Property Owners Targeted For Unfair Taxes

Property Owners Targeted for Unfair Taxes
by Jeff Wilder

Reprinted from Advanstar's Hotel & Motel Management Magazine

These are times of stress and tight budgets for business and government alike. Growing responsibilities at the state and local level have forced governments to seek additional income wherever they can. Naturally, business tax represents a likely pocket to tap, and taxing authorities are doing their creative best to go after all available cash.

As businesspeople who own site-specific property, you are easy targets and must be on guard against unfair taxation by governments that are desperate for income. Fight tooth and nail against unreasonable tax bills; don't simply roll over and pay them.

I've encountered several creative methods that "City Hall" is using in order to pick your pocket. I am sure that many of you have equally telling tales. Hopefully, by sharing some of my war stories with you, you'll realize that you're not alone in the drive to prevent unnecessary levies from being imposed on your assets.

My first example occurred in Pennsylvania. This commonwealth charges sales tax on ff&e purchases or leases, as with all other products and services that are subject to taxation. However, someone in state government got an interesting idea that attempts to expand sales-tax-collection potential.

I am a major stockholder in a wholly owned partnership in which I am a general partner. This commonly used structure for hotel ownership and operation combines the partnership/individual owner concept with an operating corporation that runs the business in order to limit the fee-owner liability arising from hotel operation - lawsuits and so forth. The fee owners own the stock of the operating corporation and pay themselves rent.

Pennsylvania recently sent me a bill for $38,000 in state sales tax on this hotel that we manage. It claimed that the portion of rent paid by the operating corporation to its fee owner that was attributed to the hotel's furnishings was subject to 6 percent sales tax. The state then came up with a formula that some tax-department bureaucrat created in order to determine what portion of the rent (that we effectively pay to ourselves) should be taxed.

No Laughing Matter

Now, you don't have to be a tax lawyer to conclude that the state is trying to reach into a pocket that it has no business being in. Fortunately, the lease in question has the tenant responsible for all ff&e purchases, so our position is that no part of the rent is attributable to ff&e and, therefore, no sales tax payment is appropriate. However, the absurdity surrounding the issue is no laughing matter. Pennsylvania is deadly serious about attempting to extend a legitimate tax on ff&e leases and purchases, to a seemingly inappropriate area for taxation. I am just as serious about knocking them on their duff.

A second example of attempted tax-gouging is in a Maryland county. There, transfer taxes on the sale of real estate are supposed to be paid based on the sales price of the property. Further, the assessed valuation of the property is supposed to be geared off its market value, which, of course, is significantly affected by its sales price.

We all know how real-estate values have dropped over the last five years. Properties are being routinely sold at prices well below earlier value levels. Well, this Maryland county assessor's office thought that it had a better handle on real value than the silent hand of the marketplace. It unilaterally decided that market forces were having such a uniquely negative impact on sales prices that price could no longer be relied on to provide an accurate measure of property market value. By logical extension, the sales price would no longer be looked on as the key from which real-estate-transfer taxes and assessed valuation were determined. This is such an absurd position to take that it wouldn't warrant a serious second thought unless you understood how firm the local taxing authority was in maintaining its position - and how costly that is for the taxpayer.

A recent office-building sale at $7 million that had $20 million of prior financing illustrates this cost potential. A 2 percent real-estate-transfer tax would have meant that the county received $140,000. Yet the county assessor, based on some creative formula, came up with the notion of a true value in the $14 million range. It then attempted to enforce a transfer tax of $280,000. Of course, this approach also would have an ongoing impact on yearly real-estate tax bills. The county's valuation policy ached to be challenged, and it was. The county assessor was forced to accept the sale price as the primary determinant of value for tax purposes.

The examples that I've cited here are typical of what is happening elsewhere. Governments facing ever-expanding demands for cash are searching for increased revenues under every rock. Creative avenues of taxation are more a function of the desperate need for cash than an attempt to be inherently unfair to the taxpayer. Yet when unfairness in taxation is the practical result, then you must fight, fight, fight. Don't simply give in.