Court Backs Little Debbie In Tax Dispute

McKee Foods’ Little Debbie

Don’t underestimate Little Debbie – the spunky tyke took on the Augusta County tax collectors and won.  But the county still has her money.

The Virginia Supreme Court has sided with manufacturer McKee Foods Corporation, which makes the Little Debbie snack products, in a dispute over the tax assessment on its 828,000-square-foot factory in Augusta County. The July 18 opinion by Chief Justice Donald Lemons (here) reverses a lower court decision, rejects the county’s existing valuations and sends the dispute back to the local circuit court for another look. 

Given the existing 5,700 pages of filings and transcripts from the first trial, the 3,400 pages of appendixes from the appeal, and the retirement of the initial judge, the court gently hinted the dispute could be resolved based on a review the existing record using the proper analysis.   The county informed its local paper, however, that it will insist on a full local retrial from scratch.

Why not? The county’s legal bills are paid by its taxpayers, of course, while any business involved one of these disputes must pay it own bills.  That’s the way it is here in the Best State for Business, which is why so few cases like this rise to the appellate level.  Often the legal cost swamps the tax amounts involved.

This dispute centers on tax years 2011-14, with the company seeking about $260,000 in refunds for the four tax cycles.  The same newspaper account indicates a similar refund request for 2015-2018 has also been submitted, but it is not known if those assessments were made in the same manner as those now rejected by the court.

The high standard applied by the Virginia Supreme Court in this case could easily prompt similar appeals from other large businesses unhappy with the local assessments on their facilities.  At issue is the tax on the real property, the land, buildings and other improvements.  Local decisions on taxable values are a common source of complaint from manufacturers, with the issues often surfacing at the General Assembly.

A county contractor appraised the McKee property at $28.5 million for 2011-13. A different outside appraiser used for 2014 set the value at $31.7 million.  The company’s own appraiser set the value at about half that amount, based on comparable sales of similar industrial property in the Shenandoah Valley region and on his determination of depreciation.

These are complicated value calculations, keeping appraisers and accountants fully employed.  The three basic methods used are described within the opinion as follows:

Taxing authorities commonly use one or more of three valuation approaches:  the cost approach, income approach, and sales approach.  The cost approach estimates the value of property based on the current cost of the asset, minus depreciation or reduced value “from physical deterioration, functional obsolescence, and economic obsolescence.”… The income approach “measures market value as the present worth of monetary benefits anticipated to be derived in the future from ownership of the asset.”  Id.  The sales approach “calls for an analysis and comparison of recent sales of comparable property.”

In an ideal situation the assessor looks and uses all three methods, unless one or more must be ruled out.  It was the failure of the county’s contacted assessors to apply those methods which led the court to support McKee’s appeal.  In fact, based on testimony at trial, the first assessment didn’t even qualify as a cost-based valuation, and used a very haphazard method to measure comparable sales.  It just looked at all sales of all factories in the area with no effort to find true comps.

That approach was belittled by the company’s retained expert witness as “probably the worst work I’ve seen in my life.”  Justice Lemons quoted McKee’s witness John Lifflander at length:

“That would be very much like me going and valuing your house in this city, for instance, and taking every house in the city, mansions, fixers, everything, and getting an average, and once I got that average I’d say, ‘That’s your value for your house.’ It doesn’t make a bit of sense… In fact, if it could be done that way, we wouldn’t need appraisers.  A clerk could do it, just go ahead and average everything.  An appraisal is not about averaging.  You use averages of similar properties, but it’s about finding properties that are similar and then making adjustments.”

That was the first appraiser he criticized.  The second contract appraiser admitted during trial that his license at the time only covered residential properties, not commercial or industrial, and said he couldn’t find any comparable properties for benchmarks.  The section on both assessment efforts should embarrass members of that profession.

State law and previous court rulings create a presumption that the assessment is correct, a presumption the taxpayer needs to overcome with strong evidence.  The presumption only holds, the court ruled, if the taxing authority followed the law and looked at all three methods and applied them properly.  In this case that test was failed.

But despite all those flaws found by the high court, all it did was remand the case. The county still has 100 percent of the company’s money paid during those four tax years and won’t pay any refund until yet another trial is held back on its home field.

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10 responses to “Court Backs Little Debbie In Tax Dispute

  1. I had asked Brett Vassey of the Virginia Manufacturing Association for a comment on this case (he called it to my attention.) It arrived after I posted the main story, so consider it an addendum:

    “The VA Manufacturing Competitiveness Index ranks VA #19 for state and local tax costs for capital intensive manufacturing. One of the principal reasons is the local taxation of tangible personal property (machinery and tools).

    “A few years ago, the JLARC study on MFG costs revealed that we were also the only state that had delegated both the rate and method of taxation to local government – a huge mistake. In the intervening years we have passed legislation to require consideration of bonafide independent appraisals, eliminated the m&t tax on pollution control equipment and required public notice before m&t taxes can be raised. So, what we are now experiencing is local government using a “third rail” to raise taxes and bypass public scrutiny – just change the assessment methodology.

    Typically the legal costs outweigh the tax but McKee Foods decided to fight for the principle as well. Their victory in the Supreme Court has established the bright line that we needed to get the General Assembly to protect taxpayers from activist local governments that are harming Virginia’s competitiveness….

    “Our work revealed that fewer than 1% of tax disputes make it to court – it’s because the deck is stacked against the taxpayer with costs and delays.”

  2. A very fine post indeed.

    I am reminded of Dick’s comment on how the Virginia court system and its enablers tack endless fines, fees, and costs on defendants, then pile compounding interest on top of those court fines, fees, and costs, to insure that the poor, once caught up in the legal system, never escape from it, but instead get dragged down by that very same judicial system so they never recover. This breeds justifiable disrespect for the law and those bureaucrats who incompetently enforce the law, making the job of the police that much more difficult.

    Here we see the same pernicious incompetence on the local government level against local businesses. People should have their hair on fire over issues like this abuses by government that at the same time throws away their tax dollars on fools errand policies, adding ever more insults to ever more injuries.

  3. If Governor Northam truly wants to do something to promote rural Virginia, perhaps he should take the lead in reforming abusive tax appraisals. As Vassey says, Virginia ranks only #19 in state and local tax costs for capital intensive manufacturing. Light manufacturing is one of the few industries that consider locating outside Virginia’s major metropolitan areas. In other words, the tax environment represents a significant competitive disadvantage for large swaths of the state.

  4. “The second contract appraiser admitted during trial that his license at the time only covered residential properties, not commercial or industrial, and said he couldn’t find any comparable properties for benchmarks.”

    Wow. Just wow. Even by the very low standards of Virginia government that is incompetent.

    While I generally favor a dilution of Dillon’s Rule in Virginia it does seem reasonable for the state to prescribe the method by which physical assets are valued for tax purposes. The alternative is to build expensive plant, property and equipment only to have some assessor in Hooterville screw you on the taxes. What are you going to do? Move the factory? No, you just won’t build the next factory in Virginia. Businesses value predictability. A lot. We don’t have to give business a free ride but we do have to provide predictability. Or, it will be just more “we can’t get businesses into RoVa so let’s just tax NoVa more”.

  5. It’s all about the revenues needed to fund the budget – and the tax rate on properties to generate that revenue and while increases in the tax rate by several pennies can get BOS voted out of office – there is no such remedy when the assessments increase even when an independent assessment differs substantially from the county’s hired contractors who do discuss the methods and process for assessment prior to it.

    In a faster growing exurb county like Spotsylvania, one penny on the tax rate generates about a million dollars. We have about 125,000 people and about 35,000 residential houses.

    We also have quite a bit of commercial that generates a substantial amount of sales taxes and our tax rate on vehicles is downright outrages – a new car that costs about 30K will be taxed at hundreds of dollars per year.

    What we have is a lot of commuters who earn good incomes in NoVa and move here to afford a detached single family home which sells for 200-400K.

    Still, every year we see a couple of dozen businesses who come in front of the BOS to ask for refunds on their property taxes – and they usually get it. Even Burger King did it and got a reduction.

    To give some further idea – an undeveloped 5-acre lot that cannot be subdivided and can have only one occupied structure on it – and has no access to water/sewer is appraised at over $80,000. Think about the county’s cost of services to that lot compared to a lot with a home on it. Both lots are appraised the same. The house then adds to the assessment value.

    I don’t know the population and demographics for Augusta but it could well be that several pennies on the tax rate are essentially funded from the high assessment on Little Debbie and I’m betting that’s involved in this on the county side who may well have to raise taxes on everyone else if Little Debbie (and other businesses) prevails.

  6. If local taxes become too much of a burden, facilities operating there could rise to the top of a company’s list for relocation of closure. Businesses contribute more to the local economy than property and BPOL taxes, a fact too often forgotten by jurisdictions.

  7. No question, Larry, local governments like to fatten the collections from business to soften the hit on voter/homeowners. But the state constitution says equal tax rates and fair market value. State law prevents differential tax rates as a general rule. I personally helped kill local government efforts to create differential tax rates a couple of times. If the Dillon Rule ever does go away, differential tax rates will sprout like mushrooms.

  8. Despite what the moron in Augusta County says, the case will settle. Local jurisdictions do not have unlimited budgets for litigation. Without having read the opinion, it looks, based on Steve’s reporting, like they will be embarrassed by it

  9. Based on his first opinion, I’d agree they don’t want this coming back to Lemons for a second round. But in my observation the localities do love to try to grind down the taxpayer with massive litigation costs in hopes they just go away….

  10. As someone here at BR observed a long time ago, we have very old and out-dated tax code. I’d fix the car tax issue too. Seems to me our tax code assigns top priority to reducing property tax and maximum friendliness to certain constituencies such as life long, lower income residents, at the expense of “newcomers” (who may not be that new) and NoVA and businesses. I resented the BPOL once my income got over $100k, but I fixed that by keeping income closer to zero.

    Yes we probably have to increase other (prop and income) taxes to compensate for the reforms.

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