Michelle Cantrell is a tax specialist residing in Tulsa.
Last November, Oklahoma voters approved State Question 766, a constitutional amendment which exempts all intangible personal property from ad valorem taxation. Though the new law seems simple, it creates complex questions for assessors and corporations that will have a major impact on the amount of property tax revenue that can be raised to support local services.
As we discussed previously, SQ 766 was proposed in reaction to the Oklahoma Supreme Court decision, Southwestern Bell Telephone Co. v. Okla. State Bd. of Equalization. In assessing the value of Southwestern Bell, the Oklahoma Tax Commission had used the “unit” method of appraisal, a typical method that looks at the entire value of a company as a whole, then apportions out the amount attributable to various jurisdictions. This method of appraisal is common for centrally assessed businesses—those whose ad valorem tax is determined at the state level because their assets are dispersed across several jurisdictions and, frequently, several states. In Oklahoma, telecommunications, energy, and railroad companies are centrally assessed. Because the unit method looks to the value of the company as a whole, it can incorporate the value of tangible as well as intangible property. Now that intangible property cannot be taxed, assessors must determine how to exclude intangible property value, a complex task that requires a high degree of appraisal expertise.
Subtracting the value of intangible property is not as simple as it might seem. Because state legislators failed to include a definition, assessors must determine what is intangible property and what is simply an attribute that enhances the value of other property. Items that can be separately bought and sold by the company being assessed, such as stocks and bonds, are easy to value; those will clearly have to be subtracted from assessments. Other types of intangible property, such as goodwill, going concern, and assembled work force, are entwined with the company that possesses them and cannot be sold separately; their value is tied to the value of the company as a whole.
Assessors must now decide whether these types of assets are intangible property that must be subtracted from the company’s overall value. The ballot language that accompanied the question provided a limited list of examples of intangible property, all of which can be separately sold by a company. Items like goodwill and going concern were not included. Taking a restricted view of what constitutes intangible property and what can be subtracted from a company’s assessed value could limit the amount of revenue loss that will occur with the new law.
States that prohibit ad valorem tax on intangible property have sought to limit this exclusion through additional laws, administrative rules, or, more frequently, the courts. Some states, like Montana, limit the intangible property exclusion to items that can be separately sold from a company; items like goodwill cannot be subtracted. California will subtract items like goodwill, but will not subtract assets that are necessary to put tangible property to productive use. Thus, an Emissions Reduction Credit could not be subtracted from the company’s assessed value, since it was necessary for the power plant to operate legally. Other states have distinguished between separate intangible property and features of property that simply add value. For example, the enhanced value attributed to the assemblage of multiple assets is not intangible property, nor is the right to purchase a club membership.
Even with property that can be separately sold and held, states have had to define what is intangible. Software programing, for example, can be purchased in either tangible or intangible form. Most states distinguish between off-the-shelf software that can be purchased at a store (tangible) and customized software written for a specific company (intangible), a distinction that Oklahoma legislators seemed to embrace. (1)
While the Oklahoma Tax Commission may choose to adopt a restrictive definition of intangible property, for now, it has decided to rely upon companies to present and justify any deductions. Any company that believes an intangible asset has been included in its assessed value will have to list and value that asset to have it subtracted. When these requests for subtractions are received this spring, we will have a better sense of how much revenue will be lost from this new law, but it is likely to be significant. While estimates prior to passage of SQ 766 were as high as $50 million, recent estimates are even higher, up to $100 million.
Ultimately, as companies seek to push the limits of the intangible property deduction further and further, the most likely outcome will be court challenges. The only certainty seems to be that Oklahoma will lose significant revenue and will likely have to revisit this issue.
(1) Unfortunately, the Oklahoma Tax Commission appears to believe all software is now exempt from ad valorem. All businesses—whether locally or centrally assessed—must submit “renditions” of their personal property each year on form 901. Previous versions of 901 required listing of computer hardware and software, but the most current version deleted all references to software.
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