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.

Legislative Session Begins; State Budget Will Dominate

statehouse picHow will the money be prioritized? That’s the overriding question as lawmakers return to the Indiana General Assembly today to start work on a new two-year state budget.

The Indiana Chamber will be pushing for substantially more dollars for an expanded education-based preschool program for low-income families.

Prudent financial decisions are necessary in budget sessions but so too is investing where it makes great sense. The current five-county preschool pilot program is inadequate. Indiana has too many children entering kindergarten unprepared to learn. The need is further underscored by the 1,800 applicants for the 450 slots in the pilot program.

The Indiana Chamber will also will be advocating for the state budget to include funding for workforce training with increased designations for high wage career areas, like those in science, technology, engineering and math.

In other education matters, the Indiana Chamber has a longstanding policy of making the state superintendent of public instruction an appointed position and will be seeking to start that on course to becoming reality.

While the political challenges are obvious, we are encouraged that legislative leaders recognize that something has to change. At a minimum, there is consensus for some level of surety that the State Board of Education will function more smoothly and stay on task.

The Governor’s proposal of letting the State Board of Education elect its own chair is a concept the Indiana Chamber can endorse and would be a good starting point if making the superintendent an appointed position is unable to prevail this session.

In the tax arena, there appears to be strong interest among the General Assembly to provide relief to small business personal property tax filers. Indeed, the Commission on Business Taxation has voiced its support for getting rid of the tax for these users. And that’s what the Indiana Chamber wants to see happen.

The current process is time-consuming and ineffective. All sides would come out ahead with a small business exemption. Much effort is spent by small businesses and their local governments on these returns. And for what? The tax liability often averages between only $10 and $50 per small business. In total, these returns come to a mere 1% of the overall business personal property tax collected.

Read about the Indiana Chamber’s top legislative priorities as well as additional areas of focus for the 2015 legislative session.

Many Tax Issues Under Consideration in Indiana

The Indiana Department of Revenue has posted the final report (with recommendations arising) from the Governor’s Tax Conference in June. The 70-page document is very comprehensive and interesting, containing a wide range of suggestions being endorsed by the Pence administration. Much is good, but there are also items that will raise some concern.

If you are a tax professional working for or representing an Indiana company, you need to review this report. It covers so many different subject areas that it is nearly certain that you will have a direct interest in something contained in the report. Whether it be the throw-back rule, personal property tax filings or any number of administrative issues, you will find something in this report to note and track, because some will surely serve as the impetus for legislation in the coming session.

Additionally, the Commission on Personal Property and Business Taxation has now met three times and taken a great volume of studies, presentations and testimony under consideration. The committee has taken on so many issues that the chair, Sen. Brandt Hershman (R-Buck Creek), announced that he has scheduled a meeting for November 12 to give commission members ample opportunity to discuss their final report (which was to be submitted prior to November 1).

It is difficult to guess whether the committee will make many detailed recommendations, but its final report will, in any case, include a great volume of information, data and recommendations from those who participated in the fact-finding exercise. It would be worthwhile to scan these documents presented to the commission to determine the matters that could impact your company. Here again, these matters will likewise almost certainly, in some part, serve as the basis of proposed legislation.

Chamber’s Bill Waltz: State Budget Holding Steady for Now

There are plenty of ways to parse the revenue collections over the first 10 months of the current (2014) fiscal year. Officially, the general fund numbers are 0.5% below the most recent (December 2013) forecast. But they are 1.7% below the 2013-2015 budget based targets. Neither percentage warrants great concern, representing in dollars $61 million (0.5%) and $194 million (1.7%), respectively. But the last two months of fiscal year 2014 will be worth noting for the purpose of identifying trend lines. The March and April numbers came in very close to the December forecast, but the problem is the December forecast adjusted the predictions downward from the April 2013 forecast on which the budget is based.

Last month’s actual collections were 6.4% below the original forecast. So there is a need for the May and June collections to be close to the revised forecast amounts, or else the budgeting going into the second fiscal year of this biennium will get trickier. If those collections drop off, the forecasters and budget-makers will be looking at less than desired numbers going into the new budget making session next year. Sales tax revenues are the real key since they make up 49% of the collections. The sales tax numbers are not bad, but are very modest, showing 1.5% growth over last year. Corporate revenues remain stalwart, 14.5% above target for the year. On the other end, gaming remains down, 7.1% below target. All in all, the budget is in an alright place, but there is a lot to be determined in the coming months as far as expectations going into the next biennium.

Stay Tuned for Real Interim Action on Tax Issues
Nothing is happening just yet, but things are in the works: This will not be an ordinary interim for tax matters. The Pence administration is currently busy organizing a major event for next month. The initiative, dubbed the Indiana Tax Competitiveness and Simplification Conference, is set for June 24. It will be opened by Gov. Pence and feature a few nationally recognized speakers. There will also be panel sessions on a variety of tax subject areas. Panelists will have a work group type format. This is a “by invitation” conference. More details will be reported next month.

Dovetailing the Governor’s conference to some degree will be the Blue Ribbon Commission established by SEA 1-2014. It is expected that his body will begin to take shape in the coming weeks.

The Legislative Council has recognized the commission (referenced as the Commission on Business Personal Property and Business Taxation) in conjunction with the other interim committees sanctioned for interim activity (via Council Resolution 14-01). Senate Pro Tem David Long will name one of his Senate colleagues as the chair and Speaker Brian Bosma will name one of his House colleagues as the vice chair. Four other legislators will likewise be appointed, while the Governor will have a designee. And the remaining seven members will be laypersons representing various interested parties, including the Indiana Chamber, the Indiana Manufacturers Association, the Realtors Association, agriculture and local governments.

Transportation Funding: Current Taxes, Fees Not Paying for Highways

Transportation funding is a topic that is getting more traction (tire pun completely intended), and we recently explored the Chamber’s position on this blog, which includes comments from our own VP Cam Carter.

In fact, one of the Indiana Chamber’s legislative priorities for 2014 is development of a vehicle miles traveled pilot program. The need for such initiatives is illustrated in a new Tax Foundation study that finds just over half of state and local expenses on roads in 2011 came from highway user taxes and fees. Indiana falls below the national average.

Despite being dedicated to fund transportation projects, revenues from gas taxes and tolls pay for only about half of state and local spending on roads, according to the nonpartisan Tax Foundation. Alaska and South Dakota come last in transportation funding derived from gas taxes and tolls—10.5 percent and 21.5 percent, respectively—while Delaware and Hawaii rank the highest—78.6 percent and 77.3 percent, respectively.

State and local governments spent $153.0 billion on highway, road, and street expenses, but raised only $77.1 billion in user fees and user taxes ($12.7 billion in tolls and user fees, $41.2 billion in fuel taxes, and $23.2 billion in vehicle license taxes). The rest was funded by $30 billion in general state and local revenues and $46 billion in federal aid.

“The lion’s share of transportation funding should be coming from user taxes and fees, such as tolls, gasoline taxes, and other user-related charges,” said Tax Foundation Tax Foundation Vice President of State Projects Joseph Henchman. “When road funding comes from a mix of tolls and gasoline taxes, the people that use the roads bear a sizeable portion of the cost. By contrast, funding transportation out of general revenue makes roads “free,” and consequently, overused or congested—often the precise problem transportation spending programs are meant to solve.”

The story is much the same even when adding other transportation options to the mix. In 2011, state and local governments spent $58.7 billion on mass transit, $22.7 billion on air transportation facilities, $1.6 billion on parking facilities, and $5.2 billion in ports and water transportation, in turn raising $13.2 billion in mass transit fares, $18.8 billion in air transportation fees, $2.2 billion in parking fees and fines, and $4.2 billion in water transportation taxes and fees. Altogether, states raised about 48 percent of their transportation spending from user taxes, fees, and other charges.

Expanding tolls and indexing gasoline taxes for inflation may not be politically popular even though transportation facilities and services are highly popular. Given that transportation spending exists, states should aim to fund as much of it as possible from user fees and user taxes. Subsidizing road spending from general revenues creates pressure to increase income or sales taxes, which can be unfair to non-users and undermine economic growth for the state as a whole.

Chamber’s Top Legislative Priorities in 2014

Eliminating business personal property tax, allowing employers to screen prospective hires for tobacco use and establishing a work share program are among the top legislative priorities for the Indiana Chamber of Commerce in 2014.

“In many categories of commercial and industrial property tax, Indiana is among the very highest states in the country. That’s largely due to our taxing of machinery and equipment. It’s a remaining black mark on our tax climate – an area where we simply can’t compete,” declares Indiana Chamber President and CEO Kevin Brinegar.

“All of our surrounding states have done away with the tax except for Kentucky, which taxes personal property at a lower rate than Indiana. It’s past time to remove this burden that can greatly hinder business expansion and innovation.”

On the health care front, the Indiana Chamber is seeking to repeal what is termed the smokers’ bill of rights for prospective employees.

“This is an intrusion into the rights of employers in making hiring decisions. Holding smoking up to the same standards as we hold discrimination based upon race, gender, religion and ethnicity seems arbitrary and without justification,” Brinegar offers.

“There are other behaviors (such as substance abuse and having a criminal record) which are also personal choice and over which employers do have discretion in hiring decisions; this reinforces that the state’s protection for smokers is unnecessary and not well founded.”

One policy the Indiana Chamber believes would benefit employers, employees and the state is a work sharing initiative that would allow employers to maintain skilled, stable workforces during temporary economic downturns.

“Employers would be able to reduce hours without layoffs and provide unemployment compensation to partially compensate workers for their lost hours. Then when circumstances improve, employees could return to full-time work status for the company,” Brinegar explains.

“What’s more, a federal grant is available for three years to pay for the cost of the program. It’s a positive scenario for all parties.”

When it comes to K-12 education, Brinegar says the Indiana Chamber will continue to push for the absolute best academic standards for the state.

“That’s the bottom line. We need to improve student learning, meet the essential college- and career-ready requirement and have an appropriate student assessment system. Those elements all currently exist within the Common Core State Standards program, which we continue to fully support.”

Below are the Indiana Chamber’s top legislative priorities. The complete list is also available on the Indiana Chamber web site (

Support regulating the practice of lawsuit lending, in which a third party provides a plaintiff a cash advance loan while the legal case is pending. In turn, a plaintiff agrees to repay the advance (which is usually at a high interest rate) from the lawsuit proceeds. This practice complicates the legal process by forcing more cases to go to trial because the plaintiffs can’t afford to settle due to their repayment agreement with the lender. In turn, this causes more and more Indiana businesses to pay expensive legal fees. This lending practice is legal in most states, but regulation and transparency do not exist in Indiana.

Support a voluntary vehicles miles travelled (VMT) pilot program as a potential replacement for existing fuel taxes. With Indiana’s already insufficient fuel tax revenues for roads/transportation trending down and more fuel efficient and electric/hybrid vehicles on the roads, a new funding mechanism for road maintenance needs to be found. Owners of alternative-fuel vehicles, including electrical vehicles, should pay for the roads they use just like other drivers. Voluntary VMT pilots in other states are currently taking place and Indiana cannot afford to ignore this potential road funding alternative.

Support expanding the patent-derived income tax exemption to the pre-patent phase. This incentive change would allow innovative, high-tech businesses that typically pay high wages to qualify during the earlier patent-pending phase of the (often long) patent application process, thus carrying forward any credit. Many emerging businesses would find this helpful in capitalizing their start-ups and expanding hiring. (Current law states you must have had a patent issued by the federal government before you can apply for the exemption.)

Support maintaining high-achieving academic standards, such as the Common Core, and allowing the State Board of Education (SBOE) to determine student assessments. Indiana needs standards that improve student learning and meet the college- and career-ready requirement. The testing component of the standards can best be determined by the SBOE.
Support a framework for the future development of publicly-funded preschool initiatives for low-income families. There is critical need for improved preschool opportunities, especially for low-income children whose families may not have the means to provide a high-quality preschool experience or to provide needed learning opportunities in the home. The Indiana Chamber supports publicly-funded preschool programs that are: focused on those families in greatest need, limited to initiatives that maintain parental choice, focused on concrete learning outcomes and integrated with reforms at the elementary school level that will maintain and build upon the gains.

Support a water policy to stabilize our economic future and effectively compete with other states. A policy/plan is needed in order for the state to effectively manage its significant water resources, as well as to ensure delivery of an adequate, reliable and affordable supply of water.

Support repealing the smokers’ bill of rights for prospective employees from the Indiana Code. The Indiana Chamber believes that all employers should have the right to choose whether or not to screen and/or hire prospective employees who use tobacco products. Since employers are footing most of the bill for health care costs for their employees, they should be able to have some discretion in determining whether new employees use tobacco products or not.

Support reinstating the wellness tax credit. The Indiana Chamber supports this incentive to start a wellness program, which can increase attendance, boost morale and productivity, as well as positively impact health care coverage costs.

Support a work sharing program that will allow employers to maintain a skilled stable workforce during temporary downturns. Employers then could reduce hours without layoffs, enabling workers to keep their jobs – which hopefully could be returned to full-time status once economic circumstances improve. Also part of the equation: Unemployment compensation to partially compensate workers for their lost hours.

Support common sense simplification and reforms to local government structures and practices. Creating the option for counties to have a single county commissioner and county councils with legislative and fiscal responsibilities is one that several Indiana counties desire. There should be incentives to reward local government efficiencies and performance in the delivery of services to taxpayers.

Support legislation to reduce the dependence on the taxation of business machinery and equipment. This tax discourages capital investment, places a disproportionate property tax burden on businesses and puts Indiana at a competitive disadvantage with surrounding states that have eliminated it or are moving to do so.

State Revenues Under Projections, but Nothing to Worry About Yet

It’s true: The tax collections for the first two months of the new fiscal year and new state budget have fallen slightly below the forecasted target. Specifically, general fund revenues for July and August combined are $65 million short of the projections. That is 3.2% under the combined forecasts for those two months. But to worry about $65 million at this point is not warranted. First, $65 million is only a blip when you consider that we are talking about a $30 billion budget. Secondly, as in surveys and polls, a variance of less than 5% in revenue forecasting is statistically insignificant.

And lastly, there are 22 more months in the biennium. There will inevitably be fluctuations in the revenue numbers throughout the balance of this fiscal year and next fiscal year. The variance could double or it could disappear in the next couple months. The point is – until we experience a full quarter of shortfalls that total more than 5% – concern is premature.

This is not to say that the numbers are meaningless or that they should be ignored. Keeping a close watch on the revenues and reacting accordingly has been a key to Indiana maintaining its strong fiscal status over the last several years. Discrepancies between the forecast and the actual collections can result from many things, as can be noted in the budget agency commentary that often accompanies release of the hard numbers each month. Changes in the law, special transfers and timing issues can all explain monthly anomalies.

However, closer looks at the individual sources, plus year-over-year and month-to-month comparisons can evidence significant trends. Sales tax revenues are by far the largest single source, making even small differences between the actual year-over-year growth and the projected annual growth something to pay close attention to. While corporate income tax collections are not as critical to the bottom line, they are a major source of revenue and have been very strong (46.7% above the target through the first two months). Another positive aspect of the short-term numbers is the modest uptick of gaming revenues (7.2% above target).

So keep in mind that the numbers will fluctuate and most probably balance out over time – if not, adjustments can and will be made to assure that Indiana maintains its prudent fiscal posture.

Waltz: Marketplace Fairness Act a Useful Measure

Bill Waltz, the Indiana Chamber's VP of taxation and public finance, penned the following column, which ran in The Journal-Gazette of Fort Wayne.

States have the right to tax activities that take place within their borders. States do not have the right to burden interstate commerce – unless Congress approves.

The Marketplace Fairness Act of 2013 involves both principles.

The act would require online sellers who have no physical presence in a state to collect sales tax from that state’s residents. It recognizes that Internet purchases take place within the buyer’s state but that compelling the seller to collect the sales tax affects interstate commerce.

The 69 U.S. senators who voted for the Marketplace Fairness Act concluded that states should be allowed to require remote sellers to collect the sales tax. But passage in the House is uncertain as opponents raise questions. The legislation should be evaluated on an objective basis.

Here are some of the statements and claims being made about the Marketplace Fairness Act :

•The Internet tax moratorium should not be lifted

•This is a “new” tax

•This will hurt small Internet businesses

•State tax administrators will abuse their power to tax out-of-state businesses

•It will be impossible for sellers to comply with the laws of 8,000 jurisdictions

•Internet businesses will move out of the United States

•Jobs will be lost

First, this has nothing to do with the 1998 federal moratorium prohibiting taxing Internet access or imposing a new tax on the conduct of business over the Internet. This is about applying existing state laws on the taxation of retail merchant transactions.

This is not a new tax. States’ sales tax is due on Internet purchases today and purchasers are legally obligated to pay. The problem is few people do so by self-reporting, shifting the burden to all those self-reporting taxpayers who do meet their legal obligations.

As for hurting small businesses, the act has a small seller exception for any business having less than $1 million in annual sales (and this threshold could be raised).

Many of the abuse objections are refuted by the text of the bill. It expressly prevents states from subjecting a seller to “any other type of taxes, other than sales and use taxes.” It further specifies that “This Act shall not be construed to create any nexus between a person and a state or locality.”

The text also addresses administrative compliance. It contains provisions on “minimum simplification requirements” to assure some uniformity in how each state identifies what is to be taxed and at what level. It calls for a single filing and single audits within any given state. The states are required to provide free software to calculate the tax. Additionally, remote sellers are shielded from liability for inadvertent noncompliance.

There will be complications with any major change in procedure, but the act is very friendly to remote sellers. Also, it is in the states’ interest to keep things as simple as possible in order to collect the tax.

As for businesses and jobs moving overseas, Internet businesses are not likely to relocate unless the costs of production motivate them to do so. Internet businesses will continue to grow and thrive in the U.S. – and create jobs – whether or not they must collect sales taxes.

The jobs focus should be on those lost today as in-state brick-and-mortar retailers have cut back due to the unfair price advantage enjoyed by online sellers.

Opponents can suggest problems where there are none, foster doubt and cater to viewpoints that have no basis in reality. But once these questions are answered fairly and objectively, there is no good reason not to support the Marketplace Fairness Act.

New Tax Guide a Valuable Asset for Indiana Businesses

We take great pride in helping to educate our members and customers through our many publications. The latest example is the newest edition of the Indiana Taxation Handbook, a valuable resource for those who deal with Indiana tax issues.

As a result of changes in tax law and policy over the last two legislative sessions, new and revised sections of the Indiana Tax Handbook: 2013-14 Edition include:

  • Elimination of the Indiana Inheritance Tax
  • Reduction in the Indiana Corporate Income Tax
  • New consolidated filing options for Indiana businesses
  • Overview of the new rolling reassessments for real property in Indiana
  • Adjustments to the property tax appeals process, and new obstacles that must be overcome in appealing property tax assessments
  • Impact of the automatic taxpayer refunds, and where Indiana taxpayers will receive savings

This informative publication is authored by attorneys at Ice Miller, LLP and is available for $111.75 for Indiana Chamber members and $149 for non-members. Order your copy today by calling (800) 824-6885 or through our web site.

Check Out the Chamber’s Issue Pages

Do you have a topic you're passionate about, and would like to know what the Indiana Chamber is working on in that area? We've developed some web pages highlighting key issues that will show you what we're focused on and offer some background on our public policies. See the pages below, and more information will be added weekly to these as the session progresses.

Our 2013 Top Legislative Priorities and Legislative Business Issues documents are also available to view.