intangibles places companies with a larger number of intangible assets at a competitive
advantage. Mr. Cornett replied that much of the value is speculation. Chair Cornia said that the
income approach includes speculation. Mr. Cornett said the income approach values current
income or expectations of future income on the assets that exist.
Glen Stevens, Property Tax, Questar Pipeline Co., reviewed the handout "Tax Review
Commission, State of Utah, October 17, 1997" which lists the companies used as comparables by
the Division in the valuation of Questar Pipeline. He highlighted the differences between the
companies and said he does not know of a company that has high enough comparability to allow
the use of direct capitalization methodology to value Questar Pipeline. He said that the ratio
derived from the average of any comparable improperly imputes the market's perception of its
characteristics to the subject company. He reported that his informal survey of 1997 appeals
filed by centrally assessed utilities showed Utah second in number of appeals to California.
Vice-chair Lee asked about including language in statute requiring specific methodologies for
valuing each industry. Mr. Stevens said a requirement by statute does not provide flexibility as
changes occur in the industries. Chair Cornia asked if Mr. Stevens would support a different
method of taxation other than the property tax. Mr. Stevens said he prefers the property tax
because it should assess all businesses equally, at 100 percent of fair market value.
c. Information from Counties
Bill Thomas Peters, Attorney for the Utah Association of Counties, distributed to the
TRC the report "Initial Report of The Utah Association of Counties to The Tax Review
Commission, Comparing Property Taxation Laws and Valuation in Other States." This report
presents preliminary findings on the valuation practices of Arizona, California, Montana,
Oregon, Colorado, Wisconsin, and Oklahoma. He stated that because there is little uniformity
among states in tax valuation, comparisons of state values are unreliable. Mr. Peters noted that
the tax value assigned to a property is a combination of state constitution, statute, and
administrative rule; but, items such as the assessor's budget, staff size, financial expertise, or the
political profile of the taxpayer often play as large a role in the value assigned by a state assessor
as any legal requirement. Each state has unique laws resulting from administrative, state, and
federal court decisions.
Mr. Peters outlined his preliminary findings on the valuation practices of other states as
follows:
1.
There is little uniformity among the states in assessment practice.
2.
Several states tax "intangibles," i.e., Colorado, Montana, Oregon, and Arizona. Others do not. Of those states that do not tax intangibles, some believe that the
value of tangible property is influenced or enhanced by the existence of intangibles.
3.
In most states polled, utilities and railroads are centrally assessed; in at least one state (Texas), these properties are locally assessed.
4.
Of the states polled, a majority accept fair market value as their valuation standard.
5.
In a majority of states, the determination of fair market value is a question of fact and appraisal judgment; in only a few states is valuation methodology established by
written policy, rule, or statute (e.g., Arizona, California and New Mexico).
6.
Assessment ratios vary among the states; some rely on 100 percent of fair value, others rely on various ratios for property classifications, e.g., utilities at 27% of fair
value, telecommunications at 25% of fair value.
7.
The taxable unit that is subject to assessment varies among the states. For example, several states do not include leased property in valuing property.
8.
A majority of states prepare and consider a stock and debt indicator.
9.
Several states prepare and consider a direct capitalization
of income as an indicator of value, but applications vary.
10.
There is no uniform "weighting" by the states of the various indicators of value.
11.
Treatment of deferred federal income taxes varies among the states, some deduct it from the cost approach, several do not.
12.
In the past, review of other state valuation practices has revealed various errors in application and practice.
Mr. Peters also discussed the non-legal considerations when reviewing values from other
states. He concluded that a comparison of the values placed on a property by other states is a
flawed method to determine whether Utah has valued property at the constitutional fair market
value standard. Also, any comparison of the valuation methods of other states should be limited
to a clearly defined group of units of comparison that include a complete consideration of non-
legal factors.
Mr. Peters stated that the Utah Constitution's standards require more than a simple
comparison of other state's values. The Constitution requires equity and uniformity.
He then reviewed information regarding: (1) Utah's value of Union Pacific Railroad for tax year 1994 as
compared to values in Washington, Oregon, Montana, California, Kansas, Texas, Oklahoma,
Colorado, and Illinois
; (2) an 11 year history of valuation and assessment disputes between Union Pacific Railroad, the state of Utah, and its counties;
(3) court cases and Tax Commission decisions; and (4) the position of the Division.
Vice-chair Lee asked if the process used by the Division is satisfactory. Mr. Peters said
that the back-log of cases is the main problem with the process. Vice-chair Lee commented that
the appeals procedure needs to be streamlined. Mr. Peters said by statute there is now a two year
limit on the Tax Commission for adjudicating appeals.
Mr. Buchi said the TRC needs to understand the law regarding intangibles. Mr. Peters
agreed and stated that in his opinion the Tax Commission confused "intangible property" with
"intangibles."
He feels that intangible property
can be separated, identified, and sold. Mr. Peters also said if intangibles are stripped from centrally assessed properties, they must be stripped
from locally assessed properties as well. Mr. Buchi read the statute regarding the taxation of
intangibles and asked if the Legislature has provided for the taxation of intangibles. Mr. Peters
said that the Legislature provided that intangible property should not be taxed; however, in his
opinion, the Tax Commission misinterpreted the statute. Chair Cornia urged the TRC members
to read "UNION PACIFIC R. CO. V. STATE TAX COM'N OF UTAH" included in Tab C
of Mr. Peters' handout.
13.
Federal Tax Reform and Its Impact on Utah
This item was not discussed.
14.
Other Business
a. Work of Consultant
Chair Cornia stated that the TRC has entered into a contract with Larry Walters,
Professor of Public Policy and Policy Analysis,
BYU;
Michael Pinegar, Professor of Finance, BYU; and Jim Schallheim, Professor of Finance, University of Utah. They will present a report
to the TRC at the next meeting. Chair Cornia encouraged the Tax Commission, attorneys from
agencies, and representatives from companies to attend, and to provide input to the consultants.
Chair Cornia asked staff to provide a list of questions that the TRC requested the consultants to
address.
b. Future Meetings
The next meeting of the TRC was scheduled for November 25, 1997 from 9:00 a.m.-
4:00 p.m. A meeting was also tentatively scheduled for December 12, 1997 at 1:00 p.m.
Mr. Wood distributed articles "Extracting the Value of Intangible Assets from the Unit
Assessment Method" and "Ad Valorem Taxation of Cable Television Intangibles: The Search for
the Holy Grail."
5. Adjournment--
MOTION: Sen. Hillyard moved to adjourn the meeting at 5:05 p.m. The motion passed unanimously.