Administrative Rules of the State of Montana

BEFORE THE DEPARTMENT OF REVENUE

OF THE STATE OF MONTANA

In the matter of the adoption of New Rule I (42.22.109) and amendment of ARM 42.22.101, 42.22.105, and 42.22.110 relating to centrally assessed property

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NOTICE OF ADOPTION AND AMENDMENT

TO: All Concerned Persons

1. On September 9, 2010, the department published MAR Notice No. 42-2-846 regarding the proposed adoption and amendment of the above-stated rules at page 1977 of the 2010 Montana Administrative Register, issue no.17 and subsequently on October 28, 2010 at page 2542 of the 2010 Montana Administrative Register, issue no. 20.

2. A public hearing was held on November 22, 2010, to consider the proposed adoption and amendment. Oral and written testimony was received at the hearing and additional written comments were received prior to December 3, 2010, which was the date set for close of comment. Those comments and responses are provided in 4.

3. The department determined it would be beneficial to provide an Economic Impact Statement (EIS) to the Revenue and Transportation Interim Committee concerning the subject of these rules and at the September 16, 2010 Committee meeting the department advised the members that the EIS would be prepared and presented to the Committee at their next scheduled meeting, which was set for November 18 and 19, 2010. On November 17, 2010 the department presented the EIS to the Committee.

The information that follows is the contents of that Economic Impact Statement:

The department proposed in Notice 42-2-846 one new rule and amendments to three existing rules. With the exception of one item, the purposes of this proposed set of rules are as follows:

(a) To place established practices and procedures of the department with regard to centrally assessed property in rule form to comply with judicial interpretations of MAPA.

(b) To make information on department valuation methodologies and procedures publicly available in an authoritative reference document.

(d) To reduce time and money spent and uncertainty and risks associated with re-litigating settled issues.

The purposes of the proposed amendment replacing the biennial review of default percentages for intangible personal property deductions with an open process for taxpayer recommendations are as follows:

(a) To provide for greater taxpayer flexibility, convenience and clarity in submitting information or proposals to the department with regard to intangible personal property default percentages, and

(b) To bring the existing rule into alignment with department practice.

The proposals in this notice do not change any department practices or decisions concerning property assessments for any centrally assessed taxpayer and therefore would not have changed any assessments issued since 1999. Thus, the proposals do not have a direct effect on property assessments for any taxpayer.

The proposed rule and amendments can be divided into five distinct changes:

Change 1 - The proposed new rule would adopt the 2009 Western States Association of Tax Administrators – Committee on Centrally Assessed Properties appraisal handbook and the National Conference of Unit Valuation States standards.

For years, the department has followed the methods and standards in the latest versions of these documents in valuing centrally assessed property. The proposed rule formalizes and makes public this existing department policy. The department's assessment methods and standards have been affirmed by a number of court and State Tax Appeals Board decisions. (See, for example, Montana Department of Revenue v. PPL Montana, 340 MT 124 (2007) and Qwest Corporation v. Department of Revenue, STAB No. SPT-2008-2.)

Change 2 - The proposed amendments to ARM 42.22.101 and 110 clarify the definition of "intangible personal property" in 15-6-218(2), MCA and the application of that definition. The proposed amendment to ARM 42.22.101 defines the term "goodwill" and adds details to the definition of "intangible personal property" in 15-6-218(2), MCA. Section 15-6-218, MCA exempts intangible personal property from property taxation.

ARM 42.22.110 gives default percentages of centrally assessed companies' property that is assumed to be intangible personal property and a process for a company to propose a higher percentage. Proposed new (4) in ARM 42.22.110 specifies that in this rule, the term "intangible personal property" has the meaning given in 15-6-218(2), MCA and the proposed amendment to ARM 42.22.101.

The definitions in the proposed amendments embody established department practice and have been affirmed by the State Tax Appeals Board (See Qwest Corporation v. Department of Revenue, STAB No. SPT-2008-2). When department practices have been litigated, and STAB has either affirmed those practices or directed the department to change its practices, the department often places those practices in rule. The department's rules then give taxpayers a single authoritative reference for these settled practices.

Change 3 - The proposed amendment to ARM 42.22.105 clarifies reporting requirements for centrally assessed companies. Section 15-23-103, MCA and other sections require owners of centrally assessed property to make annual reports to the department. The department's long-standing procedure is for centrally assessed companies to file annual reports to the department's central office in Helena rather than to file reports with each county. The proposed amendment clarifies that it is the department's determination that a company's property is centrally assessed, subject to confirmation based on the information received, that triggers this reporting requirement. The amendment also specifies that a taxpayer that disagrees with the department's determination that its property is centrally assessed must continue to meet the reporting requirements for centrally assessed property while it seeks an informal review or appeals the department's determination. The proposed amendment places this established procedure in rule.

Change 4 - Existing ARM 42.22.110(2) states that, for railroad property valued using the method set out in 15-23-205, MCA, the default deduction for intangible personal property is 5 percent. The proposed amendment clarifies that the default deduction for railroad intangible personal property is 5 percent regardless of the valuation method used.

Section 15-23-205, MCA gives detailed directions for how railroad property is to be assessed, using the previous year's value and formulas for calculating an annual change factor. However, there are situations where other methods must be used. Another method must be used for a new railroad. Also, Subsection 15-23-205(6), MCA directs the department to adjust assessments for unusual operating events or one-time financial changes. This requires using other information and valuation methods in addition to or instead of the ones given in 15-23-205, MCA.

This amendment reflects current department practice. If the proposed amendment is adopted, ARM 42.22.110 will still give taxpayers the ability to suggest changes to the default percentage or to make the case that the actual percentage for their property is higher than the default percentage.

Change 5 - The proposed amendment replacing existing ARM 42.22.110(3) with new ARM 42.22.110(5) replaces the requirement for biennial meetings to review default percentages for intangible personal property deductions with an open-ended process for taxpayer recommendations.

From 1999, when ARM 42.22.110(3) was adopted, until 2009, the department did not consistently hold the meetings it requires. The department did hold an industry meeting on June 12, 2009, at the request of Qwest and other telecommunication providers. The department's standing process is to discuss the intangible personal property exemption provision with each taxpayer upon a taxpayer request. For many of the large multi-state taxpayers this discussion occurs annually.

As noted above, the purpose of the proposed amendment is to make the rules and department practice consistent and to provide taxpayers with flexible, convenient and clear opportunities to suggest changes to default intangible percentages.

Changes 1 through 4 would place existing department procedures and currently-used definitions in rule. The impacts of these proposed changes are considered together. The impacts of Change 5 are considered separately.

Section 2-4-405(2)(a), MCA - Class of persons affected by the proposed rule, including classes that will bear the costs of the proposed rule and classes that will benefit from the proposed rule.

All proposed changes in this notice will directly affect owners of centrally assessed property and indirectly affect other property tax payers and taxing jurisdictions. There are 129 centrally assessed property taxpayers. The proposed rule will benefit 498,400 other property taxpayers and the more than 1,800 local governments and school districts by reducing the fiscal uncertainty associated with the re-litigation of settled issues in centrally property taxation. All property taxpayers, including centrally assessed property taxpayers, and local governments will benefit from clear and certain rules for the administration of property taxes in this area.

Alternatives Considered for This Economic Impact Statement:

Proposed Changes 1 - 4 - No action:

In addition to no action, the department considered other methods for informing taxpayers of existing procedures and terminology. The alternatives considered are:

(a) Explain methodologies and procedures in meetings with individual taxpayers; and

(b) Publish taxpayer guidance in a pamphlet and on the state web-site.

Proposed Change 5 - The alternatives considered are:

(a) Hold meetings every two years as required by the rule; or

(b) No action: Continue to hold meetings only as requested by taxpayers without changing the rule.

Alternatives Not Considered for This Economic Impact Statement:

Under the law governing economic impact statements, alternatives that are outside the purposes of a proposed rule are not subject to analysis in the statement. Notice 42-2-846 fulfills the department's duty to place established practices into rule form and, thus, does not propose any changes to existing department procedures or methodologies. If this notice were proposing substantive changes to department methodologies, it would be appropriate to consider alternative changes, along with the option of leaving procedures and methodologies unchanged. However, since no substantive changes are proposed, alternatives involving substantive changes were not considered for this economic impact statement.

Other options for getting information to taxpayers were briefly considered and discarded because they would be less effective, more expensive, or both.

Comparison of Alternatives: Proposed Changes 1 - 4:

Section 2-4-405(2)(b), MCA - A description of the probable economic impact of the proposed rule upon affected classes of person, including but not limited to providers of services under contracts with the state and affected small businesses, and quantifying, to the extent practicable, that impact.

The proposed rule changes will not affect the department's assessment of any taxpayer's property or the state and local property taxes on that property because the proposed changes simply place existing assessment practice into rule.

Compared to no action, each of the alternatives could reduce the probability that taxpayers would waste resources on unsuccessful appeals or procedural moves. They could reduce appeals that are based on uncertainty about department methodologies and procedures and they could reduce appeals that are based on the hope of overturning established methodologies and procedures.

A taxpayer's cost of unsuccessfully appealing an assessment is largely determined by the taxpayer. It will depend on the complexity of the appeal, the staff and outside consultant time the taxpayer devotes to the appeal, and how far the taxpayer pursues the appeal. For a complex appeal that is pursued through STAB and the courts, fees for legal representation and expert witnesses can run into the hundreds of thousands of dollars.

It is impossible to quantify the likely reduction in resources wasted on unsuccessful appeals because it depends on future taxpayer actions. Based on history, it is likely that some owners of centrally assessed property will appeal their assessments each year regardless of which alternative is adopted. However, the alternatives may have different effects on the number of unsuccessful appeals. This makes it possible to rank the alternative's likely effects.

Publishing information in rules does not guarantee that taxpayers will initially be exposed to it or understand it, but does give taxpayers a permanent reference document they can consult at any time. In addition, rules convey information with greater force and authority than the other alternatives. For example, a taxpayer knows that a definition in rule has the force of law. A taxpayer may or may not know that a definition conveyed in some other format is backed by a STAB or court decision.

Most owners of centrally assessed property with a significant amount of property in the state meet with the department at least annually. Spending additional time explaining department procedures and methodologies in these meetings could do the most to increase taxpayer knowledge in the short run. These meetings would give the department the opportunity to explain its methods and procedures in detail and give taxpayers the opportunity to ask questions. On the other hand, these meetings may cover many topics, and taxpayers may not absorb all of the information they hear. Over time, the knowledge transferred in these meetings is likely to decay, as people change jobs or simply forget. Also, taxpayers may be less willing to take information provided informally as authoritative and may be more willing to challenge established procedures in an appeal if they are not in the rules.

Publishing information in a pamphlet mailed to all owners of centrally assessed property and on the department website would not guarantee that taxpayers would be exposed to it or understand it. This alternative would give taxpayers a permanent reference source, but taxpayers may be less likely to know how to find it than if it were in rule. Taxpayers also would be less certain that the information is authoritative. When the department, and other states' revenue agencies, publishes taxpayer information documents, it generally is to explain the law and rules in a general and non-technical way, not as a replacement for rules.

Compared to no action, all of the alternatives could reduce the wasting of taxpayer resources through unsuccessful appeals. Providing additional information on department procedures and methodologies in meetings with taxpayers may do more to reduce taxpayer uncertainty about those methodologies and procedures in the short run for taxpayers who meet with the department. However, not all taxpayers appear to be interested in meeting with the department on a regular basis, and this alternative would not provide any information to those who do not. The proposed rule changes will do more to inform taxpayers in the long run.

The proposed rule change would do the most to reduce unsuccessful appeals due to taxpayer's continuing to re-litigate issues that have already been decided by STAB or the courts.

None of the alternatives will deter taxpayers who appeal as a matter of course.

Placing the department's assessment methodologies and procedures in rules would reduce the risk that future STAB or court decisions would depart from precedent and overturn existing department methodologies and procedures. A STAB or court decision overturning established methodologies could result in significant, unexpected shifts of property taxes between groups of taxpayers. Small businesses and other taxpayers will benefit from this reduction in risk. The other alternatives will not result in this risk reduction.

None of the alternatives will affect sate contracts or directly affect businesses with state contracts in their role as state contractors.

Section 2-4-405(2)(c), MCA - The probable costs to the agency and to any other agency of the implementation and enforcement of the proposed rule and any anticipated effect on state revenue.

No expected fiscal impacts. None of the alternatives, including the proposed rules and no action, will affect the department's valuation of any property. Because they would not affect assessments, they are not expected to affect state or local property tax revenue.

Difference in Fiscal Risks.

One of the purposes of the proposed rules is to reduce re-litigation of settled issues. When parties continue to bring forward the same issues, STAB and the courts generally follow precedent. In rare cases, they do not. This can have unexpected consequences for all parties.

Placing definitions and procedures in rule gives them the force of law and further reduces the chance that STAB or the courts will depart from precedent, with potentially large consequences for all taxpayers and taxing jurisdictions. Adopting the proposed rules would increase stability and certainty in tax administration. The other alternatives would not have this effect.

Differences in Department of Revenue Costs.

The alternatives differ in their cost of implementation. The cost of filing rules with the Secretary of State's office is $50 per page. When formatted, the proposed rule is likely to be four or five pages, for a filing cost of $200 to $250. Development of the proposed rules involved time from a number of department staff. Staff involved did not track their time on this project separately, but on the order of 50 to 100 hours were spent on these rules. The average compensation of staff involved, including benefits, was no more than $30 per hour. The cost of staff time was therefore on the order of $1,500 to $3,000.

Spending extra time in periodic meetings with taxpayers explaining department procedures and valuation methodologies would have a cost in terms of diverting staff resources from other uses, but would not have a direct monetary cost. Staff time can be valued at average compensation, including benefits, which is a little less than $30 per hour. If department staff spent an additional 100 hours per year explaining department procedures and methodologies, the cost would be about than $3,000. At a discount rate of 5 percent, the present value of incurring this cost indefinitely would be less than $60,000.

Publishing and distributing 500 copies of a taxpayer information pamphlet and putting an additional page on the department website would cost about $530. In following years, updating the pamphlet and web page and mailing 500 pamphlets would cost about $530. Mailing the pamphlet with no updates would cost about $320. At a discount rate of 5 percent, the present value of annual mailings and maintaining a web page would be between about $6,600 and $10,600, depending on how often the taxpayer information pamphlet and web page were revised.

Section 2-4-405(2)(e) and (f), MCA - An analysis that determines whether there are less costly or less intrusive methods for achieving the purpose of the proposed rule and an analysis of any alternative methods for achieving the purposes of the proposed rule that were seriously considered by the agency and the reasons why they were rejected in favor of the proposed rule and an analysis of any alternative methods for achieving the purpose of the proposed rule that were seriously considered by the agency and the reasons why they were rejected in favor of the proposed rule.

Neither of the other alternatives would accomplish all of the purposes of the proposed rules.

All alternatives considered would provide information to taxpayers, and hopefully reduce the waste of resources on unsuccessful appeals due to taxpayers not knowing or not understanding department procedures and assessment methodologies.

Only the alternative of placing information in the department's rules provides taxpayers with an authoritative reference document and has the potential to reduce the waste of resources re-litigating settled issues.

Section 2-4-405(2)d), MCA - An analysis comparing the costs and benefits of the proposed rule to the costs and benefits of inaction.

Benefits: To some extent, all of the alternatives may result in fewer resources being wasted on unsuccessful appeals of centrally assessed property valuations. This benefit cannot be precisely quantified because it depends primarily on future taxpayer choices. It could be very small or it could be up to hundreds of thousands of dollars per year.

Differences in benefits between alternatives cannot be quantified, because they depend on taxpayer's future choices. All of the alternatives could reduce appeals caused by taxpayers not knowing or misunderstanding assessment methodologies and procedures. The proposed rules may also reduce appeals attempting to re-litigate settled issues.

Costs: The process of developing, adopting, and publishing the proposed rules would have a one-time cost to the department of no more than $3,000. Interested parties' costs of participating in the process would probably be of the same order of magnitude. Total costs are likely to be less than $10,000.

Additional time spent explaining assessment methodologies and procedures in meetings with taxpayers would have an annual cost in department staff time of $3,000 or less. The cost of additional time for taxpayer representatives would be in the same range. Total annual costs would be $6,000 or less. The present value of spending extra time explaining methodologies and procedures to taxpayers indefinitely would be $120,000 or less.

Publishing a taxpayer guide, distributing it annually, and posting it on the department website would have annual costs between $320 and $530. Taxpayers who study the taxpayer guide annually might spend about as much time on it as they would spend having the information explained in person, but some would probably spend little or no time on it. The present value of department and taxpayer costs of pursuing this option indefinitely would be between about $7,000 $70,000.

Risk: Adopting the proposed rules would reduce the risk that STAB or a court would overturn precedent and direct the department to change existing methodologies and procedures. If this happened, assessments, and therefore taxes, could decrease or increase for the directly affected property owners. This would shift local property taxes from one group of taxpayers to another and either reduce or increase total state property taxes. There would be a redistribution of benefits and costs, but no net change in the total. The benefits to taxpayers whose taxes were reduced would be offset by the cost of higher taxes on other property and the change in either services provided by public schools and the university system or non-property tax funding of education.

Section 2-4-405(2)(g), MCA - A determination as to whether the proposed rule represents an efficient allocation of public and private resources.

None of the alternatives would be likely to affect taxes paid by any taxpayer or state or local property tax revenue. Where they differ is in the public and private costs incurred in reaching the same outcome and in the risks they impose on state and local revenues and other taxpayers. The proposed rules have lower present value of costs than the other alternatives and may do more to reduce the waste of public and private resources on unsuccessful appeals of property values based on lack of information, misunderstanding, or the desire to keep litigating settled issues. The proposed rules are the only alternative that promotes stability and certainty in taxation by reducing the risk that established procedures and valuation methodologies will be overturned.

Comparison of Alternatives: Proposed Change 5:

None of the alternatives would affect tax assessments or taxes on any centrally assessed property.

If the department began holding the biennial meetings required by the existing rule, taxpayers who chose to attend would incur additional costs. Staff, and possibly consultants, would spend time in the meetings. Many of them would have to travel to Helena, and some would need to stay overnight in Helena. Time for consultants and some employees would represent an additional financial cost. The cost for other employees would come from diverting their time from other duties.

As an example of possible costs, suppose fifty industry representatives attended the meeting. Suppose that, on average, they spent eight hours attending the meeting and traveling to and from Helena, that their average compensation was $75 per hour, and that their average travel cost was $200. Then, participating taxpayers would incur costs of $40,000 to attend the meeting.

Actual costs would be higher or lower depending on how many taxpayers participated and who represented each taxpayer at the meeting. If only a few taxpayers participated, the cost could be a few thousand dollars. If most taxpayers participated and many sent multiple representatives, the cost could be a few hundred thousand dollars.

Section 2-4-405)2)(c), MCA - The probable costs to the agency and to any other agency of the implementation and enforcement of the proposed rule and any anticipated effect on state revenue.

None of the alternatives would affect state or local revenue.

No action would have no direct costs. It would expose the state to an unknown risk from the fact that the department is not following a procedure that is in rule.

Holding the meetings required by the existing rule would involve some costs for the department. The biennial meetings probably would be held in a state facility. If expected attendance were too large for any state-owned meeting rooms, the department would need to rent a facility. Several department staff would need to attend the meeting and spend time preparing for it. Staff time would also be spent on reviewing any information submitted at the meeting. Depending on the amount and type of information submitted staff time could vary from insignificant to requiring a significant amount of analysis and research time. Facility and staff costs would be absorbed in the existing department budget, and the cost would take the form of diverting staff time from other uses, and possibly the cost of renting a facility.

While the rulemaking process has some costs, the cost of adding this proposed change to a notice containing other changes is minimal.

The no-action alternative would not achieve the purpose of making the rule and department practice consistent.

Both the proposed rule and the alternative of holding the biennial meetings required by the existing rule would make the rule and department practice consistent. Holding the biennial meetings would have additional costs of thousands to hundreds of thousands of dollars every two years.

Section 2-4-405(2)(d), MCA - An analysis comparing the costs and benefits of the proposed rule to the costs and benefits of inaction.

Both the proposed rule and holding the meeting required by the existing rule would have the benefit of reducing risk associated with having department procedures that are not consistent with department rules. This benefit has not been quantified in money terms.

The cost of adding the proposed amendment to a notice including other proposed rule changes is minimal.

The cost of holding the biennial meetings required by the current rule would be in the thousands to low hundreds of thousands of dollars. Most of these costs would be incurred by taxpayers who participated in the meetings.

Section 2-4-405(2)(g), MCA - A determination as to whether the proposed rule represents an efficient allocation of public and private resources.

Of the alternatives considered, the proposed rule accomplishes the goal of making department procedures and the rule consistent while continuing to give taxpayers the opportunity to suggest changes to default intangible percentages at the lowest cost to the department and interested taxpayers.

Section 2-4-405)2)(h), MCA - Quantification or description of the data upon which subsections (2)(a) through (2)(g) are based and an explanation of how the data was gathered.

Costs of providing information to taxpayers were estimated by the department's Communications Officer based on the cost of recent mailings and web-site development. Department staff time required for the rule-making process was estimated by the department's rules coordinator. Hourly staff costs were provided by the department's budget analyst. The range of potential department and taxpayer costs of participating in property tax appeals were estimated by department Centrally Assessed Property staff based on department costs of recent cases, including hourly fees for expert witnesses and outside counsel.

4. Oral and written testimony received at the hearing, and subsequent to, is summarized as follows along with the response of the department:

COMMENT NO. 1: Definitions - Mr. Eric Feaver, representing the Montana Education Association and Montana Federation of Teachers (MEA-MFT); Mr. Bob Strong representing AT&T; Ms. Nancy Riedel and Mr. Michael Mupo, representing Verizon Wireless; Mr. Roy Adkins, representing Qwest Communications; Mr. Mark Baker and Mr. Jerry Lambert representing Bresnan Communications; and Mr. Michael Green and Ms. Mary Whittinghill, representing the Montana Taxpayers Association commented on the definitions.

Mr. Eric Feaver stated the MEA-MFT supports the proposed rules for valuing centrally assessed property. He stated that these rules narrowly define "goodwill" to keep the intangible exemption from swallowing centrally assessed values, ensure that the department determines what properties file centrally assessed property forms, and establish third party standards for valuation methods.

He commented that the department is right to keep the exemption for intangible property narrow and sharply defined. Exempting what centrally assessed taxpayers may want to call intangible creates a loophole that the well-funded will exploit to shift tens of millions of dollars in local property taxes to homeowners and small businesses.

Mr. Feaver said the department is also on the right track when it adopts valuation standards. Both the department and centrally assessed taxpayers should know where they stand in disputes over value. Leaving things uncertain only benefits taxpayers with the determination and means to litigate.

Mr. Strong commented that the definition of "intangible" contradicts with the Montana statute and is probably unnecessary and possibly could be illegal.

Ms. Riedel commented that the proposed definitions would lower the exempt intangible value too low. She continued that using the book value for intangible personal property for the exemption would be inaccurate because the additional market value over book value for intangible personal property would not be part of the exemption.

Mr. Mupo stated that the definition of "goodwill" and "intangible personal property" do not need to be redefined because 15-6-218, MCA, clearly provides that a broad array of intangible assets are exempt from taxation. He suggested that instead of attempting to narrow the breadth of the statutory exemption, it would be more appropriate to clearly define the type of documentation that the department will accept to support the taxpayer's claim of intangible value. Mr. Mupo stated "it is beyond the DOR's authority to 'instruct the taxpayer on what is included in the taxable value and what is not'." That authority rests with the Montana legislature. Thus, for example, the proposal to limit goodwill to "booked or accounting goodwill" violates the statutory mandate by purporting to limit exempt goodwill to only the booked goodwill that is recorded subsequent to an acquisition transaction. This proposal contradicts not only the statutory goodwill exemption but also violates the requirement of taxing on the basis of current market value - which will not necessarily accord with the purported regulatory attempt to limit the valuation of goodwill to a booked amount, which is based on historical costs and prior transactions. He stated that "courts throughout the country have held that when intangibles are by statute exempt from taxation, the best way to [a] sic value the taxable, tangible personal property is by the use of a cost approach. Montana statutes are clear that intangibles are exempt and it is the DOR's responsibility to reasonably and fairly review and examine evidence taxpayer's present to support the value of the intangible property." Mr. Mupo suggests the portion of the rules relating to exempt intangibles should be deleted as it does not follow the statute or accepted appraisal practices.

Mr. Adkins stated that Montana code clearly contains intangible exemptions that are very broad. They are the broadest types of intangible exemptions that they normally see in a multi-state operation where they function. He further stated that the department currently has a rule which affects the spirit of this statute as well and indicates that for each unit valuation indicator that includes intangible property it should not be relied upon. This is the scheme currently being modified by the adoption of these rules.

Mr. Adkins stated that Qwest believes the definition of intangible personal property in the rule is inconsistent with Montana law, concerning separability. He continued that the definition of intangibles in 15-6-218(2)(a), MCA is broad and that statutory definition is inconsistent with the proposed rule definition. Specifically, the statute states that licenses and software are exempt from tax but under the proposed rule any intangible asset that is separable, without causing harm to the unit is exempt. Mr. Atkins contends that removal of licenses or software destroys the value of the unit. Mr. Adkins stated that if the proposed standards regarding separability do not apply with respect to the property actually listed in the statute, they should not apply to property not listed that is commonly recognized as intangible property everywhere else.

Mr. Adkins addressed the definition of "goodwill" and stated that it is unreasonably restrictive and inconsistent with the statute. He stated for example, "goodwill" is not an asset that could be sold separately from the business enterprise - it is part and parcel of the going concern with which it is associated. It is included in 15-6-218, MCA, as a specific intangible asset that is exempt from tax. Then the definition that is incorporated in this proposed rule is not consistent with Montana law. Both "software" and "licenses" are specifically listed in 15-6-218, MCA as qualifying intangible assets. The proposed rule would completely contradict the statute, and would purportedly disqualify assets that are specifically referenced as being exempt. He further stated that to understand the effect of this proposed rule, it is necessary to first understand what goodwill is, and, how and when, it is recognized for financial statement purposes. Goodwill is customarily considered to be the value of a company's ability to achieve returns that cannot be attributed to specific assets. It is the value of a business over and above the value of its "hard" or identifiable assets; thus it is recognized within the intangible exemption in the Montana statutes. Goodwill is derived from such intangible attributes as history and reputation - the ability to obtain new and return customers or business as a result of the way it has conducted its business over time. For financial accounting purposes, goodwill is only recognized when one company acquires another company. When this occurs, Financial Accounting Standard (FAS) 141 requires an allocation of the purchase price among the values of all the acquired assets. Any value that remains after allocating value to tangible and other intangible assets is assigned to goodwill -- consistent with the idea that is represents this residual element of value that relates to the operation of the business. There is nothing in 15-6-218, MCA that limits the recognition of goodwill to the cost approach.

Mr. Adkins also stated, if the proposed rule cannot pass scrutiny with intangible assets that are specifically included as exempt within the statute, there is no reason to believe it would be appropriate for assets that are not so referenced. Section 15-6-218, MCA defines intangible property as "including but not limited to" certain listed assets. Those assets therefore are mere examples of property that is considered intangible.

Mr. Adkins stated he finds it ironic that the department would want companies to assign a certain amount of income to intangible assets when states and the IRS do not allow for that assignment, as the assigning of income to intangibles provides companies the ability to assign intangibles to tax favorable states or countries thereby allowing some of the revenue to escape income taxes.

Mr. Adkins further stated that the department has a rule that is currently in effect (ARM 42.22.110) on the intangible property exemption that paraphrases the mandate of the statute that if the unit method includes any intangible value, that value "must" be removed. This rule identifies specific percentages of "default" intangible values for different industries, in each of the three valuation approaches, and uses 15 percent for the telecommunications industry. It puts the burden on the taxpayer to establish that the intangible property value exceeds this default percentage. Thus, even though the statute and the department's own rule state clearly that the department may not use the valuation approach if intangible property cannot be removed from that approach, the department will still use the approach unless the taxpayer proves the intangible property value exceeds this arbitrary 15 percent limit.

Mr. Adkins recommended the department reject the proposed rules and follow the mandate of the statute that if intangibles appear in a valuation approach - such as the income or market approach - the approach should not be used unless all that (intangible) value can be removed. Section 15-6-218, MCA requires that all intangible value be removed - not just 15 percent. ARM 42.22.110 requires the department "to the extent that each unit valuation indicator includes intangible personal property it shall not be relied upon unless such value of intangible personal property is excluded or removed." The rule does not say that a method may be relied upon if only 15 percent of the intangible property value is removed. It requires that all the intangible value be removed.

Mr. Baker commented that the rules, especially the definition of intangible, are contradictory to statute. He stated that 15-6-218, MCA, identifies certain property as intangible property including such things as contracts and franchises. If these rules are put up again the four point test that the department is proposing in its rules that perhaps contracts, franchises, would not qualify as intangible personal property, which is clearly contradictory to the statutory language.

Mr. Lambert offered a comment that the proposed definition for "intangible personal property" should not be adopted because it is unlawfully imposing property tax on intangible property that is exempt from tax under Montana law. This proposed regulation places a new condition on the ability of taxpayers to avail themselves of the exemption in violation of the clear intent of the Montana legislature. He stated the rule seeks to unlawfully narrow the scope of the exemption by imposing new conditions for intangible property to qualify for the exemption.

Mr. Lambert further stated that application of these new requirements to intangibles, that have historically been statutorily exempt from Montana property taxes, illustrates how they directly conflict with the statute.

He stated that "goodwill" is not the only item that the legislature exempted from property tax that the department now seeks to tax in the proposed rules. Franchises and customer contracts are also examples of intangible personal property that is exempt from property tax under 15-6-218(2)(a), MCA. These could also fail the department's new test for exempting intangibles. As a result of the proposed rule, assets that statutorily qualify as exempt intangible property could now be subject to a new property tax. The rule creates a significant administrative burden for both the taxpayers and government.

Mr. Green stated that during the 2002 special legislative session, Senator DePratu questioned the department as to whether the same definitions contained in these rules needed further clarification and he was told that clarification of intangible personal property was not necessary at that time.

Mr. Green stated equalization issues will develop if the department limits goodwill to the booked amount.

Ms. Whittinghill asked the department to explain why "booked goodwill must be present on the subject properties' financial statements" in order to qualify for the exemption from taxation provided in 15-6-218, MCA. Further, she asked how "booked goodwill" and "intangible personal property" as stated in the proposed rule are consistent with and not more restrictive than, legislative intent as expressed in 15-6-218, MCA.

Ms. Whittinghill asked for an explanation for the term "contributory value" and the specific methods the department expects to employ when quantifying the "contributory value" of intangible personal property.

She asked the department to provide some examples of intangible personal property that the department believes to be "capable of earning an income as a standalone entity or apart from the other assets of the unit."

She asked the meaning of the term "normal rate of return" as used in ARM 42.22.101(12)(d). Also, she asked for an explanation of the specific procedure or method the department intends to employ to determine whether taxpayer owned assets are generating returns equivalent to a "normal rate of return," at a rate below a "normal rate of return", or at a rate above a "normal rate of return."

She questioned how the department intends to measure the existence or lack of "excess revenues" for the purposes of ARM 42.22.101(12)(d). Also, how does "excess revenues" impact a taxpayer's "normal rate of return." She asked why expected net cash flows are not a more appropriate measure of returns as opposed to "excess revenues."

Ms. Whittinghill also asked what the department means when it uses the term "intangible value" in ARM 42.22.101(12)(d).

RESPONSE NO. 1: The department appreciates the comments and participation in this rulemaking process.

The department would like to thank Mr. Feaver for his comments supporting the proposed rules.

The department believes the proposed rules are necessary to inform taxpayers of the department's current and historic practices as it applies to the exemption of intangible personal property and the standards and appraisal methods the department uses in arriving at the fair market value of centrally assessed properties. The department does not believe the proposed definitions contradict the statute. Rather, the department believes that the definitions are consistent with the statutory language and support the legislature's intent.

Ms. Riedel, Mr. Strong, Mr. Mupo, Mr. Adkins, Mr. Baker, Mr. Lambert, Mr. Green, and Ms. Whittinghill each voiced several concerns with the department's proposed rule. In many cases, these concerns overlapped or were related. The department has attempted to identify certain key issues or concerns, attribute those concerns to the appropriate individual, and provide the department's response.

Intangible value versus intangible personal property - Mr. Mupo, Mr. Adkins, Mr. Baker, and Mr. Lambert generally stated that the department's proposed rule avoids the exemption found at 15-6-218, MCA and improperly taxes intangible property or intangible value. The department respectfully disagrees and believes that those concerns are founded on the mistaken assumption that intangible personal property has the same meaning as intangible value. The department believes that there is a clear difference between those two terms—and that the legislature understood that distinction when enacting 15-6-218, MCA.

The unit method values an entire operating system as a going concern and integrated organic whole irrespective of where it is located and without functional or geographic division of the whole into its component parts. The appraiser values an integrated group of assets functioning as an economic unit without reference to each component part. The value determined pursuant to the unit method is meant to capture all the operating assets both tangible and intangible as a going business concern. ARM 42.22.101(30) and (31). The unit method of valuation has been long-accepted by both the United States Supreme Court and the Montana Supreme Court. See; Adams Express v. Ohio State Auditor, 165 U.S. 194, 220 (1897); Pullman Co. v. Richardson, 261 U.S. 330 (1923); Western Union Telegraph v. State Bd. of Equalization (1932), 91 Mont. 310, 7 P.2d 551, 138 Mont. 603, 611, 358 P.2d 55, 60; Dep't of Revenue v. PPL Montana, 2007 MT 310, ¶ 41, 340 Mont. 124, 172 P.3d 1241. Therefore, the legislature was clearly aware of the department's use of the unit method when it enacted 15-6-218, MCA, to exempt intangible personal property, rather than intangible value.

Section15-6-218, MCA specifically exempts intangible personal property from taxation; the statute contains no language exempting intangible value. The department cannot omit language the legislature included in 15-6-218, MCA (intangible personal property) and insert language (intangible value) that the legislature chose not to include. In addition, 15-8-111, MCA requires the department to determine the fair market value of centrally assessed property for property tax purposes. As noted above, the department employs the unit method to reach such a determination. Intangible value or intangible influences on value are not exempt and are rightfully captured in the fair market value and correctly taxed.

Thus, the department finds that its current practices, as reflected in these proposed rules, are consistent with and supported by 15-6-218, MCA, with regard to limiting the intangible deduction to intangible personal property.

A thorough discussion regarding intangible value verses intangible personal property is referenced in the Qwest STAB decision, which is in part referenced below:

"Further, intangible assets listed by Qwest are not the same as 'intangible person property.' By statute, 'intangible personal property' is not the equivalent of intangibles that exist above and beyond the tangible value developed by the cost methodology.

Intangible personal property indicates property which can be sold or an ownership interest that can be transferred. The term personal property indicates items that may be the subject of private ownership (real, personal, and mixed); that is, items such as money, goods, chattels, things in action and evidences of debt. See 1-1-205; 15-1-101(n); and 15-1-101(p), MCA. The majority of the Montana cases previously addressing intangible personal property did not address its definition. See Lewis v. Puget Sound Power & Light Co., 2001 MT 145, 29 P.3d 1028.

By current statutory definition, 'intangible personal property' includes certificate of stocks, bonds, promissory notes, licenses, copyrights, patents, trademarks, contracts, software, franchises, and goodwill. The intangible personal property statute does not include the terms customer relationships, intellectual property or marketing rights. While not prohibited by statute from [being] sic included, there is no evidence which demonstrates those items should be properly included as intangible personal property. There is no indication those items have been properly valued as personal property, with any indication of an ownership interest, or that they may be valued for sale purposes as required for valuation purposes. There is also no indication those items are not already included in a valuation of goodwill.

The general terms customer relationships, intellectual property, and marketing rights are too nebulous in this instance to be properly considered personal property that can be exempted from unit valuation. Qwest failed to provide the Department or this Board with credible data that would support such wide-ranging claims for deduction of intangible personal property." Qwest v. Dept. of Revenue, STAB SPT-2008-2, p. 30.

Taxpayer obligation to substantiate a claimed exemption with reliable data - Ms. Reidel, Mr. Mupo and Mr. Baker expressed concerns with the documentation to be supplied by a taxpayer to the department with respect to claiming a deduction in excess of the default deduction permitted under ARM 42.22.110.

If the unit value of centrally assessed property includes intangible personal property, that value must be removed from the unit value. Section 15-6-218(3), MCA. The department implemented ARM 42.22.110 through a negotiated rulemaking process which included the centrally assessed taxpayers, which provides a default intangible personal property, to administer the above provision of law. As part of this negotiated rulemaking process the taxpayers were guaranteed a minimum deduction for the intangible personal property exemption even if no intangible personal property is present within the unit value. If a company believes that its intangible personal property exceeds the default percentage, it may "propose alternative methodology or information at any time during the appraisal process and the department will give it full and fair consideration. If the department concludes that the value of intangible personal property is greater than that allowed in (1), the unit value will be decreased accordingly. In no event, however, will the value of intangible personal property be less than that allowed in (1)." ARM 42.22.110(2). The foregoing rule is consistent with the general principle of taxation that it is the taxpayer who bears the burden of proving an entitlement to a claimed deduction or exemption.

The department believes that the proposed rule specifies the type of information that a taxpayer should provide if it feels that the value of its intangible personal property exceeds the default deduction.

Because the department utilizes three approaches to value (cost, income and market), currently a taxpayer must provide information relating intangible personal property on an approach by approach basis. Intangible personal property information should be provided on a historical cost less depreciation basis for cost approach. Intangible personal property information should depict income streams for use in an income approach. Intangible personal property information should depict the fair market value for use in a market approach. If the exemption request satisfies the proposed definition of intangible personal property and has value, the information should be made available by the taxpayer.

Reliance on booked goodwill - Mr. Green, Mr. Mupo, Mr. Adkins, and Ms. Whittinghill expressed concerns about the department's proposed rule respecting booked goodwill.

Similar to the discussion about supporting an intangible personal property deduction with reliable data, the proposed rule defines goodwill and requires that the supporting goodwill information be derived from a reliable source, namely the company's financial statements. The department does not believe that the definition is unduly restrictive or contradicts the statute. Rather, the department believes the definition to be consistent with the unit method of appraisal. Additionally, the department thought it necessary that the value of goodwill is evidenced in the company's books and derived from certified standards such as GAAP to eliminate the possibility that an entity might overstate their goodwill for property tax purposes.

The department will allow a deduction for goodwill in the income and market approaches if the taxpayer provides the income and/or market information attributable to the intangible personal property, and if the totality of the taxpayer's intangible personal property exceeds the default percentage provided for in ARM 42.22.110.

Mr. Green stated that equalization issues will arise if the department limits the exemption of goodwill to the booked amount. The department, respectfully, is unclear as to the concern that Mr. Green is expressing with this comment.

Miscellaneous comments - The department does not believe that removal of a license or software would ruin the value of the unit. The department agrees that the value of the unit may be different. A request for an exemption above the default deduction must meet the proposed definition of intangible personal property to ensure that it is personal property, and not intangible value or an influence on intangible value. Thus, the rule is not in conflict with the statute but rather supports its intent and is consistent with the department's longstanding practices.

The department does not agree that the value of contracts and franchises will necessarily lose their exemption because of the proposed rule. Contracts and franchises are specifically identified as intangible personal property in 15-6-218, MCA, and will be exempt from taxation based on the fair market value of the contracts and franchises.

Mr. Green commented that in 2002 the department stated that no further definition of intangible value or goodwill was needed. Due to the recent litigation that has, in part, focused on these terms, the department determined it was necessary to define them in rule in order to inform the public of the department's position. The definitions are consistent with the positions the department has taken in those matters.

Contributory value - The definition and use of the term "contributory value" can be found in the 2009 WSATA handbook. The term is also used and defined in most appraisal texts such as; The Appraisal of Real Estate. Contributory value can be measured in several different ways: by developing market to book ratios and applying that ratio to the book cost of the intangible personal property or by using market sales of the intangible personal property or comparable intangible personal property assets.

Specific examples of the types of intangible personal property that may be capable of earning an income as a standalone entity or apart from other assets of the unit would be assets that can be separated from the unit or held under separate ownership, can be bought and sold separate from the unit without causing harm or destroying the unit, have value, and are not intangible value or an influence on intangible value. Examples of these types of intangible personal property may be, but are not limited to patents, licenses, trademarks and copyrights.

Normal rate of return - Normal rate of return is the rate of return that an appraiser would use when determining what a willing buyer or seller could expect to earn. To determine if the normal rate of return is equivalent to, above, or below a given taxpayer's rate of return, an appraiser would undertake a financial analysis of the projected cash flows to calculate the taxpayer's internal rate of return. If the projected revenues exceed the probable revenues there is an excess rate of return. Excess revenues do not impact a taxpayer's normal rate of return.

Intangible Value - Intangible value is value that is not tangible, and does not meet the definition of being intangible personal property as defined in the amendments to ARM 42.22.101(12)(a), (b), (c), and (d). As described in (d) intangible value is specifically the value of an entity as a going-concern – its ability to make excess revenues over the normal rate of return. See the STAB Qwest decision referenced above.

COMMENT NO. 2: WSATA-CCAP handbook and NCUVS standards - Mr. Robert Strong; Mr. Michael Green; Ms. Mary Whittinghill; Mr. Michael J. Mupo; Mr. Norman Ross, representing PacifiCorp; and Senator Jeff Essmann, representing Senate District 28; stated that they oppose the adoption of the Western States Association of Tax Administrators (WSATA) handbook and the National Conference of Unit Valuation States (NCUVS) Standards.

Mr. Strong provided a resolution to lessen the amount of litigation that is legal, acceptable under the WSATA handbook, is consistent with appraisal theory, and is consistent with unitary valuation concepts which would encompass the application of the intangible deduction from a correlated value of the individual indicators of value.

Mr. Green, representing the Montana Taxpayers Association commented that the adoption of the NCUVS Standards and the WSATA handbook is a broad measure that does not provide much direction to the public. The large volume of the handbook and the standards make them difficult to use. Mr. Green continued that it would be better if the department identified the areas in the handbook that are contrary to the department's practice.

Ms. Mary Whittinghill, representing the Montana Taxpayers Association asked if the department considers the 2009 version of the WSATA handbook and the NCUVS standards to be an authoritative treatise with respect to the valuation of centrally assessed property. She asked the department to explain in detail the factors considered by the department when formulating its response to the previous question; the specific weight it gave to each factor; and its rationale for the belief that the identified text is or is not authoritative with respect to the valuation of centrally assessed property. She further stated, in view of the department's stated goal of providing direction to the industry, please identify each specific valuation approach, method or technique discussed within the 350 page WSATA handbook that the department intends to utilize when valuing centrally assessed property.

Ms. Whittinghill questioned whether the 2009 WSATA handbook and the NCUVS standards are available for review on the department's web site and how taxpayers would obtain this information. She further questioned the cost to each taxpayer, if any, to obtain a copy of the WSATA handbook.

Ms. Whittinghill asked if the department would be prevented from relying on and utilizing the 2009 WSATA handbook and the NCUVS standards if New Rule I as proposed were not adopted. Also, if the answer is yes, what affect will not adopting New Rule I have on the department activities?

She further asked why it is now necessary to append by reference the entire contents of the 2009 WSATA handbook and the NCUVS standards in the rules but it is not necessary to incorporate numerous other reference materials, i.e., Value Line, Moody's, Ibbotson's SBBI Text, etc., which are also routinely used by the department.

Ms. Whittinghill also asked 100 questions pertaining to non related materials, information, directions, opinions, taxing positions of other states, and valuation standards that are not related to this rulemaking action.

Mr. Mupo commented that Verizon objects to the regulatory incorporation of the WSATA-CCAP appraisal handbook and the NCUVS standards. He stated that both contain provisions that are extremely controversial and the subject of ongoing litigation. The defects incorporated in these have been pointed out on numerous occasions by industry representatives, including the Western States Association of Taxpayer Representatives (WSATR), and are particularly inapt in a state like Montana that exempts intangible personal property from assessment for property tax purposes.

Mr. Ross also commented that the proposed rule that adopts the WSATA handbook and the NCUVS standards is a mistake as both of these sources are not commonly accepted or authoritative material. In addition, both of these materials are not readily available to the public which runs counter to the department's efforts of transparency practices and full communication. He further suggested that until such time that these documents are made publicly available for taxpayers on the department's web site that these rules ought to be postponed.

Mr. Ross presented numerous correspondences and supporting documents that offered the assistance of various parties and expertise to the WSATA executive committee during the development of the WSATA handbook.

Senator Jeff Essmann, representing Senate District 28 stated that attempting to adopt the proposed manuals that contain language that is contrary to Montana statute is not an appropriate action by the department.

RESPONSE NO. 2: The department believes that the 2009 WSATA handbook and NCUVS standards are authoritative sources that should be relied upon when determining the fair market value of centrally assessed property.

The Montana Supreme Court has stated that "the term 'method' refers to a consistent process for arriving at market value, the details of which may vary from place to place, depending on available data, and which will necessarily include a number of different approaches--e.g., the market data approach, the income approach, the cost approach--or some combination of these approaches, depending on the market in the area where appraisals occur." Albright v. Dept. of Revenue, 281 Mont. 196, 208-209 (1997).

The department considers all approaches to value the WSATA handbook is the only authoritative handbook that describes the proper techniques and methodologies for developing all approaches to value for use in unitary appraisal for property tax purposes. The 2009 WSATA handbook and the NCUVS standards are an excellent resource for appraisal methods and practices that align with the department's historical appraisal practices. The 2009 WSATA handbook was adopted by WSATA Executive Committee pursuant to that organizations review and approval as authorized by its by-laws. The NCUVS standards are developed and approved by that organization's by-laws.

WSATA is an organization of thirteen states that offers assistance and guidance to state appraisers who perform unit valuations of centrally assessed companies. In addition to promulgating an appraisal handbook, WSATA also conducts an annual appraisal school for state appraisers at Utah State University. NCUVS is a national organization that develops standards of appraisal practice for unit valuation appraisals.

The WSATA handbook has been utilized by the department since the 1950's and is currently on its fourth edition. The department has historically used this handbook as an appraisal resource when performing unit valuations of complex centrally assessed companies. These handbooks reflect the accumulated experience and expertise of the thirteen western member states that conduct unit valuations. For example, the state of Oregon had adopted the 1989 version and, more recently, the 2009 WSATA handbook through an administrative rule under 150-308.655

The department believes that the governing bodies of the 2009 WSATA handbook and NCUVS standards provided sufficient oversight and evaluation to ensure that the information included in the treatises is appropriate for use in the valuation of centrally assessed property. Therefore, the department did not feel the need to develop independent factors and rationale tests for the two treatises.

Some comments were made that the size of the 2009 WSATA handbook makes it difficult to use. The 2009 WSATA handbook's size is evidence of the complexity of these appraisal issues and attempting to summarize these practices does not provide clarity or good direction to the readers. Unfortunately, accurately and completely explaining how taxes work and are administered cannot be done briefly. Centrally assessed property valuation and taxation is no exception. The Internal Revenue Service publishes hundreds of thousands of pages of documentation explaining what Congress intended in passing thousands of pages of Internal Revenue Code. The Internal Revenue Code is far more complex and affects hundreds of thousands of Montanan's annually. The average Montanan struggles through thousands of pages of tax code and instructions to file their federal tax return, many without any assistance from paid professionals.

There was a request that the department identify all of the practices outlined in the 2009 WSATA handbook that are counter to department's practices. The department uses the 2009 WSATA handbook and NCVUS standards in their entirety. An appraiser would use the handbook and standards to develop an understanding of centrally assessed appraisal theory in total. In situations where Montana law is contrary to the 2009 WSATA handbook or NCUVS standards, Montana law must be followed. The 2009 WSATA handbook and NCUVS standards clearly state this fact to eliminate any confusion or doubt as to which should prevail.

Concerning the comment that issues inside the 2009 WSATA handbook and the NCUVS standards are controversial, subject to current litigation, and inapt for the state of Montana, the department respectfully disagrees that the proposed rules should not be adopted because of current litigation. The department asserts that providing prospective certainty is a valid purpose.

The department agrees that having a viewable copy of the 2009 WSATA handbook available on the department's web site for the convenience of the centrally assessed property taxpayers is a good idea and will make it available there. The department will also facilitate the purchase of the 2009 WSATA handbook through the web site. The NCUVS standards are currently readily available and easily found on the NCUVS web site. In addition, to make sure that centrally assessed property taxpayers can have convenient access to the NCUVS standards the department will include a link to the NCUVS standards on the department's web site.

Regarding the question of whether the department would be prevented from relying on the 2009 WSATA handbook and NCUVS standards if New Rule I was not adopted, the answer is "no". The department would not be prevented from relying on the 2009 WSATA handbook or NCUVS standards if New Rule I was not adopted. But the department feels strongly that taxpayers should be aware that the department relies on these sources when appraising centrally assessed properties. The department has not proposed adopting the reference materials suggested by Ms. Whittinghill because those references are used by the department primarily as sources of data to develop capitalization rates. They are not authoritative references on the appraisal of centrally assessed properties.

There were numerous documents and correspondence presented at the hearing which were provided to the WSATA Executive Committee during the development of the 2009 WSATA handbook. During these rule proceedings, it was stated that some of the responses were addressed by the developers of the 2009 WSATA handbook and the executive committee while others were not. It is the department's belief, however, that the WSATA Executive Committee undertook an extensive analysis of all comments made during the comment period before adopting the 2009 WSATA handbook. Although there may have been legitimate reasons why some of the issues were not addressed by the WSATA Executive Committee, the department believes that this rule hearing is not the appropriate forum to address those issues. Rather, if a participant to this rule hearing is concerned that the WSATA Executive Committee ignored a specific comment or certain materials before adopting the 2009 WSATA handbook, such concerns should be sent to the WSATA Executive Committee for its review.

Regarding the proposal provided by Mr. Strong, the current method of applying the intangible personal property deduction separately by approach was put into the current rule at the request from the centrally assessed property taxpayers. The department disagrees with the Mr. Strong's suggestion that application of a mathematical intangible percentage after correlation more accurately reflects market value. To correctly remove intangible personal property market value from the centrally assessed unit, the intangible personal property market value must be deducted in each approach to determining market value. The same concept holds true for the income and market approaches of value. Although the department appreciates Mr. Strong offering an alternative to deducting exempt intangible personal property from the centrally assessed property unit, the department believes that this approach would not arrive at a fair market value for the property.

COMMENT NO. 3: Legislative Intent - Senator Jim Peterson, representing Senate District 15, Senator Kim Gillan, representing Senate District 24; Senator Jeff Essman; Ms. Nancy Riedel; Mr. Lambert; and Ms. Whittinghill all had comments on the legislative intent of the rules.

Senator Peterson stated that the rules appear to ignore legislative intent and the department is conducting expensive litigation that holds up funds needed by local municipalities.

Senator Peterson asked "what's the hurry?"

Senator Peterson further commented that when the rule proposal notice was first published in September of this year, the Revenue and Transportation Interim Committee requested an Economic Impact Statement (EIS) be prepared by the department before moving forward. The department prepared the EIS and presented it to the Revenue and Transportation Interim Committee just before the last meeting of that committee. During the committee meeting in November, the committee attempted to delay the implementation of these rules but was unable to do that.

Ms. Riedel also stated that the legislative intent was to exempt goodwill.

Senator Essmann stated the department is ignoring the plain meaning of the law and ignoring obvious legislative intent. Therefore, the department is attempting to exceed its delegated authority in attempting to implement these rules. The language in the proposed rule concerning intangibles is contrary to the plain meaning of the law and therefore is in direct violation of legislative intent. The department alleges these changes are simply clarification of the current practice, but if that is the case, the current practice violates the plain meaning of the adopted statute and should cease immediately.

He also stated the department's late notices and scheduling maneuvers are an attempt to circumvent the legislative process.

Senator Gillan commented that after reviewing the Economic Impact Statement it still remains unclear as to whether the rules reflect statutory authority.

Mr. Lambert stated the department cannot deprive taxpayers of a statutorily authorized tax exemption by creating new, and in many cases insurmountable, rules that could effectively prohibit taxpayers from claiming a tax exemption. Where the legislature intends for a specific group of taxpayers to receive intended tax benefits such as the exemption here, the department cannot single-handedly deny those benefits.

He further stated the Montana legislature enacted this exemption in 1999 and has taken no steps to amend it since. The department is now seeking to unilaterally contravene the legislature's will by imposing new requirements on a taxpayer's ability to exempt its intangible personal property. If the scope of the exemption is to be changed, such change should come from the legislature, not the department.

Ms. Whitttinghill asked how the proposed amendments to ARM 42.22.101 is consistent with and not an expansion of the legislative intent expressed in 15-6-218, MCA.

RESPONSE NO. 3: Respectfully, the department believes that the proposed rules implement the legislative intent. The legislature requires through its adoption of 15-8-111, MCA the department to value centrally assessed property at 100 percent of its market value. Section15-6-218, MCA specifically states that intangible personal property is exempt from taxation; the statute does not mention anything regarding the exemption of intangible value. The department does not have the authority to grant tax exemptions or deductions without explicit consent of the legislature through statutory language. Intangible value or intangible influences of value are not exempt and are rightfully captured in the fair market value of a unit of operating assets.

Statutory construction would dictate that tax exemptions be narrowly construed and construed in favor of the taxing agency's interpretation of the exemption. Similarly, it is well established that taxpayers bear the burden of establishing an entitlement to a deduction or exemption from tax. The department respectfully disagrees that the department is holding up or delaying the use of tax revenues, rather, the department is following the statutory direction to arrive at fair market value of property. Some companies do not agree with the values the department has assigned to their properties, and thus appeal the department's values. In all instances the department believes that its appraised values accurately reflect the fair market value of the assets. The department has a duty to apply 15-8-111, MCA, and not concede the fair market values to avoid lengthy litigation.

Many of the taxpayers providing comments in this matter have advocated expansive definitions of intangibles or believe that the department should have to prove that its valuations contain no value contributed by intangibles. In the case of the telecommunications industry there have been allegations that 75 to 80 percent of the value of the industry value should be deducted as intangible. If these positions are accepted by the courts or legislature they could have a significant destabilizing effect on the Montana tax system and measurably shift the burden of taxation to other classes of property particularly to class 4 residential and commercial property which represents the majority of the tax base in Montana.

The 2009 WSATA handbook and NCUVS standards are subservient to Montana state law and that law prevails when detailed matters in the handbooks or standards conflict with the law. In all respects, the department through its traditional valuation practices has clearly implemented legislative intent on achieving full market valuation of centrally assessed properties for decades and continues to do so today by adopting these practices in the rules.

In response to the question "What is the hurry?" The department believes that a general criticism has been lodged that the department's practices regarding valuation of centrally assessed companies are not found within the department's administrative rules. The absence of these rules raised many questions that the department believes these rules will clarify. Over the last several years, the department has advised the Committee of the litigation between the department and centrally assessed companies. Some of these cases have been fully adjudicated while others await adjudication in the appropriate venue. It is the department's intent through the adoption of these proposed rules to alleviate confusion surrounding the department's practices of valuing centrally assessed properties.

Concerning the department's notices and the timing of the department's work, the department apologizes for any inconvenience that may have occurred related to this rule action. The department published the first proposal notice for this rulemaking action on September 9, 2010 in MAR No. 42-2-846, which scheduled a public hearing for October 6, 2010. The department determined that there was a public interest, and volunteered to have an EIS prepared for the rules. Based on that understanding, the department advised the Committee that the rule hearing previously scheduled for October 6, 2010 would be postponed pending the preparation of an EIS. The department convened a meeting with the industry representatives on October 6, 2010 to listen to their concerns with the proposed rules. Subsequent to that meeting, on October 28, 2010, the department filed a new proposal notice scheduling a hearing for November 22, 2010. The EIS was prepared and provided to the Committee on November 17, 2010. Whatever the perception, the department's actions have been within MAPA's statutory timeframes for promulgating administrative rules and have been delayed to permit preparation of, and review of, the accompanying EIS.

COMMENT NO. 4: Biennial Review - Ms. Riedel; Mr. Green, Mr. Mupo; and Mr. Adkins provided comments concerning the biennial review portion of the rules.

Ms. Riedel stated they would argue for maintaining the biennial review of the percentages that are in the rules.

Mr. Green stated the department failed in its obligation to biennially review the intangible deduction percentages and they are concerned that the department has elected that rather than to start operating in a way consistent with the rule, it simply is abolishing the rule that would require some kind of regular review of these percentages. There was a fairly extensive process which resulted in these rules through the negotiated rulemaking process and the expectation of the participants is that there would be fairly extensive discussions with the department, on a going forward basis, as to whether or not any or all of these default percentages remain or are appropriate. The rule is making clear, or clarifying the department's position in a way that was never discussed in the negotiated rulemaking process that these percentages really are a default in a way that imposes a burden on taxpayers that was never intended.

Mr. Mupo stated the biennial review is a very important provision that was originally negotiated to prevent he DOR from ignoring changes affecting centrally assessed industries. Recent wireless sales transactions over the past several years indicate that the majority of the value has been made up of intangible assets.

Mr. Adkins stated that there is a provision in the department's current rules that states the department and the taxpayers will review the 15 percent limit every two years, but the department has not complied with that rule and, until 2009, had never held hearings or conducted meetings to review the rule since it was adopted in 1999. It is noteworthy that the proposed rules eliminate this review process.

RESPONSE NO. 4: Regarding the elimination of the biennial review between the industry and the department, the department already contains an open door policy for any issue the industry or any company wishes to discuss. Maintaining a scheduled biennial review is not needed and could prove to be inefficient by delaying the discussion of important matters at a scheduled time instead of immediately when the issues are identified.

COMMENT NO. 5: Litigation - Senator Peterson; Ms. Riedel, Mr. Ross; Mr. Baker; Senator Gillan; Ms. Tara Veazey, representing the Montana Budget and Policy Center; Mr. Lambert; and Mr. Adkins all provided comments concerning litigation.

Senator Peterson stated that the rule tries to validate current tax practices by the department retroactively to strengthen their position in current litigation.

Ms. Riedel stated that the proposed rules would lessen litigation because there would be no gray area, everything would be taxable the way that the department is currently doing it. The reason there is so much litigation right now in the industry is because the industry thinks there is a fundamental disconnect with the statutes and the methodologies that are being put forth by the department.

Mr. Ross, representing PacifiCorp stated that the department's proposed rules are an attempt to strengthen its legal position for current and future litigation. The proposed rules are a direct attack on the PacifiCorp litigation against the department.

Mr. Baker further stated the rules do not provide clarity and will not lessen the amount of litigation.

Senator Gillan asked the department to consider reassessing the proposed rules to ensure that they do not trigger additional litigation. She stated that it is critical that all taxpayers feel that tax rules are transparent, based on statutes and predictable.

Ms. Veazey commented that the rules adopt the existing practices of the department as those practices relate to the valuation of centrally assessed properties in Montana. Doing so provides certainty and stability for Montana taxpayers, reduces expensive and unnecessary litigation related to those practices, and provides for consistent revenue streams to the state of Montana to fund its common investments in education, health and human services, corrections, infrastructure and other public functions that help make Montana's communities safe, healthy, and vibrant.

Ms. Veazey further stated failure to adopt the rule changes will result in continued and increased litigation. If centrally assessed property owners challenging the rule and bringing litigation ultimately succeed in reducing the valuations of their intangible property, it will ultimately lead to a property tax shift toward Montana homeowners and small businesses.

Mr. Lambert suggested that the proposed rules will lead to years of controversies and litigation.

Mr. Adkins stated there has been litigation concerning the proper interpretation of 15-6-218, MCA, and ARM 42.22.110. The proposed rule would formalize the department's position in this litigation, and Quest believes there is no basis for that position and in fact is contrary to Montana statutes.

RESPONSE NO. 5: The adoption of administrative rules cannot be retroactive unless the agency has a specific retroactive applicability statute allowing the agency to apply the rules retroactively, as stated in 2-4-306, MCA. Therefore, the adoption of the rules will have no effect on current litigation.

The proposed rules may lessen the amount of litigation and increase the taxpayers understanding of the department's position in these matters.

The department disagrees that there is a fundamental disconnect with the statutes and the methodologies that the department uses. Section 15-8-111, MCA, states that all property must be assessed at 100 percent of its market value. The current methods used by the department and the methods explained in the 2009 WSATA handbook and the NCUVS standards are accepted ways to arrive at market value.

The department has not proposed the rules in MAR Notice 42-2-846 to strengthen its litigation position or to attack the PacifiCorp litigation but rather to inform the public of the department's practices, provide more tax policy transparency, and to possibly lessen litigation. Specifically the rules provide clarity and inform the industry of the department's position as it applies to intangible personal property, the standards, and appraisal methods used by the department. The proposed rules will make the department's tax positions more predictable and will continue to be based on the statute.

The department appreciates Ms. Veazey's comments in support of the proposed rules.

COMMENT NO. 6: Delay Adoption - Senator Peterson and Senator Essmann provided comments requesting a delay of the adoption of the rules.

Senator Peterson requested the department delay of the adoption of the rules to allow the legislative process to address the issues discussed in the rule hearing during the upcoming legislative session, which is an open transparent accountable process, which would avoid costly litigation and very expensive tax protests.

Senator Essmann urged the department to not adopt the proposed rules citing the reasons mentioned in the other comments found in this notice.

RESPONSE NO. 6: Regarding Senator Peterson and Senator Essmanns' request to delay the adoption of these proposed rules until the legislature can review the issues and provide a remedy to lessen the amount of litigation, the department believes that the points in the proposed rules are the main issues of dispute and need to be communicated and made clear to the taxpayers in the quickest and earliest manner possible. The department welcomes the legislature's assistance in these matters but the department believes the best avenue to take at this time is to fully disclose the department's practices through the adoption of the proposed rules. The legislature has continual authority to review rules.

COMMENT NO. 7: Safe Harbor Percentages - Mr. Mupo provided comments concerning the safe harbor percentages as they apply to the proposed rules.

Mr. Mupo provided comments related to the safe harbor percentages and his understanding that the safe harbor percentages were proposed to ease the burden on small taxpayers. He stated that if such taxpayers relied on the safe harbor percentages, they would not be required to incur the time and expense of annually valuing their exempt intangible property. But these safe harbor percentages were developed without any input from the wireless industry. Until 2007 the wireless property was assessed locally on a cost approach. Now that wireless companies are subject to central assessment, the disparity between the department's outdated safe harbor percentages and the reality of wireless company intangibles will lead to substantial over-taxation. The failure of the department to properly establish a reasonable safe harbor percentage for exempt intangibles discriminates against the wireless industry. He suggested that the department should follow the statutory requirement and meet with the wireless industry to ascertain the correct percentage which should be established as a safe harbor amount.

RESPONSE NO. 7: The department has always allowed companies an opt-out provision for the "safe harbor" percentages. If a company does not believe that their current safe harbor percentage accurately reflects their intangible personal property values, ARM 42.22.110 states that the department will consider any evidence of additional intangible personal property value when the company provides that information. Specifically ARM 42.22.110(2) states: "If any taxpayer believes that the value of its intangible personal property is greater than that allowed under (1), the taxpayer may propose alternative methodology or information at any time during the appraisal process and the department will give it full and fair consideration. If the department concludes that the value of intangible personal property is greater than that allowed in (1), the unit value will be decreased accordingly. In no event, however, will the value of intangible personal property be less than that allowed in (1)."

The department does not believe that it has discriminated against the wireless industry.

COMMENT NO. 8: Correct classification for assessments - Mr. Feaver; Senator Peterson; Senator Essmann; and Mr. Green all provided comments regarding whether taxpayers should be centrally assessed.

Mr. Feaver further stated the department should definitely administer who files centrally assessed returns. If there is a dispute over whether a property should be centrally assessed or locally assessed, all the cards should be on the table when the taxpayers appeal.

Senator Peterson stated the legislature attempted in the 2009 Session to define centrally assessed property, particularly gathering systems related to pipelines. He further stated that it appears the department is ignoring legislative intent which is leading to very time consuming, costly litigation.

Senator Essmann further stated attempting to adopt rules to apply central assessment on targeted companies and including a penalty for refusal to file when the statutory authority is not well established violates the procedures of the Montana Administrative Procedures Act.

Mr. Green commented that it creates a situation where the department is ordering taxpayers, which do not believe they should be centrally assessed, and which have not been historically centrally assessed, to begin reporting on a central assessment basis. He stated that they believe this rule is an effort to bolster the department's assessment of penalties against particular companies and to enhance its position in pending litigation.

RESPONSE NO. 8: The department would like to thank Mr. Feaver for his support of these proposed rules.

The proposed rules support the legislation enacted by the 2009 legislature that defined gathering systems related to centrally assessed property. The proposed rule amendment provides these entities and other centrally assessed companies with direction to submit the annual reports in Helena.

The department respectfully disagrees with the comment that the filing requirement is not well established. The rule substantiates the requirements of 15-23-101, MCA which identifies the industries that are subject to central assessment.

It is common practice for a revenue or tax collecting agency to apply a filing penalty when a taxpayer refuses to file in the manner desired by a tax authority and this requirement does not violate the Montana Administrative Procedures Act.

The department is not including language requiring companies to file as a centrally assessed company in an effort to increase the department's penalty and interest assessments but rather to require companies to file correctly, use the correct forms, and file at the correct location.

COMMENT NO. 9: Economic Impact Statement (EIS) - Ms. Whittinghill posed several questions related to the Economic Impact Statement (EIS) which was provided to the Revenue and Transportation Interim Committee upon their request.

RESPONSE NO. 9: In response to the questions posed by Ms. Whittinghill concerning the EIS, the department presented the EIS to the Revenue and Transportation Interim Committee pursuant to 2-4-405, MCA. It is the department's understanding that the Committee has taken no action formally or informally that the EIS is insufficient or otherwise contrary to Montana law. To date the department has received no correspondence from the Committee concerning the EIS. The department believes that Ms. Whittinghill's questions concerning the validity to the EIS are beyond the scope of the requirements under the Montana Administrative Procedures Act as part of this rulemaking action. The department will provide answers, as appropriate, to the appropriate forum.

5. The department adopts New Rule I (42.22.109) and amends ARM 42.22.101, 42.22.105, and 42.22.110 as proposed.

6. An electronic copy of this adoption notice is available through the department's site on the World Wide Web at www.mt.gov/revenue, under "for your reference"; "DOR administrative rules"; and "upcoming events and proposed rule changes." The department strives to make the electronic copy of this adoption notice conform to the official version of the notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the notice and the electronic version of the notice, only the official printed text will be considered. In addition, although the department strives to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems.

/s/ Cleo Anderson /s/ Alan G. Peura

CLEO ANDERSON DAN R. BUCKS

Rule Reviewer Director of Revenue

Certified to Secretary of State December 13, 2010