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State's Grab of CSUT Fund & Tax Preferences for Veterans: Unfair Actions?

Explore the impact of the state's sweep of the CSUT fund and proposed tax preferences for veterans in Virginia. Learn about the consequences for local governments and the need for means-testing. Discover changes to tobacco taxes and the potential for reform.

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State's Grab of CSUT Fund & Tax Preferences for Veterans: Unfair Actions?

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  1. VML Finance Policy CommitteeThe 2020 Session Crystal Ball Richmond Marriott Hotel July 18,2019

  2. Communications Sales & Use Tax“What’s Mine is Mine & What’s Yours is Mine” • In the 2018 Session, the Senate grabbed $2.0 million in each year of the biennium from the CSUT Fund. • Despite heavy lobbying the budget conferees agreed to sweep $2.0 million in FY19 and again in FY20 to pay for state general fund expenses. ======================================= • Gov. Northam put $2.0 million in his introduced 2019 Budget Bill to restore the CSUT Fund. • The General Assembly took the money, leaving the FY20 revenue transfer in place. July 18, 2019

  3. Communications Sales & Use Tax“What’s Mine is Mine & What’s Yours is Mine” A Bit of History: • In the 2006 Session the General Assembly eliminated the authority of localities to impose taxes on landlines and wireless telephone services, E-911 landline telephone service, cable television franchise fees, and utility taxes on cable television. • The legislative intent of the Communications Sales and Use Tax was to replace the lost local revenues. • Under §58.1-662, Code of Virginia, the CSU tax is distributed primarily to local governments for local general funded programs. July 18, 2019

  4. Communications Sales & Use Tax“What’s Mine is Mine & What’s Yours is Mine” Why is the State’s Action so Bad? • Since FY07, CS&UT revenues have steadily declined while the upsurge of state general fund revenue in FY18, FY19 and FY20 make the transfer unnecessary to balance the state budget. ============================================= July 18, 2019

  5. Communications Sales & Use Tax“What’s Mine is Mine & What’s Yours is Mine” • Show me: July 18, 2019

  6. Communications Sales & Use Tax“What’s Mine is Mine & What’s Yours is Mine” What to do? • The scale is less but the principles are identical to the struggle faced by local governments over the state’s taking of local fines and fees and “local aid to the Commonwealth.” • If localities accept the state’s sweep of CS&UT revenue, it will become permanent and, over time, the transfers will increase. July 18, 2019

  7. Veterans’ Tax Preferences“What’s Mine is Mine & What’s Yours is Mine” • The 2019 Session approved HJ 676 and SJ 278. The measures have to pass the GA in 2020 and the voters in November of 2020 to be incorporated in the Virginia Constitution. • One motor vehicle belonging to a veteran (or jointly owned with the spouse) who has a 100 percent service-connected, permanent, and total disability would be exempt from local taxes. The amendment provides that only automobiles and pickup trucks qualify for the exemption. July 18, 2019

  8. Veterans’ Tax Preferences“What’s Mine is Mine & What’s Yours is Mine” Fun Facts: • Local governments already have the authority to exempt vehicles owned by disabled veterans from tangible personal property taxes. • The constitutional amendments would make this mandatory. ======================================= How much will the state contribute for the tax break? • Answer: The same amount contributed for the constitutional tax breaks given for real property. July 18, 2019

  9. Veterans’ Tax Preferences“What’s Mine is Mine & What’s Yours is Mine” What to do? • With few exceptions, these local tax breaks for veterans are not means tested. That puts financial pressure on localities providing means tested real property tax relief for seniors and disabled. • This is another example of the Commonwealth appropriating local tax dollars. Local governments are not afforded the same rights and privileges regarding state revenues. • The General Assembly and the voters will end up approving the proposed constitutional amendments. • Localities need to work to require that the new tax preference be means tested. July 18, 2019

  10. Vaping: It’s Not Just Blowing Smoke In The Air • The 2019 Session passed SB 1371, a bill enjoying the support of Altria and changing tobacco taxes. • This bill, for purposes of the cigarette tax, removes the word “heated” from the definition of “cigarette” and adds a provision that a cigarette produces smoke from combustion under ordinary conditions of use. • This bill would also, for purposes of the tobacco products tax, provide definitions for the terms “alternative nicotine product,” “heated tobacco product,” “liquid nicotine,” and “nicotine vapor product.” • These newly defined products, however, would not be subject to the tobacco products tax. July 18, 2019

  11. Vaping: It’s Not Just Smoke Blowing In The Air • Additionally, this bill extends to November 2019 the study by the Joint Subcommittee to Evaluate Tax Preferences of options for the modernization of cigarette taxes and possible reforms to the taxation of tobacco products. • It’s likely the 2020 Session will significantly alter tobacco taxes to go along with the General Assembly’s decision to exempt e-cigarettes from state and local excise taxes. July 18, 2019

  12. Machinery & Tools Tax Study • In 2018, the General Assembly approved HJR 98 regarding the appeals process for businesses disputing determinations of fair market values of real and tangible personal property. • The resolution requires the Virginia Department of Taxation to complete a study by November 1, 2019, and submit to the Governor and General Assembly an executive summary and a report on the agency’s findings and recommendations. ============================================= July 18, 2019

  13. Machinery & Tools Tax Study The resolution claims what? • Lack of a clear state appeals process for property assessments costs taxpayers millions of dollars in court costs each year. • State statutes authorize appeals to the Tax Commissioner but do not require him to state the facts and law in support of this determination. • No analysis of any appraisals or other valuation information is required to be included in Commissioner’s findings. July 18, 2019

  14. Machinery & Tools Tax Study The resolution claims what? • The Code of Virginia (§58.1-3983.1 D5) prohibits the Tax Commissioner from making a determination regarding the valuation or the method of valuation of property subject to any local tax other than a local business tax. ============================================ What’s happening? • The Tax Department has interviewed several Commissioners of the Revenue in addition to VML and VACo. TAX also intends to interview the Virginia Manufacturers Association. July 18, 2019

  15. Machinery & Tools Tax Study What’s next and why is the study important? • TAX intends to call all the major stakeholders together to discuss the issue. Reaching a consensus will be difficult. • Business interests push legislative proposals almost every year that would severely reduce M&T collections. • Exempting pollution control equipment & facilities; • Separate classifications for machinery & tools; July 18, 2019

  16. Machinery & Tools Tax Study • More examples of M&T proposals: • Classification as intangible personal property; • Tax exemption to create tangible personal property from recycled materials; • Developing a plan for repatriating manufacturing jobs and evaluating possible tax incentives; • Reclassify as intangible personal property exempt from state and local taxation (later amended to be a state grant program); • Freeze M&T tax rates; July 18, 2019

  17. Machinery & Tools Tax Study • More examples of M&T Proposals: • Separate classification of machinery and tools used directly in producing or generating renewable energy; • Require appraisals or assessments to take into account the condition of the machinery and tools, all forms of depreciation, including obsolescence, and any other factor taken into account by the valuation method; and • Define  "original total capitalized cost“ as the price paid by the current owner. July 18, 2019

  18. Machinery & Tools Tax Study • M&T is an important revenue source for many local governments. The Department of Tax study on HJ 98 could have far-reaching impacts on assessment methodologies and the appeals process. • It is reasonable to assume that there will be new legislative proposals in the 2020 Session. July 18, 2019

  19. Changing The Real Estate Appeals Process • Real estate taxes comprise 51.3 percent of all local revenues. • 54.9 percent for counties • 45.1 percent for cities • In FY18, the Virginia Auditor of Public Accounts reported real estate collections of over $10.9 billion. July 18, 2019

  20. Changing The Real Estate Appeals Process Is This A Real Issue? Taxable Parcels 3,164,835 Assessment Appeals 20,777 Administrative Appeals Granted 10,472 Appeals Granted by BOE 2,341 Appeals Filed in Circuit Court 18 Appeals Granted by Courts 7 July 18, 2019

  21. Changing The Real Estate Appeals Process Fun Facts: • Taxpayers can appeal without cost to the local assessing body and the local Board of Equalization. • Members of the BOE are selected by the local court and have expertise in real estate valuations. • The Virginia Department of Taxation does annual “Assessment Sales Ratio Studies” comparing property sales and assessments. July 18, 2019

  22. Changing The Real Estate Appeals Process What Happened in 2011 Session? • The appeals process was amended in these ways: • Presumption that the valuation determined by the assessor is correct was endorsed. • The level of proof required by the taxpayer was lowered from clear preponderance to preponderance (51%). • Taxpayer’s appeal (to either BOE or Circuit Court) must provide evidence that property is valued at more than FMV or that the assessment is not uniform in its application and that it was not developed in accordance with generally accepted appraisal practices and applicable Virginia law relating to property valuation. July 18, 2019

  23. Changing The Real Estate Appeals Process • The statute confirmed that manifest error was the proper standard to apply by the Boards of Equalization as well as by the courts. ============================================ What’s going on? • The 2019 Session approved House Joint Resolution 687 directing the Small Business Commission to study models from other states and to streamline procedures for appealing tax assessment actions. • The Commission is to finish its meetings by November 30, 2019 and submit an executive summary of its findings and recommendations which may include the Commission’s intentions to submit legislation in the 2020 Session. July 18, 2019

  24. Changing The Real Estate Appeals Process • The House resolution also directs the Commission to evaluate the tax court systems of other states. • The Small Business Commission has held one meeting and is planning for a second final meeting. • Commission members expressed skepticism regarding setting up a tax court system, particularly with so few appeals going to the courts. July 18, 2019

  25. Changing The Real Estate Appeals Process Who is Unhappy and Why? • In the 2018 Session, Delegate Mark Keam introduced legislation to prohibit the Courts and Boards of Equalization from considering “manifest error” as a guideline in hearing assessment appeals. • The delegate’s bills (HB 786 an HB 787) breezed through the House of Delegates but bogged down in the Senate and did not pass the General Assembly. • Manifest Error is a judicial standard and is not embedded in statute. July 18, 2019

  26. Changing The Real Estate Appeals Process • VML and others have raised the question if manifest error is junked then what will the Courts use in its place? ============================================ What’s Next? • No matter which way the Small Business Commission leans, it’s likely that legislation will be introduced in 2020 reviving efforts to change the appeals process for both real and tangible personal property. • VML members need to be ready to respond as these proposals work through the legislative process. July 18, 2019

  27. Changing The Real Estate Appeals Process • Commercial property owners are the chief advocates for removing manifest error from court deliberations, considering the judicial standard too difficult to successfully overcome. • These property owners believe “establishment of a tax court as an interim level of appeal between local Boards of Equalization and Circuit Courts would produce myriad benefits and efficiencies without unduly tipping the scales of justice.” July 18, 2019

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