Don’t underestimate Little Debbie – the spunky tyke took on the Augusta County tax collectors and won. But the county still has her money.
The Virginia Supreme Court has sided with manufacturer McKee Foods Corporation, which makes the Little Debbie snack products, in a dispute over the tax assessment on its 828,000-square-foot factory in Augusta County. The July 18 opinion by Chief Justice Donald Lemons (here) reverses a lower court decision, rejects the county’s existing valuations and sends the dispute back to the local circuit court for another look.
Given the existing 5,700 pages of filings and transcripts from the first trial, the 3,400 pages of appendixes from the appeal, and the retirement of the initial judge, the court gently hinted the dispute could be resolved based on a review the existing record using the proper analysis. The county informed its local paper, however, that it will insist on a full local retrial from scratch.
Why not? The county’s legal bills are paid by its taxpayers, of course, while any business involved one of these disputes must pay it own bills. That’s the way it is here in the Best State for Business, which is why so few cases like this rise to the appellate level. Often the legal cost swamps the tax amounts involved.
This dispute centers on tax years 2011-14, with the company seeking about $260,000 in refunds for the four tax cycles. The same newspaper account indicates a similar refund request for 2015-2018 has also been submitted, but it is not known if those assessments were made in the same manner as those now rejected by the court.
The high standard applied by the Virginia Supreme Court in this case could easily prompt similar appeals from other large businesses unhappy with the local assessments on their facilities. At issue is the tax on the real property, the land, buildings and other improvements. Local decisions on taxable values are a common source of complaint from manufacturers, with the issues often surfacing at the General Assembly.
A county contractor appraised the McKee property at $28.5 million for 2011-13. A different outside appraiser used for 2014 set the value at $31.7 million. The company’s own appraiser set the value at about half that amount, based on comparable sales of similar industrial property in the Shenandoah Valley region and on his determination of depreciation.
These are complicated value calculations, keeping appraisers and accountants fully employed. The three basic methods used are described within the opinion as follows:
Taxing authorities commonly use one or more of three valuation approaches: the cost approach, income approach, and sales approach. The cost approach estimates the value of property based on the current cost of the asset, minus depreciation or reduced value “from physical deterioration, functional obsolescence, and economic obsolescence.”… The income approach “measures market value as the present worth of monetary benefits anticipated to be derived in the future from ownership of the asset.” Id. The sales approach “calls for an analysis and comparison of recent sales of comparable property.”
In an ideal situation the assessor looks and uses all three methods, unless one or more must be ruled out. It was the failure of the county’s contacted assessors to apply those methods which led the court to support McKee’s appeal. In fact, based on testimony at trial, the first assessment didn’t even qualify as a cost-based valuation, and used a very haphazard method to measure comparable sales. It just looked at all sales of all factories in the area with no effort to find true comps.
That approach was belittled by the company’s retained expert witness as “probably the worst work I’ve seen in my life.” Justice Lemons quoted McKee’s witness John Lifflander at length:
“That would be very much like me going and valuing your house in this city, for instance, and taking every house in the city, mansions, fixers, everything, and getting an average, and once I got that average I’d say, ‘That’s your value for your house.’ It doesn’t make a bit of sense… In fact, if it could be done that way, we wouldn’t need appraisers. A clerk could do it, just go ahead and average everything. An appraisal is not about averaging. You use averages of similar properties, but it’s about finding properties that are similar and then making adjustments.”
That was the first appraiser he criticized. The second contract appraiser admitted during trial that his license at the time only covered residential properties, not commercial or industrial, and said he couldn’t find any comparable properties for benchmarks. The section on both assessment efforts should embarrass members of that profession.
State law and previous court rulings create a presumption that the assessment is correct, a presumption the taxpayer needs to overcome with strong evidence. The presumption only holds, the court ruled, if the taxing authority followed the law and looked at all three methods and applied them properly. In this case that test was failed.
But despite all those flaws found by the high court, all it did was remand the case. The county still has 100 percent of the company’s money paid during those four tax years and won’t pay any refund until yet another trial is held back on its home field.
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