March/April 2003
Property tax collections were expected to hit an all-time high in 2001, exceeding $250 billion, according to a report by the Tax Foundation (Washington, D.C.), a nonpartisan, nonprofit organization that has monitored fiscal policy since 1937. That same report points out that 73 percent of all local taxes paid by scrap businesses and other taxpayers were property taxes on real estate.
Though virtually all real estate or property taxes are assessed by local taxing authorities rather than computed by the scrap business owners—or their professional advisers—they can be reduced. In fact, despite the tremendous number of property-taxing jurisdictions, every property tax bill as well as the assessment on the scrap processing operation’s property can be successfully challenged.
The reward? A lower property tax bill year after year.
Now is a good time for every recycler to take a closer look at the often-neglected property or real estate tax on all property owned by the scrap business. Even tenants, especially those whose rents increase as property taxes escalate, may profit from a review of the property tax assessment on their business premises. After all, the odds are that the present assessment on that property is shot full of errors.
An Error-Ridden System
According to one recent survey, a whopping 75 percent of 375 senior financial executives in larger companies challenged the property tax assessments on their employer’s property. What’s even more surprising, nine out of 10 of those who challenged the assessment felt that they’d been successful.
Adjusted for inflation, property tax collections have risen steadily since 1950, according to the Tax Foundation report. Property taxes, in fact, are now the second-largest tax burden for most scrap businesses (29 percent)—just behind income taxes, which represent the largest share at 36 percent.
A recent development in North Carolina is expected to open the door to higher and higher property tax assessments. A recent decision of the North Carolina Supreme Court allows that state to hire third-party assessors to perform property tax audits on a contingent-fee basis. Obviously, the assessors won’t be looking for reasons to reduce the tax obligation. Can other states be far behind?
If property taxes are such a problem—and so successfully challenged—why aren’t more scrap processors doing something about their property tax bills? The answer may lie in how little many of us know about property taxes.
Why are property assessments so inaccurate? Property values are, in many cases, determined by understaffed, inexperienced workers in the tax assessor’s office. Incredibly, the tax assessor himself is often an elected or appointed official frequently with little formal training, no professional qualifications, and little experience.
A quick look at the many property tax systems (every state is divided into local property tax jurisdictions, totaling well over 14,000 separate taxing authorities nationwide) reveals why 70 to 75 percent of assessments challenged were successful. Once upon a time, all properties—residential and commercial—were valued and property taxes assessed. As individual properties changed hands or underwent improvements, the basic assessed value increased—theoretically. Rarely did anyone check to see whether that original assessment was correct or even if the later additions had been reported correctly.
The scrap recycler who adds a new building to the business often has an assessed value computed that’s supposedly in line with the value placed on similar neighboring properties. Few property tax systems rely solely on cost even though that may be an easier figure for the appraiser than comparative values.
Also, being basically a tax on value, the assessment isn’t supposed to take into account what the property is being used for, only its value computed in the same manner as all other similar properties.
Property taxes are computed by the local government, with the taxpayer told how much to pay. Unlike the Internal Revenue Service, which checks to see that the figures and computations used by a taxpayer are correct, few business owners are aware of the figures on which the property tax bill is based. Nor are they aware that they can easily check both the computation of their property tax bill and the underlying valuation.
Checking for Accuracy
It’s a fact that every scrap processor can review any property record in the tax assessor’s office. These records are public records and, as such, are available to everyone. Most tax assessors are eager to cooperate and usually willing to correct any errors detected. And, boy, do those errors exist.
You’ll find two-story buildings where only a one-story building stands, a 200-foot-deep building on a lot only 75 feet deep, basements where none exist, parking lots that are really on a neighboring property. The list of errors is endless. However, few recyclers will ever know whether any errors exist or whether the valuation on their property is equitable—unless they check.
Math errors and mistakes in the property’s measurements, construction materials, roof type, and condition of the building are quite common and quickly corrected by the property tax assessor on the spot. Unfair valuations, on the other hand, may require professional assistance to correct.
What’s It Worth?
Generally, there are three approaches used by assessors to determine the value of a given property:
• Market value is the price that the property would bring compared with other properties in the area if there were a willing buyer and a willing seller—in other words, the fair market value of the property;
• The cost approach looks at what the cost would be to replace or erect the building again on the same property, or the actual cost of the improvements made to that property; and
• The income approach tries to determine the amount of income that the property could produce.
The market value method is usually employed for all residential properties and is a consideration in assessing the value of commercial/industrial properties. The cost approach is almost always used in conjunction with the market value method on residential properties. The cost method is also used to reassess properties that have had improvements done on them or on recently constructed properties, along with the market value method.
The income approach is usually used exclusively for income-producing properties (such as apartments, storage warehouses, and shopping centers) and commercial properties, along with the market value.
Normally, once the appraisal is complete using the approaches above, a correlation is drawn to determine the final assessed value. That’s not to say that the three methods are averaged together—rather, they’re all considered, with the most weight given to the one that’s most appropriate for that property.
Obviously, a lot depends on the view or judgment of the person valuing or challenging the assessment of a property.
All property taxes are considered ad valorem taxes—that is, taxes based on the value of the property. Since so many variables enter into the equation, it’s rare that the assessor and the property’s owner will agree on a value.
Fighting City Hall
Should the tax assessor refuse to correct any errors discovered or if a scrap processor plans to challenge any assessment on the grounds that it isn’t comparable to other similar properties, the matter is usually presented to a local appeal review board.
In some jurisdictions, it may be necessary to complete and submit a formal complaint and appeal form in order to go before the local review board.
In most cases, the appeal review board is an informal meeting between the property’s owner (or that operation’s representative) and a small group of citizens appointed or elected to the job of listening to challenges to tax assessments. Rarely are the hearings before those review boards formal in nature.
However, as when attempting to sway the local assessor, it’s wise to amass as much documentation as possible to support the reduced valuation. Once before the review board, the first step is to show the current value of the property and the computations that were used to arrive at that figure.
Should the assessor turn a deaf ear to the recycler’s request to correct any errors and should the local property tax review board deny a request for a lower valuation, the next step is to present the case to the state board of appeal. And, finally, in those rare instances where these steps fail, the entire matter may be taken to court.
Horror stories abound about the errors in property tax assessments on real estate. However, the time to review those property tax assessments is now, not when the local assessor is ordered to reassess all of the properties within his or her jurisdiction, not when a new addition is completed at your scrap operation, and certainly not after the bank’s refinancing appraisal threatens to increase the property tax assessment. •
—Mark E. Battersby, an Ardmore, Pa.-based freelance writer, columnist, author, and lecturer specializing in tax- and finance-related topics
Property tax collections were expected to hit an all-time high in 2001, exceeding $250 billion, according to a report by the Tax Foundation (Washington, D.C.), a nonpartisan, nonprofit organization that has monitored fiscal policy since 1937. That same report points out that 73 percent of all local taxes paid by scrap businesses and other taxpayers were property taxes on real estate.