Paul Gordon, Gordon & Polland LLP Douglas Mo, Sutherland ... · Current Property Tax Developments BTI Annual Conference Half Moon Bay, California October 21, 2014 . Paul Gordon, Gordon

Current Property Tax Developments BTI Annual Conference Half Moon Bay, California October 21, 2014

Paul Gordon, Gordon & Polland LLP

Douglas Mo, Sutherland Asbill & Brennan LLP

Mark Schichtel, Time Warner Cable

Zack Atkins, Sutherland Asbill & Brennan LLP

©2014 Sutherland Asbill & Brennan LLP

Agenda 1 Intangibles

2 Central assessment

3 Possessory interests

4 Converter litigation


INTANGIBLES


CA: Elk Hills Recap

• Generally endorsed nontaxability of intangible assets

• Created distinction between “direct” and “indirect” intangibles – direct being nontaxable, indirect intangibles “merely allow[ing] the taxable property to generate income”

• Cable intangibles (e.g. franchise, license to construct, subscriber list, going concern, goodwill) were considered “direct” intangibles

Elk Hills Power LLC v. Bd. of Equalization, 57 Cal.4th 593 (2013).


CA: SHC Half Moon Bay Recap

• Assessor used “Rushmore” method to remove intangibles

• Deduction of management and franchise fee from income stream did not exclude assembled workforce, leasehold interest in employee parking lot, and hotel’s agreement with golf course operator

• Deduction of management and franchise fee did exclude value of goodwill

• Assessor’s method failed to attribute a portion of hotel’s income stream to enterprise activity

SHC Half Moon Bay v. Cnty. of San Mateo, 226 Cal.App.4th 471 (2014).


CA: SHC Half Moon Bay Recap

• Court cited with approval GTE Sprint v. County of Alameda, 26 Cal.App.4th 992 (1994)

• Taxpayer introduced evidence of income attributable to workforce and leases, but not goodwill; with respect to goodwill, taxpayer used a residual approach

• Assessor did not explain how deduction of management and franchise fee removed value of workforce and leases

• Goodwill became a question of fact – court deferred to Board’s determination that goodwill was zero (because it was deducted through management/franchise fee)

SHC Half Moon Bay v. Cnty. of San Mateo, 226 Cal.App.4th 471 (2014).


CA: Intangibles Recap

The Good

• Rushmore method rejected in part

• Reliance on GTE Sprint and Assessors’ Handbook

• Approval of cable cases

The Bad

• Rushmore method endorsed in part

• Using residual method invokes “substantial evidence” standard for goodwill

• Vast majority of intangible value was in goodwill

The UGLY

• How do you value goodwill without a residual analysis?

• How do you reconcile the characterization by the Elk Hills court of goodwill as a “direct” intangible and the application of the Rushmore method in SHC Half Moon Bay?


CENTRAL ASSESSMENT


OR: Comcast Recap

• Oregon Tax Court (2011) Defining feature of a “data transmission service” is that the

provider is transmitting the customer’s data Cable television service is not a data transmission service,

but Internet access service is Primary use of Comcast’s mixed-use property was cable

television service; thus, no central assessment

• Oregon Supreme Court (2014) It’s ALL subject to central assessment

Comcast Corp. v. Or. Dep’t of Revenue, TC 4909 (Or. Tax Ct. Aug. 10, 2011), SC S059764 (Or. Oct. 2, 2014).


OR: Comcast Recap

• A “data transmission service” is the service of transmitting information in electronically coded form between computers and computer-like devices

• Court points to convergence and digital conversion; determines that cable television service now is not the same service that was offered in 1973

• “The defining characteristic [of a data transmission service] is . . . the format of the data transmitted.”

• Remanded to tax court to resolve remaining claims Comcast Corp. v. Or. Dep’t of Revenue, TC 4909 (Or. Tax Ct. Aug. 10, 2011), SC S059764 (Or. Oct. 2, 2014).


OR: Comcast Recap

• “[O]nly the property used in the business, service, or commodity is assessed (and thus taxed). The value of the business, service, or commodity itself is not subject to central assessment.”

• “Finally, it does not matter that the service preexisted the 1973 amendments, and only since then has evolved to become a data transmission service.”

• If cable television service is a “data transmission service,” does that mean that set-top boxes are computers or computer-like devices that should be depreciated as such?

Comcast Corp. v. Or. Dep’t of Revenue, TC 4909 (Or. Tax Ct. Aug. 10, 2011), SC S059764 (Or. Oct. 2, 2014).


MT: Bresnan Recap

• Dissent calls it “information superhighway robbery”

• Supreme court completely ignored trial court’s findings that Bresnan’s property met definition of “cable television system” and instead determined it was a “telecommunications company”

• Case remanded to decide remaining issue of nontaxability of customer relationships

• Charter purchased Bresnan and settled case Bresnan Communications, LLC v. Mont. Dep’t of Revenue, 315 P.3d 921 (Mont. 2013).


AZ: Cable One Recap

• Cable One operates cable, Internet access, and VoIP services in a single entity; the Department of Revenue centrally assessed all of Cable One as a “telecommunications company”

• Court notes at outset that Cable One advertises itself as providing “phone service”

• VoIP is different than circuit switched service, but it didn’t matter; court focused on “function” instead of “technology”

Cable One, Inc. v. Ariz. Dep’t of Revenue, 304 P.3d 1098 (Ariz. Ct. App. 2013).


AZ: Cable One Recap

• Court concludes that “telecommunications exchange” and “inter-exchange access” mean local telephone service and long distance telephone service

• Cable One argued it needed Level 3 to complete calls, but “internal calls” between Cable One customers did not need Level 3

• Court rejects “predominant use” test, ignores federal regulatory authority (statutes and FCC orders)



AZ: Cable One Recap

• Is there a silver lining here?

Cable One asserted that the Department’s actions violated the uniformity clause of the state constitution because the Department does not centrally assess the property of a cable company if it has spun off the VoIP service to a subsidiary

Court finds no unconstitutionality—“Cable One’s property is not functionally equivalent to the property owned by these other cable companies because it is providing VoIP service and these other companies are not.”



POSSESSORY INTERESTS


CA: Possessory Interest Update

• Board illegally included broadband and VoIP revenue in possessory interest valuation

• Board failed to apportion rent to right to do business

• Board applied static ten-year term instead of following Rule 21

• Scheduled for trial on April 20, 2015 Time Warner Cable Inc. v. Cnty. of Los Angeles, No. BC528475 (Cal. Sup. Ct.).


CA: Possessory Interest Update

• Settlements

Most of the counties have settled

Most settlements are in the 5% economic rent range

Significant resistance to Rule 21 declining term

Broad based acknowledgement of little if any revenue growth

Virtually no appetite for litigation of broadband and VoIP issue – awaiting TWC litigation


VT: Possessory Interest Update

• Taxpayer operated electric transmission system

• Assessor taxed the value of the utility easements

• Court cited previous precedent for exclusion of easements from property tax

• Court commented that “it is impossible to identify, value and tax the multitude of easements in a reliable, efficient matter.”

Vt. Transco LLC v. Town of Vernon, 2014 WL 4723620 (Vt. Sept. 19, 2014).


CONVERTER LITIGATION


VA: Converter Litigation Update

• Are the set top boxes “machines” and thus taxable in Virginia as personal property? What is a “machine”?

• Cable property is not taxable, but there is an exception for “machines and tools”

• Hearing held on September 30, 2014; briefing ongoing

Kellam (Virginia Beach) v. Verizon Online LLC, No. CL13-68 (Va. Cir. Ct.).


QUESTIONS?

Documents

Paul Gordon, Gordon & Polland LLP Douglas Mo, Sutherland ... · Current Property Tax Developments BTI Annual Conference Half Moon Bay, California October 21, 2014 . Paul Gordon, Gordon