Taxpayer Strikes Out Again vs. APSC Tax Division

The Tax Division of the Arkansas Public Service Commission has special authority over the property tax assessment of “public utilities” and “public carriers,” both of which are broadly defined. This stems from a view that taxpayers of these types typically own property in more than one county that should be valued as a unit (unit valuation); plus, unit valuation is often more complex than the individual property assessments typically handled by local county assessors, and requires special expertise.

Challenges to assessments by the Tax Division are rare, since most public utilities can pass along their property tax costs to customers as a part of rate base. But there have been a few instances where taxpayers that must absorb the costs, or are willing to go to bat for their ratepayers, have resisted and have taken the Tax Division to court. Unfortunately, the courts have been particularly unwilling to provide any relief in the past, and a taxpayer struck-out again before the Arkansas Court of Appeals last week. Fayetteville Express Pipeline LLC v. Pub. Serv. Comm’n,October 25, 2017.

Fayetteville Express Pipeline, LLC (FEP) owns a 185-mile natural gas pipeline that extends from Conway County, Arkansas, to another interstate pipeline in Mississippi. The pipeline went into operation in 2012 and entered into long-term contracts with four natural gas producers to use or pay for 92.5 percent of the pipeline’s capacity through 2020 and 2021. But the pipeline’s financial future is bleak after that, based on market conditions affecting the Fayetteville Shale region.

The Tax Division refused to accept FEP’s arguments that economic obsolescence must be taken into account in applying the cost approach to valuation; or that upcoming termination of the capacity contracts together with market conditions must be taken into account in applying the income method of valuation. In short, the appellate court rejected all of the taxpayer’s arguments, finding that the Tax Division has extremely broad discretion to apply its own valuation judgments, particularly when economic obsolescence is concerned. This follows the same pattern that the appellate courts applied in two previous appeals filed by Arkansas Electric Cooperative Corp. in 1991 and Ozark Gas Pipeline Corp. in 2000. But even more troubling to taxpayers in general, the appellate court had no problem holding that it is not enough for a taxpayer to present better or stronger evidence than the Tax Division on a valuation issue. Rather the evidence must be so strong as to show that the assessment is “clearly erroneous, manifestly excessive or confiscatory.” When this high standard is combined with the appellate court’s view that the Tax Division has discretion to consider or disregard whatever it chooses, the taxpayer’s burden continues to be a heavier lift than any taxpayer has yet been able to carry.

The Arkansas General Assembly addressed the burden of proof in appeals of County Equalization Board decisions in Act 659 of 2017. That Act specifically states that appeals shall be decided based on a “preponderance of the evidence,” and taxpayers are no longer required to show that an assessment is “clearly erroneous, manifestly excessive or confiscatory” in order to successfully challenge an assessment. But the new Act only set this standard for appeals from County Equalization Board decisions, not appeals of Tax Division determinations or other instances where County Equalization Boards are not involved. For now, it will be up to the courts to decide if preponderance of the evidence should be accepted as legislative guidance in appeals such as this, or (in honor of the 2017 World Series champion Houston Astros) if taxpayers without overwhelming power will continue to “strike out.”

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