I. SELECTED NEW LEGISLATION
P.L. 1-2023 (Senate Enrolled Act No. 2): Taxation of Pass Through Entities. (signed by Governor Feb. 22, 2023)
Authorizes certain pass-through entities to elect to pay tax at the entity level based on each owner’s share of adjusted gross income.
Senate Enrolled Act No. 325: Homestead Standard Deduction. (signed by Governor May 4, 2023)
Among other provisions, would amend the definition of “Homestead” to include properties not exceeding one acre, immediately surrounding a dwelling, and used for any residential purpose, regardless of whether the improvements are connected to residence, but not including improvements used for business and commercial purposes. It also limits the definition of “dwelling” to a single house and a single garage.
House Enrolled Act No. 1106: Mine Reclamation Tax Credit (signed by Governor May 4, 2023)
Provides tax credit for taxpayers agreeing with the Indiana Economic Development Corporation to invest in redevelopment of property located on reclaimed coal mining land. Effective retroactively as of January 1, 2023.
House Enrolled Act No. 1499: Property Tax Matters (signed by Governor May 4, 2023)
Among other provisions, provides that if a taxpayer in a property tax appeal presents an appraisal before a county board of property tax appeals meeting certain requirements (USPAP compliance, “market value-in-use” focus, prepared for purposes of the appeal with an effective date of the assessment date at issue) the appraisal is presumed to be correct. Further provides that local assessing officials may obtain professional review of such appraisal, or may obtain their own appraisal to present in response. Also added certain property tax relief provisions, including temporary adjustments to Indiana’s supplemental homestead tax deduction.
II. Select Administrative and Case Updates
A. Sales and Use
Covance Cent. Lab’y Servs. LP v. Ind. Dep’t of State Rev. (Ind. Tax Ct. Jan. 5, 2023) —
The Indiana Tax Court granted summary judgment to the Indiana Department of State Revenue (Department) based on the plain language of the statutory sales tax exemption for certain property used for research and development activities. Taxpayer has research and development facilities and sought sales tax refunds for the utilities it consumed in relation to its research and development. The Department denied in whole the refund claims for purchases from January 1, 2011 to June 30, 2013, but granted partial refunds according to the percentage of utilities actually used in research and development activities for purchases after July 1, 2013. Taxpayer appealed both decisions.
Retail transactions between July 1, 2007 and June 30, 2013 “involving research and development equipment” are exempt from Indiana’s sales tax. Ind. Code § 6-2.5-5-40(f). Retail transactions occurring after June 30, 2013 “involving research and development property” are exempt. Ind. Code § 6-2.5-5-40(g). The court looked to the statute in effect for the earlier years, which contained a list of property that was deemed to qualify as research and development equipment. Noting that any ambiguities in an exemption statute are construed in favor of the imposing state and specific statutes control over general statutes, the court concluded that utilities were not eligible for the exemption because the list of exempt items did not expressly include utilities. The court thus granted summary judgment for the Department on this issue.
As for the later years, the court determined that the applicable statute indicated the Legislature’s intent to wholly exempt, dollar-for-dollar, purchases of utilities essential and integral to exempt research and development activities, without exempting any purchases of utilities incidental to exempt research and development activities. The court therefore granted summary judgment in favor of the Department, which had allowed partial refunds for the later years.
The Department also sought summary judgment on the issue of whether Taxpayer waived its argument that the utility purchases also qualified for a statutory manufacturing exemption under Indiana Code § 6-2.5-5-3(b) and Indiana Code § 6-2.5-5-6. Because Taxpayer stated in its refund claims that the electricity was used in “Mfg functions,” this sufficiently raised the issue, “albeit tersely,” according to the court. The merits of the manufacturing exemption involved genuine issues of material fact to be resolved at trial.
Revenue Ruling #2022-05ST (August 25, 2022) (Sales Tax) – Manufacturing Exemption
An out-of-state company in the business of manufacturing conveyor equipment requested a ruling on whether its rental of fork and scissor lift equipment in Indiana was exempt from sales tax as manufacturing machinery, tools, and equipment. Although the company completes the majority of its equipment manufacturing in its out-of-state facility, the final production and assembly of the equipment takes place on the site of its Indiana customers, where the company rents certain welding and fork and scissor lift equipment.
In evaluating whether the rental of these items is exempt, the Department considered whether the rented machinery has an immediate effect on the article produced as an essential and integral part of an integrated process which produces tangible personal property, specifically, whether the on-site assembly was a part of the production process, or simply a postproduction activity. Referring to Indiana regulations, the Department found that prior to the company’s on-site assembly, the various pieces and parts do not constitute finished products, and only become finished products through the use of the rented fork and scissor lift equipment to assemble the final product. As such, the Department found the rental of the equipment exempt from Indiana sales tax since they are directly used in the production of a finished product. Though, the Department cautioned that usage of machinery and equipment for installation, as opposed to on-site assembly, would not come within the exemption.
Revenue Ruling #2022-03ST (June 16, 2022) (Sales Tax) – Sales of Digital Items
The Company sought an opinion concerning the application of Indiana sales and use tax to its sales of virtual items in Indiana, specifically “emotes” – i.e., small, usually static images occasionally with short repetitive animations. The Company offers these virtual items for sale to viewers on the Company’s online video-streaming platform. Viewers can then send the virtual items to third-party streamers using the Company’s platform to air live videos. The virtual items are sent via typed comments on the platform’s chat function and cannot be displayed a second time without again sending another virtual item; the virtual item remains visible in the chat stream until it is hidden by the natural flow of the chat.
In considering whether the virtual items were tangible personal property subject to sales tax, the Department noted that while the virtual items are perceptible to the senses, the Streamlined Sales and Use Tax Agreement of which Indiana is a signatory, provides that a member state shall not include products transferred electronically in its definition of tangible person property other than specified digital products – i.e., digital audio works, digital audiovisual works, and digital books. Indiana imposes sales tax only on specified digital products which grant the end user the right of permanent use of the product. Upon considering Company’s virtual items, the Department found them dissimilar from specified digital products subject to Indiana sales and use tax, i.e., songs, movies, and digital books, particularly because the virtual items were not conferred for permanent use. The Department thus ruled that emote sales are not sales of specified digital products or digital codes subject to Indiana sales and use tax.
B. Property Tax
Old National Bank v. Hendricks Cnty. Assessor, Pet. Nos. 32-012-18-1-4-00202-21, et al. (Ind. Bd. Tax Rev. Dec. 19, 2022) – Appraisal Methodology; Owner-Occupied Bank
The subject property of this assessment appeal is an approximately 5,000 sq. ft. bank building with an attached drive-through canopy on approximately 1.5 acres. It was assessed at $1,500,000 during the years at issue.
Both the Assessor and the Taxpayer engaged appraisers who developed all three approaches to value. The Indiana Board of Tax Review noted a series of flaws by the Taxpayer’s appraiser which, in total, detracted from the reliability of the appraiser’s conclusions. For instance, the Taxpayer’s appraiser used land sales that almost all occurred after the assessment date as part of her cost approach and her sales comparison approach, even though Uniform Standards of Professional Appraisal Practice cautions that doing so could be misleading because such information was not available to marketplace participants on the valuation date. The Board also criticized adjustments to comparable properties based solely on the experience and judgment of the Taxpayer’s appraiser, without supporting market data. The Board further observed that the Taxpayer’s appraiser “had to spend a significant amount of time during examination correcting the numerous errors contained throughout her appraisal report.” Even though those errors did not significantly impact the valuation conclusion, they detracted from overall credibility.
In contrast, the Assessor’s appraiser responded to the criticisms leveled by the Taxpayer with market evidence and detailed references to the physical features of the selected comparable properties. Finding that the Assessor’s appraiser offered better market-based rationale for his decisions, and finding no serious flaws in the appraisal, the Board found the Assessor’s appraiser to be more persuasive and ordered the assessment changed to $1,550,000.
Sohum Hotels Anson LLC v. Boone Cnty. Assessor, Pet. No. 06-005-21-1-4-00251-22 (Ind. Bd. Tax Rev. Oct. 19, 2022) – Appraisal Methodology; Sales Comparison
The subject property of this assessment appeal is an 84-room hotel, assessed at approximately $4,700,000. The Taxpayer relied on a valuation opinion prepared by a consultant who was certified by the Department of Local Government Finance as a Level III Assessor-Appraiser, although he was not licensed as an appraiser, and he acknowledged that his valuation opinion was not an appraisal of the property. The consultant developed a sales comparison approach by considering the sale prices of several properties that he believed were generally comparable to the subject property and adjusted those sale prices to account for several differences.
The Indiana Board of Tax Review concluded that although the consultant’s sales-comparison grid “may not look too different from such a grid in an appraisal,” his assertions were not backed by the education, training, and experience of an appraiser. The consultant failed to show that he complied with generally accepted appraisal principles, and he did not explain why he did not develop valuations using the cost or the income approaches to value.
Because the Taxpayer did not meet its burden of presenting a probative case to change the assessment, the Board affirmed the original assessment.
Cabela’s Wholesale LLC & SPT Prairie 7700 CB Drive v. Lake Cnty. Assessor, Pet. Nos. 45-023-18-1-4-00228-20, et al. (Ind. Bd. Tax Rev. Sept. 26, 2022) – Appraisal Methodology; Specialty Retail
The subject property of this assessment appeal is a 32-acre area of land located in a highly visible and frequently traveled area, which contains a 9.7-acre unimproved area, a well-constructed and highly ornamented 180,620-square-foot store, assessed at approximately $15.8 million during the years 2018-2020. The store’s ground floor includes approximately 133,120 square feet, which contains a retail sales floor, restrooms, employee areas, office space, and warehouse storage, and an approximately 47,500-square-foot mezzanine, which is accessible by stairs, escalator, and two elevators, which contains a retail-sales area, a cafe, a shooting gallery, an archery range, a conference center, restrooms, offices, and ancillary areas. The Taxpayer and Assessor each hired appraisers with the MAI designation to appraise the property. Both appraisers performed an appraisal and prepared a report in conformance with the Uniform Standards of Professional Appraisal Practice, using the cost, sales-comparison, and income approaches. The Taxpayer’s appraiser valued the property from approximately $7.8 million to $10 million, and the Assessor’s appraiser valued the property from approximately $15.7 million to $16.3 million.
The Indiana Board of Tax Review concluded that the Assessor’s appraiser more accurately captured the property’s utility and used better substitute properties in his analysis under the sales and income approaches. The Board criticized the Taxpayer’s appraiser for not attributing any value to the 9.7-acre area in estimating the subject property’s value. The Board recognized that although an existing easement might restrict some uses of the area, there was no basis to conclude that the area had no value whatsoever. However, the Board found the Taxpayer’s appraiser’s explanation for discounting the mezzanine’s contributory value throughout his analysis more credible than the Assessor’s appraiser’s treatment of the mezzanine in the same manner as the ground floor.
The Board found the Taxpayer failed to meet its burden of proof, except towards the treatment of the mezzanine. The Board thus determined that the Assessor’s appraiser’s analysis under the income approach, combined with the Taxpayer’s appraiser’s adjustment to the mezzanine, represented the most persuasive determination of the property’s market value-in-use. The Board changed the 2018 assessment to $14,584,700.
Under a burden-shifting statute that has subsequently been repealed, the burden of proof in a multi-year hearing is dependent on the outcome of the prior year’s appeal. Therefore, because the Property’s 2019 assessment increased more than 5% over what the Board determined for 2018, the burden shifted to the Assessor to prove that the original 2019 assessed value was exactly and precisely correct. Because the opinion of value of the Assessor’s appraiser did not precisely and exactly match the 2019 assessed value, and because Taxpayer failed to prove its proffered value was correct, the 2019 assessment reverted by operation of law to the 2018 value. The Board applied the same analysis for the 2020 assessment and likewise concluded that it would revert to the 2018 value.
Polygon Company v. St. Joseph Cnty. Assessor, Pet. Nos. 71-015-19-1-3-00675-20, et al. (Ind. Bd. Tax Rev. Sept. 7, 2022) – Appraisal Methodology; Sales Comparison
The subject property of this assessment appeal is an L-shaped industrial building of roughly 125,000 sq. ft., assessed at approximately $2,000,000 during the years at issue. The Taxpayer relied on a valuation opinion prepared by a consultant who was certified by the Department of Local Government Finance as a Level III Assessor-Appraiser, although he was not licensed as an appraiser, and he acknowledged that his valuation opinion was not an appraisal of the property. The consultant developed a sales comparison approach by considering the sale prices of four properties that he believed were generally comparable to the subject property and adjusted those sale prices to account for several differences.
The Board concluded that although the consultant’s sales-comparison “analyses might superficially mirror the sales-comparison approach in form,” his assertions were not backed by the education, training, and experience of an appraiser. The consultant failed to show that he complied with generally accepted appraisal principles, and he did not explain why he did not develop valuations using the cost or the income approaches to value.
Because the Taxpayer did not meet its burden of presenting a probative case to change the assessment, the Board affirmed the original assessment.
SBCC Partners, LLC v. St. Joseph Cnty. Assessor, Pet. Nos. 71-029-17-1-4-00439-21, et al. (Ind. Bd. Tax. Rev. Jan. 19, 2023) — Settlement Agreement
The subject property was four parcels of golf course land located in South Bend, which the Assessor valued using the cost approach at $1,006,300 in the 2017 assessment and $989,600 in the 2018 assessment. Taxpayer filed Form 130 notices initiating assessment appeals for the subject property’s 2017 and 2018 assessments. In February 2021, the Assessor issued Form 134 reports to Taxpayer, proposing to reduce the 2017 assessment to $349,300, and the 2018 assessment to $433,600, which the Taxpayer rejected. However, in October 2021, the Assessor issued identical Form 134 reports, which the Taxpayer signed. The Assessor used SBCC’s prior year income statements to calculate the 2017 and 2018 assessments, respectively, without considering a three-year average of prior income statements.
During the Indiana Board of Tax Review hearing on July 27, 2022, Taxpayer argued the settlement agreements were invalid because the Assessor did not calculate the agreed valuations in accordance with the requirements of Ind. Code § 6-1.1-4-42 and 50 IAC 29-3-3, which mandate the use of a three-year average of income statements. Taxpayer presented two income capitalization approaches in support of its proposed assessments, contending that the valuations should have been $60,946 and $56,770 for 2017 and 2018, respectively.
The Board found that the parties entered into settlement agreements in October 2021 that fully resolved their dispute over the 2017 and 2018 assessments of the subject property, and that settlement agreements are governed by the general principles of contract law. Therefore, although the Board determined that the Assessor indeed failed to use the mandated three-year average to calculate the assessments for 2017 and 2018, this failure had no impact on the settlement agreements. The Board found the terms of the settlement agreements clearly and unambiguously set forth values for which the Assessor was offering to settle each appeal, and that on each form Taxpayer accepted by signing the signature block labeled “AGREE.” There were no allegations or evidence of fraud. The Board concluded the parties intended to settle the 2017 and 2018 appeals for the assessed values listed on the Form 134 reports and therefore dismissed Taxpayer’s appeals.
The Board further determined that even if it reached the merits, Taxpayer’s claim would fail because Taxpayer failed to offer any probative valuation evidence supporting its proposed assessments for 2017 and 2018. Specifically, Taxpayer did not establish who prepared the income statements the Taxpayer used to develop its income capitalization analyses, nor did Taxpayer introduce any testimony or documentary evidence verifying the accuracy of the income statements. Accordingly, the Board concluded that Taxpayer’s proposed assessments were unreliable.
Gold Coast Rand Dev. Corp. v. Lake Cnty. Assessor (Ind. Tax Ct. Nov. 4, 2022) — Sufficiency of Telephonic Hearing; New Evidence on Appeal
The Indiana Tax Court upheld the Indiana Board of Tax Review’s final determination because Taxpayer failed to demonstrate the decision was erroneous. The Board held a telephonic hearing on February 28, 2022, which Taxpayer claimed unduly prejudiced Taxpayer by impeding Taxpayer’s ability to present certain GIS information. The Board rejected Taxpayer’s arguments because Taxpayer did not claim telephonic hearings would cause undue hardship and did not request an alternative hearing setting.
Taxpayer appealed to the Indiana Tax Court and filed his brief, but the Assessor filed her response brief after the deadline for doing so had elapsed, and she did not request that the belated filing be considered for good cause. Accordingly, the court did not consider the Assessor’s response brief in resolving this case.
Taxpayer provided twelve exhibits to the Indiana Tax Court that were not presented to the Board to demonstrate how the Assessor failed to follow statutory guidelines and deviated from assessment norms. Since the court found no evidence that the exhibits were newly discovered, they were not considered. Concluding that Taxpayer had not shown any error in the Board’s final determination, the court affirmed the Board’s final determination.
May 15, 2023