Policy, which has scheduled meetings for October 7, 13 and 21.