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Tax valuations for outdated equipment reined in

A solar energy company based in Asheville has something to be sunny about after the North Carolina Court of Appeals shaved more than a million dollars from the taxable value of a heating system it owns.
An attorney for the company predicted that the ruling should lighten the tax burden for businesses that have seen once-pricey equipment rendered obsolete by rapid technological advances.
In 2010, a subsidiary of FLS Energy leased a 200-panel industrial solar thermal heating system to a knitted-apparel factory in Asheboro. The system was cutting-edge at the time, but a lot has changed in the solar energy game since 2010—thermal systems, which produce hot water, have fallen out of favor as the price of photovoltaic cells has plummeted.

Kitchen

Kitchen

Randolph County appraised the value of the system at $1,056,917. FLS challenged that appraisal before the state’s property tax commission, arguing that it was improperly based on a cost estimate found in a press release put out by the state governor’s office. FLS also argued that that under a state law promoting green energy, it should be taxed only the value of a comparable conventional heating system. Its expert witness testified that a conventional replacement would cost only $56,000.
The tax commission upheld the appraisal, but on Jan. 5, the Court of Appeals unanimously reversed. In a first-impression ruling, the court took its first look at a state statute providing that buildings equipped with solar energy heating or cooling systems should be assessed for taxation in accordance with the “value for buildings equipped with conventional heating or cooling systems and no additional value shall be assigned for the difference” between the two.
Randolph County argued that the statute should be interpreted narrowly. The heating system is personal property for tax purposes, while the land on which it sits is real property. The county argued that under the statute, the tax break should apply only to the added value to the land, but not to the value of the heating system itself.
The appeals court rejected that argument, finding that it would contradict the legislature’s intentions. The court concluded that such an interpretation would cause functionally identical properties to be taxed at radically different rates, depending on whether the same entity owned both the building and the solar heating system.
“A building-owner who did not own the building’s solar heating system would recoup a windfall tax break for property it did not own. Yet the owner of the solar heating unit would have to pay taxes on its system as if it were nineteen times more valuable than an identical system next door, which happened to be owned by the same individual who owns the building,” Judge Ann Marie Calabria wrote for the court.
Chuck Kitchen of the Turrentine Law Firm in Raleigh represented FLS. Kitchen said that he thinks the decision will have important ramifications for how counties have to value personal property, above and beyond the more narrow issue of tax breaks for solar thermal power.
Randolph County calculated the value of the heating system by taking the estimate in the press release and applying a standard reduction based on the system’s age and expected life span. The court held that in doing so, the county had failed to apply the legally required factors for assessing a property’s value.
The court cited a 2009 decision in which it had rejected the use of historical costs to calculate the tax value of specialty equipment, saying that it misses “a critical step in the appraisal analysis,” particularly when technological improvements have made the equipment obsolete, and thus less valuable. Kitchen said that the court’s ruling was its most important statement on the issue since that 2009 decision.
Shelley Eason of Raleigh represented Randolph County. A receptionist with the Wake County attorney’s office said that Eason is now retired and could not provide further contact information.
The 13-page decision is In re Appeal of FLS Owner II, LLC (Lawyers Weekly No. 011-009-16). The full text of the opinion is available online at nclawyersweekly.com.
Follow David Donovan on Twitter @NCLWDonovan

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