Tax assessors look to reclassify salt caverns in Louisiana
Jesse (Jay) R. Adams, III, and William M. Backstrom, Jr, Jones Walker LLP
The fact that state and local governments are hard pressed to find new sources of revenues is not news to anyone. What is news is how some Louisiana tax assessors have become more creative and aggressive in how they classify and value taxable property for ad valorem property tax purposes. In those parishes, the result is a new level of uncertainty and potential exposure for additional property taxes for businesses, in particular energy companies.
The efforts of tax assessors have become particularly noteworthy. Assessors in a number of Louisiana parishes - including Ascension and St. Landry Parishes - are attempting to implement new methods to classify and value underground salt caverns used by energy companies to store natural gas and other petroleum products.
For Louisiana-based energy companies and businesses with operations in the state, now is the time to take action. The laws of Louisiana regarding property and taxes have changed very little in this area. That fact, however, has not hindered some Louisiana tax assessors' strategies for expanding the property tax base by reclassifying underground salt caverns as "other property" (as opposed to a feature of the land like a lake) and assessing the caverns at 15%, rather than the 10% used for land, of the fair market values of the natural underground storage facilities.
The risks to energy companies are significant. If underground caverns storage facilities are successfully reclassified and then their value is determined using the cost of creating the cavern as the indicator of its value, energy companies stand to pay millions of dollars in increased ad valorem property taxes.
Background
Louisiana tax assessors have one primary objective: to ensure that all local property taxes owed to the government are properly assessed and collected as provided by established laws and guidelines. While the local tax assessors have always been motivated to improve property tax revenues, things changed drastically during the economic crises of the mid-2000s.
As state and local revenues decreased, business income and property values also declined. While the state and local tax bases were shrinking, demand for government services rose, particularly as the federal government turned responsibility for many legislatively-mandated programs over to the state and local governments.
Despite feeling a strong pinch in their pocketbooks, many state and local elected officials were unwilling to raise taxes through the legislative process. As a result, many tax assessors and collectors took things into their own hands, bypassing the legislative process entirely. Instead, some assessors focused their attention on trying to find property that they viewed as "omitted" from their tax rolls. Salt-cavern storage facilities owned by energy companies became a prime target. According to some assessor estimates, the value of these storage facilities can range from a few million dollars to more than $100 million - representing a lucrative source of additional property tax revenues without having to change any existing tax laws.
In Ascension Parish alone, the current tax assessor, M.J. "Mert" Smiley, Jr., has identified at least 20 underground storage caverns that he sees as equivalent to aboveground storage tanks. In order to tap into what they see as source of additional funds, Smiley and other assessors have begun classifying these facilities as "other property," which is assessed at 15% of fair market value rather than the 10% assessment ratio for "land." They have also assessed the caverns based the alleged "replacement cost" of the cavern; a standard appraisal technique. Their consultants, however, have created their own version of an appropriate cost structure to apply to these caverns that purports to recreate the cost of leaching a cavern and the installation of all of the necessary equipment. It significantly increases the value of the caverns, in many cases, well beyond the actual costs of creating the caverns.
Recent court decisions
Energy companies targeted by these new moves have fought back in court. However, the results have been mixed and have done little to uphold the rights of industry.
For example, in December 2013, in PBGS LLC, et al. v. Rhyn L. Duplechain, Assessor for St. Landry Parish, et al, 13-278 (La. App. 3 Cir. 12/18/2013); 130 So. 3d 45, writ denied, 2014-0114 (La. 04/04/2014); 135 So. 3d 641, the Court of Appeal of Louisiana, Third Circuit, found in favor of the defendant, determining that the tax assessor "appropriately classified the salt caverns as 'other property.'" In this case, two salt caverns owned by PBGS, leased to Spectra Energy Corp and located in St. Landry Parish, had long been classified as "land" taxable at 10% of fair market value. In the 2011 assessment, the assessor classified the salt caverns as "other property" and assessed them at 15% of fair market value, which resulted in additional taxes due by the owner.
Spectra paid the 2011 taxes under protest after filing appeals with the St. Landry Board of Review and the Louisiana Tax Commission. After paying the disputed taxes under protest, PBGS and Spectra filed a lawsuit in district court, arguing that the disputed taxes were "overstated and illegal" and requesting a return of the disputed taxes. The district court found in favor of the assessor, and the appellate court ultimately upheld that decision.
On appeal, the first panel of the Court of Appeal reversed the district court. However, because one judge dissented, the matter was referred to a five judge panel. After additional briefing, the second panel reversed the earlier decision and affirmed the district court's decision.
The judges were split, however, which further muddied the current waters. Writing for the dissent, Judge Phyllis Keaty argued that the appeals court lacked jurisdiction and that the appeal properly belonged in the hands of the Louisiana Tax Commission. The Louisiana Supreme Court denied the property owner's writ of certiorari, which means the decision in PBGS is final and "the law" only in the Louisiana Third Circuit Court of Appeal.
What this means for future disputes is unclear. There is separate, ongoing litigation on the same issue in Assumption Parish, which is located within the jurisdiction of Louisiana Court of Appeal, First Circuit. While the PBGS decision will certainly be considered on any appeal of the Assumption Parish litigation, it will not be binding on that Court. Thus, the different circuit Courts could reach conflicting decisions, which would likely result in the matter ultimately being decided by the Louisiana Supreme Court. In any event, it is unlikely that a final decision on the issue will be rendered in the near future.
In the meantime, it is uncertain whether the disputes can be resolved amicably. It is by no means certain that local taxing authorities will be motivated to agree that the salt caverns are a feature of the land (assessable at 10% of fair market value), thereby denying local tax recipient bodies of potentially significant additional property tax revenues. On the other hand, a strong argument can be made that the uncertainty created by the disputes and the potential for increased property taxes places undue pressures on local businesses or outside investment, which in turn could have a negative impact on the local, regional and state economy in general.
A little help from their (paid) friends
In the current environment, tax assessors are not operating singlehandedly. A number of parishes have contracted with third-party auditors and tax consultants to help them determine the potential value of salt cavern storage facilities and to develop innovative arguments for shifting the classification of this property toward a more favorable (for the parish) assessment scheme.
One consulting firm, Pritchard and Abbott, claims to have more than a half dozen parishes under contract or in discussions with them as potential clients. Spokesmen for the company note that they do not use contingency fees in their contracts, stating that such compensation agreements would be "unethical." However, it is likely that other consultants and auditors are operating under such agreements, making it quite clear where their loyalties lie. In fact, the Louisiana Attorney General recently issued an opinion concluding that assessors can legally enter into contracts with consultants and pay them a "pro rata" share of the increased tax revenues received. See La. Atty Gen. Op. No. 14 0040 (05/16/2014).
Taking the fight to the assessors
Given the current threat, industry participants need to be equally, if not more, creative than the assessors in fighting these reclassification and revaluation challenges. Further, industry must be proactive. Trying to change tax law, once it has been established by legislation or judicial decision, is like trying to capture steam that has escaped from a boiling pot of water: difficult, to say the least.
Perhaps even more costly than the additional taxes is the price of uncertainty. Without clear direction, energy companies will be required to set aside income in order to prepare for a possible tax bill, rather than directing those funds toward research, exploration, expansion of existing facilities or any number of other business goals, including those in Louisiana.
Without a doubt, taking action costs money. It is easier and less expensive, in the short term, to do nothing. But whether making healthier lifestyle choices, replacing worn-out brakes on a car, or nipping tax assessment changes in the bud, a few resources spent now can save a lot of heartache and dollars down the road.
There are a number of things that energy companies can do today:
Increase awareness.
One cannot fight a battle that one does not see coming. Well-informed energy companies may not be able to see around corners, but they can predict what is coming down the road with reasonable accuracy. When you know what lies ahead, you can make more effective choices and take steps to prevent or diminish the negative effects of tax-assessor activism.
For example, while salt cavern storage facilities have become an immediate focus of attention on both sides of the issue, the Legislature has recently considered proposals that would expand taxes to cover well-drilling operations and other oilfield activities and services. Now is the time to take action on these and other issues - it is generally easier to defend an existing tax system than it is to overturn changes.
Create strength in numbers.
Organizations such as the Louisiana Oil & Gas Association, the Louisiana Mid-Continent Oil and Gas Association and others have tax and government affairs committees focused on emerging tax issues. In-house counsel can also become members of national, state and local committees and working groups. Working together, industry participants can reap a number of benefits, including the development of new ideas through collaboration and sharing of best practices and information, and at the same time demonstrate a willingness to act in a unified manner against unauthorized and unilateral expansions of property, and other, taxes.
Get professional advice.
As noted above, local tax assessors are contracting with third-party auditors and valuation consultants (some on a contingency-fee basis) to help them identify and determine the potential taxable value of salt cavern properties.
Turnabout is fair play - there is absolutely no reason that energy companies should go it alone. Legal, tax and government relations counsel can help businesses make sense of complex laws and regulatory schemes and develop proactive - and sometimes counteractive - strategies. They can also foster positive working relationships with key legislators, regulators and other decision makers in state and local government before policy changes under consideration are written into law.
If push comes to shove, litigate.
While litigation is often seen as an option of last resort, it can often be a company's, association's or industry's best choice when it comes to fighting particularly aggressive tax assessors or tax agencies. The recent decision in PBGS LLC, et al. v. Rhyn L. Duplechain notwithstanding, the Courts have not yet closed the door on these issues.
Act promptly and fairly.
Tax assessors are unlikely to cease their efforts to find new sources of revenue. While some assessors may seek to unilaterally expand the local property tax base outside the legislative process, it is understandable that local governments are seeking the resources required to provide much-needed services to their citizens.
However, any such changes should be debated and enacted through the legislative or regulatory process; not unilaterally by assessors. It is incumbent on the energy industry to participate in the process and develop tax policy that balances the needs of local government with the needs of the industry and the broader economy - ultimately serving everyone.
