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July 14 and 15, 2005
State Capitol, Room 302
Cheyenne, Wyoming
Senator Bob Peck, Co-chairman
Representative Rodney “Pete” Anderson, Co-chairman
Senator Jayne Mockler
Senator Michael Von Flatern
Representative Kurt Bucholz
Representative Layton Morgan
Representative Lockhart
Mark Quiner, Assistant Director, LSO
Don Richards, Senior Research Analyst
Please refer to
Appendix 1 to review the Task Force Sign-in Sheet
for a list of other individuals who attended the meeting.
Representative Anderson called the meeting to order at 8:30 a.m. The following sections summarize the Task Force proceedings by topic. Please refer to Appendix 2 to review the Task Force Meeting Agenda.
Representative Morgan nominated Senator Peck as Chairman.
Senator Peck nominated Representative Anderson as Co-chairman. The motion
passed. (See Appendix 3 for an account of the attendance roll call.)
Co-chairman Anderson asked Senator Mockler to summarize the work of the Subcommittee of the Joint Revenue Interim Committee completed in 2004. Using the Subcommittee’s final report (Appendix 4), Senator Mockler provided a background of the 2004 Subcommittee activities. Senator Mockler explained the consideration of different definitions of intangible property and the complications raised by local and state assessments for certain industries. Senator Mockler concluded with a discussion of the three pieces of legislation proposed by the Subcommittee and passed by the Legislature in 2005 - 2005 Laws, Chapters 10, 62, and 64.
Ed Schmidt, Director, Department of Revenue, provided the Task Force with a historical background of the issues surrounding the taxation of intangible property from the Department’s perspective. He explained that this issue arose from two court cases: RT Communications and Airtouch Cellular. In those cases, the Supreme Court ruled that the Department of Revenue should remove the value of intangible personal property that is separable and identifiable, according to Mr. Schmidt. Director Schmidt briefly described the Department’s use of the unitary assessment approach, using the income methodology. This methodology results in the inclusion of intangible property when identifying the value of assets. Director Schmidt explained that an expansion of the definition of intangibles could reduce the tax base. He indicated that the Department’s position is that taxes on intangibles are property taxes, which support counties and local governments. Depending upon how this issue is resolved, he warned that it could result in the erosion of the state's tax base.
Next, Director Schmidt introduced Tom Tegarden, Tegarden and Associates, and offered a summary of his credentials and background. Director Schmidt explained that Mr. Tegarden is a recognized assessment expert with extensive experience, as college instructor and as a state property assessment administrator in Tennessee.
Representative Anderson asked the Department to distinguish between state and locally assessed properties. Director Schmidt explained that the local assessments use a cost approach to assess commercial entities. In contrast, the state’s assessment approach uses an income approach: the unitary method, since the state-assessed properties cross geographic borders. One benefit to state assessment is that the companies must deal with just one assessor. However, he noted that state-assessed properties are valued at the rate of 11.5 percent and some local commercial properties are valued at 9.5 percent.
Mr. Tegarden, at the request of and under contract with the Task Force, addressed the Task Force, beginning with a discussion of the unit appraisal concept. (Mr. Tegarden’s full PowerPoint presentation is available as Appendix 5.) Mr. Tegarden explained that under the unit appraisal method, the sum of the parts is not necessarily equal to the value of the full unit. Under the unitary approach, the value the business is determined using such things as income and costs, potentially beyond the value of simply real property. The ethical guidelines for assessors prohibit unit assessors from valuing assets through the sum of the parts. Next, Mr. Tegarden discussed the characteristics of public utilities - they are operationally interdependent and regulated as a unit, unlike commercial properties. Public utilities are generally valued using a unit approach, while the assessment of commercial properties are generally assessed using a unit or a fractional approach, using a cost or replacement cost method. Furthermore, public utilities are also often regulated, which can expand the audited information available. Regulated companies may also have limitations on income of the utility, restrictions on depreciation guidelines, and other limitations that could be imposed by a government regulator. Mr. Tegarden discussed that the three assessment approaches: cost, income and sales all have the same goal - to identify the appropriate market value of property.
Mr. Tegarden explained that Wyoming is one of 35 states that use the unit concept and applauded Wyoming’s state assessment and organization in obtaining market values as "the best operation west of the Mississippi."
Cost Approach. Mr. Tegarden indicated that personal property tends to depreciate with time, e.g., state-assessed railroads. In contrast, land and improvements assessed locally tend to appreciate over time. He added that deprecation (physical, function, and external) results in the greatest area of disputes for assessments. These three different types of depreciation are shown differently on a business’s books and records. For example, physical depreciation is generally shown on the business records. In contrast, external depreciation such as the impacts of war, interest rates, or market conditions is generally not included on the business’s books. Therefore, an income or sales approach must be used to determine this depreciation. Under the cost approach, the original cost (or replacement cost) is used as the basis and then must be reduced by all three forms of depreciation.
Income Approach. In sum, the value is equal to the estimated business income divided by the capitalization or market rate. Both the numerator and denominator must include debt, equity, and preferred stock components. In order to estimate a business’s cash flow, state assessors use prior year results, perhaps adjusting for specific historical or future trends. Estimating the capitalization rate tends to be more contentious. Typically a “band of investment” method is applied, which considers debt and equity independently and assigns an expected rate (or cost of debt) to each. Finally, minor adjustment of “flotation costs” should be considered to accurately account for market value, which, Mr. Tegarden reported that the Wyoming Department of Revenue currently does.
Comparable Sales Approach. One comparable sales approach is the “stock and debt” approach, which uses the liabilities and equity of a company as a measure of the company’s assets. Assessing standards require that all approaches should be considered when assessing a property. As a rule, the income approach should be given the most weight, cost approach next most weight, and stock and debt approach the least weight.
Removal of Non-assessable Property. Mr. Tegarden discussed intangible real and personal property. He explained a range of intangible property examples and discussed the typical characteristics of these types of property. He then introduced methods to deduct the value of intangibles either at the unit basis or on a statewide basis. He stressed the need for taxpayers to provide sufficient information to the Department of Revenue, in the event the Wyoming Legislature elected to exempt intangibles.
Senator Mockler asked Mr. Tegarden what his opinion of the temporary 2005 statute ('05 Laws, Ch. 10), which outlines which intangibles can be exempt. Mr. Tegarden indicated that many intangibles do not show up on a business's books, that every intangible does not necessarily contribute to value, and the unit analysis would likely be easier than a statewide analysis. Therefore, the language, “contributory value” is appropriate. Most companies are likely to give the state data on a unit basis not a statewide basis. Mr. Tegarden added that he does not believe that “location” should qualify as an intangible. Rather, it is simply a characteristic of the property.
Robert Reilly, Willamette Management Associates. Mr. Reilly provided the Task Force with extensive details regarding the identification and valuation of intangible assets. (See Appendix 6 for a copy of his presentation.) Mr. Reilly came to the meeting on behalf of Qwest Communications as a tax expert. Mr. Reilly pointed out the benefits of the Internal Revenue Service (IRS) work that might be used as a model in characterizing intangible assets for purposes of taxation. Mr. Reilly discussed a number of resources that the Legislature could turn to in order to become informed on this issue of valuing intangibles, including the Internal Revenue Service financial valuation methods for specific transactions, textbooks, and case law.
Senator Mockler asked why, if intangibles can be defined and valued, tax policy should exempt such property. Mr. Reilly responded that it is a legislative question of policy as to what assets to tax and at what rate. He indicated that his understanding is Wyoming law exempts intangibles, and if using the unitary method, that intangible property value needs to be removed. The Task Force then discussed what methodology should be used to identify the contributory value of an intangible asset. Mr. Reilly indicated that he believed it is actually easier to identify the contributory value of intangible property, using generally accepted procedures, than to identify the full property unit value.
Senator Mockler asked whether or not Mr. Reilly would recommend putting a list of intangibles in statute or using broader language such as the temporary 2005 statute ('05 Laws, Ch. 10). Mr. Reilly suggested that the IRS does use a list developed as a result of substantial judicial action. At minimum, Mr. Reilly suggested Wyoming's law should proscribe a generally recognized intangible asset and a generally accepted methodology for valuation. Mr. Reilly suggested the state could reference the IRS definitions or, alternatively, could reference those intangible assets identified as a generally recognized asset by an authoritative source. Mr. Reilly spoke against using a definition that is too broad. Rather, he would prefer a specific list or reference to a specific, authoritative list and require the taxpayer to carry the burden of proof. Tom Tegarden concurred.
The Task Force inquired as to whether the list of recognized intangibles would likely continue to grow. Mr. Reilly responded that, from his experience, the scope would not increase over time. In fact, the scope may be reduced. However, Mr. Reilly stated the value of the intangibles could grow, along with the value of the entire company.
Mr. Reilly clarified that his use of the term "discrete" is as a modifier of intangible. He suggested that intangible property must be identifiable and separable. For example, he does not consider location to be an intangible asset.
Co-chairman Anderson resolved the Task Force into Executive Session at 1:30 p.m. to discuss specific examples of claimed intangible exemptions for taxation purposes. The Task Force returned to open session at 2:30 p.m.
Robert Barton, Qwest, addressed the Task Force with both verbal and written comments. (Appendix 7.) He stated that the total state-assessed tax value was not falling; rather, it was increasing based upon total tax collections. He suggested that the Department of Revenue had been reluctant to exempt intangibles as included in statute. Mr. Barton also provided a county analysis of what the reduction to each county's tax collection might be expected to be. (Appendix 8.) He concluded his testimony with a discussion of the potential options available to the Task Force including identifying a select list of exempt intangible property, enhancing the Department of Revenue’s valuation abilities, and standardizing methods for state-assessed and locally-assessed business in order to tax tangible property only.
Stacie Sprinkle, Verizon Wireless, addressed the Task Force and stressed the need for taxpayer equity. Senator Mockler asked if Ms. Sprinkle’s company can attribute specific intangible property value to Wyoming, rather than the entire business unit. Ms. Sprinkle indicated that Verizon Wireless was positioned to attribute intangible property value to Wyoming. She added that the proportion of intangible property attributable to Wyoming should be the same as the total value attributed to Wyoming.
Liz Zerga, Western Wireless, addressed the Task Force, restating that some percentage of income is attributable to Wyoming under the unitary method. Similarly, intangible property values should be attributed to Wyoming using the same percentage. Ms. Zerga stated that she believed Western Wireless was appropriately treated under the 2005 assessment procedures, and that the Department of Revenue accepted their requests for intangible taxation exemptions.
Alec Vincent, Burlington Northern/Sante Fe Railroad, spoke in support of the unitary method and the testimony of the earlier experts. Mr. Vincent agreed that the system wide attribution of intangible value should be the same as the Wyoming value attributable to the total company value.
Brenda Arnold, Laramie County Assessor, commented on the 2005 SF 12 ('05 Laws, Ch. 62). She suggested that the Department of Revenue, in Chapter 9 of its rules, could include either specific intangible property inclusions or specific exclusions. Ms. Arnold also indicated that, generally, the best approach to determine value through local level assessments is the cost approach, in part due to the limitations on obtaining income information. Ms. Arnold clarified that local assessments do include some industrial valuations at the 11.5 percent rate.
Senator Mockler inquired whether local assessors distinguish between proprietary software or off-the shelf “canned” software. Ms. Arnold responded that the most important point to note is that local assessors rely on self-reporting. In most cases, Ms. Arnold believed canned software is being reported, though the information is self-reported. In-house developed software is less likely to be reported, according to Ms. Arnold.
Senator Mockler asked the Department of Revenue how they interpret the allocation of the intangible exemption to Wyoming. Ken Uhrich, Department of Revenue, indicated that each company has its own percentage of state allocation. Casey Parker, Assistant Attorney General, indicated that the exemptions for intangibles should be at the state level to be consistent with pollution control exemptions. Such a policy would also maintain consistency among taxpayers. Ms. Parker added that the Department’s current action was a policy for the 2005 tax year only. Ms. Parker suggested this decision shifted the burden to the taxpayer to provide the Department with the appropriate justifying information, and she stated that the policy can be changed by Department of Revenue or the Legislature.
Senator Mockler asked what issues there may be with the temporary statute for 2005 (2005 SF 44, '05 Laws, Ch. 10). Ms. Parker indicated that it could be over-reaching and that including definitions of terms such as intangibles, intangible assets, or intangible property would be a good starting point.
Mr. Reilly responded to Senator Mockler’s inquiry and suggested that he believed the term “intangible asset” probably should be defined, at least through a list of characteristics. He also indicated that intangible influences, such as location, are different than intangible assets. The bright line test distinguishing the two (assets and characteristics or influences) is whether or not the item could be sold separately, according to Mr. Reilly. When the answer is no, as in location, the item is not an asset.
Co-chairman Anderson adjourned the first day of the meetings at 3:35 p.m.
Co-chairman Peck called the meeting to order at 8:30 a.m.
Co-chairman Peck reviewed the activities of the prior year’s Subcommittee and yesterday’s meeting. He indicated that the Supreme Court’s ruling interpreted the word “includes” to be expansive.
Director Schmidt, responding to a question from Co-chairman Peck, stated that the expansive Court decision will result in an erosion of the tax base. The Committee then discussed the magnitude of the fiscal impact on local governments and its relation to total property tax collections. The Committee then discussed how to proceed, and Senator Mockler moved that the issue is of such a significance to deserve Committee consideration. Representative Bucholtz seconded the motion, and it passed.
Co-chairman Peck asked Director Schmidt, as indicated in the Supreme Court opinion, whether the issue could be appropriately addressed through Department rule and regulation. Director Schmidt responded that, as a practical matter, the total number of potential intangibles and the methods to identify contributory value are large. Director Schmidt indicated that the Montana statute provides a ten percent across the board exemption for intangibles, and that such a statutory policy would remove a lot of the administrative complexities in determining contributory value of intangibles. Representative Anderson asked whether or not the current statutory list would be included on top of the ten percent or within the ten percent. Ken Uhrich, Department of Revenue, responded that the statutory list is currently excluded from valuing property, so the ten percent would be in addition to the list, in his opinion.
After further discussion, the Task Force agreed that the issue deserves legislative attention. Then, the Task Force discussed two issues charged to the Task Force for study: the definitions of intangible property (and the potential taxation thereof )and issues of tax equity. Senator Mockler reviewed the 2004 Subcommittee’s efforts to define tangible and intangible property. Next, the Committee discussed limiting the current statutory list, by changing the term “includes” to “means.”
The Committee also discussed either reference to, or inclusion of, a list of intangibles. Wade Hall, Department of Revenue, expressed some concerns, noting that there are differences between generally accepted appraisal standards and generally accepted accounting standards. Ken Uhrich added that there would also be a lot of interpretation and subjective consideration of terms such as “tangible,” “intangible,” “taxable,” and “nontaxable.” Wade Hall indicated that a term within the definition of real property for local assessment, "intangible" should be changed to "intangible characteristic." He added that incorporating the definition of intangible asset, as defined by The Dictionary of Real Estate Appraisal, 3rd Edition would be one legislative approach.
Liz Zerga, Western Wireless, suggested that the Supreme Court opinion would not allow exemption of just any intangibles – only those intangibles that are reasonable. She indicated that if the state elects to grant a ten percent across-the-board exemption, then the locally assessed properties need to have the same deduction. Further, Ms. Zerga stated the wireless telecommunication industry has a much higher percentage of intangibles – higher than 15 percent exemption. Further, Ms. Zerga pointed out that Montana’s statute allows for higher exemptions if requested and shown by a company. She stated that lumping all industries together would not provide an accurate exemption.
After Committee discussion, Co-chairman Anderson asked how to avoid abuse of industry’s estimate of the contributory value of an intangible asset. Ms. Zerga responded that the Department of Revenue should be the one to make the determination within a reasonable range.
Stacie Sprinkle, Verizon Wireless, expressed concerns with establishing a statutory percentage as to the contributory value of intangibles. Representative Anderson asked if industry and the Department of Revenue could arrive at a reasonable percentage. Ms. Sprinkle responded that would be possible. The Task Force also discussed what the reaction of industry might be to a default statutory percentage for intangibles. Ms. Sprinkle indicated that it would be difficult to do in statute.
Ken Uhrich, Department of Revenue, provided a copy of the Montana statute and related regulations regarding the taxation of intangibles. (Appendix 9.) Mr. Uhrich illustrated that the Montana rules and regulations (42.22.110) differ by industry type, including the option to appeal to the Department in the event a taxpayer believes the value of its intangible property is greater than the allowable industry percentages.
Director Schmidt stated that the option for industry to appeal beyond the regulated percentages is concerning. Many industries are not declaring sizeable percentage exemptions. (The Department of Revenue staff provided a summary of total intangible impact by county and industry, Appendix 10; and a summary of the type of intangibles requested in 2005, Appendix 11.) The telecommunications industry, on the other hand, would immediately appeal to the Department under the Montana proposal, arguing that their percentage is higher. Further, supporting such a default percentage system, Mr. Schmidt noted that Iowa has incorporated similar percentage system.
Representative Anderson inquired whether anyone knew how often the taxpayer appeal process had been used in Montana. Ken Uhrich responded that he would investigate that issue. The Task Force discussed whether the industry lists in Montana were exhaustive and how the lists might differ in Wyoming.
Co-chairman Peck asked for a quick review of which telecommunications companies are assessed by the state or which are assessed locally. Wade Hall explained that all two-way telecommunications companies are state-assessed, including voice over internet. Ms. Zerga indicated that wireless, cable, and internet companies are not regulated by the state.
The Task Force discussed what industries are requesting exemptions for intangibles. Director Schmidt indicated that when valuing minerals, the Department does not use an income approach; therefore, the exemption for intangibles is not the same issue as when the unitary/income approach is used. Mr. Schmidt added that the exemption would only be necessary when the income approach is used. Since local assessment generally use a cost approach, an adjustment is not necessary.
Senator Mockler asked if creating different intangible percentages for different industries creates subclasses, contrary to the Constitutional requirement. Casey Parker, Assistant Attorney General, replied that the method of assessment does not have to be the same. The purpose of using a percentage would be to identify the fair market value. Ms. Zerga recommended not establishing percentages in statute for each industry. Rather, it should be addressed in rules, depending upon the appropriate methodology used by the Department of Revenue, according to Ms. Zerga.
Co-chairman Anderson moved that LSO prepare draft legislation similar to Montana and have the Department of Revenue work with industry to develop draft rules similar those in force in Montana. The draft should include appropriate direction to the Department of Revenue to include necessary definitions of intangibles, such as appropriate standard definitions, e.g., those used by the IRS. The motion was seconded, and Senator Von Flatern inquired about appeal rights of companies. Director Schmidt responded that there currently is significant due process allowed for in the rules process.
Dan Sullivan, lobbyist for Verizon, et. al., asked if a meeting between the Department of Revenue and industry could produce such rules in a timely manner. Representative Anderson indicated that the Task Force would like to see at least a draft of rules during this legislative drafting process. After further discussion, the motion passed unanimously. (See Appendix 12 for a coly of the vote form for this motion.)
Senator Mockler stated that certain terms still need to be defined. The Committee discussed the definition of real property used in the 2005 legislation. Representative Anderson inquired whether intangible characteristics ever contribute to the value of a company. Wade Hall responded with a distinction between asset and characteristic. He also offered a potential definition for real property.
The Task Force discussed whether definitions should be presented to the Task Force at the next meeting and whether reference to another recognized authority would be sufficient. Director Schmidt favored putting the definitions in rules.
Senator Mockler moved that LSO staff provide a draft statute including definitions of intangible, tangible, real property, intangible characteristic, and intangible asset for the full purposes of Title 39. Senator Von Flatern seconded the motion. The Committee discussed whether the previous (Anderson) motion included sufficient direction to provide for the necessary definitions. Casey Parker, Assistant Attorney General, stated she believed that a general statutory definition would be beneficial but with opportunity for the Department to specify a list in rule. Representative Bucholz asked why the term intangible characteristic needs to be defined when it is not currently used.
Senator Mockler's motion carried, with Representative Anderson voting no. (See Appendix 13 for a copy of the vote form.) Co-chairman Peck appointed a subcommittee of Senator Mockler and Representative Lockhart to work on the definitions prior to the Task Force’s next meeting.
Senator Mockler moved to redraft 2005 interim legislation (Ch. 10) with the option to apply it tax year 2006 and to revisit the reference "attributable to Wyoming." Representative Bucholz seconded and the motion carried with Representative Anderson voting no. (See Appendix 14.)
Senator Mockler moved to redraft 2005 Laws, Ch. 62 to include either the full definition of real property or the inclusion of intangible characteristic rather than intangible. The motion passed unanimously by voice vote.
Jody Levin, Qwest Communications, raised an additional concern of tax equity within competitive industry. She stated that locally assessed companies are assessed at 9.5 percent and other phone companies are assessed at 11.5 percent. Ken Uhrich indicated that the portion of any company offering two-way communications should be assessed at 11.5 percent. After additional discussion on this topic, Senator Peck suggested the Task Force instruct industry to continue discussions in this area and report to the Task Force as necessary.
The Task Force tentatively established its next meeting as Tuesday, November 8, 2005 in Cheyenne.
There being no further business, Co-chairman Peck adjourned the meeting at 11:40 p.m.
Respectfully submitted,
Representative Anderson, Co-chairman Senator Peck, Co-chairman