Administrative Rules of the State of Montana

BEFORE THE DEPARTMENT OF REVENUE

OF THE STATE OF MONTANA

In the matter of the adoption of New Rule I (ARM 42.20.607) relating to value before reappraisal for 2009 agricultural land

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NOTICE OF ADOPTION

TO: All Concerned Persons

1. On April 15, 2010, the department published MAR Notice No. 42-2-828 regarding the proposed adoption of the above-stated rule at page 903 of the 2010 Montana Administrative Register, issue no. 7.

2. A public hearing was held on May 10, 2010, to consider the proposed adoption. Oral and written testimony was received at the hearing and is summarized as follows along with the response of the department:

COMMENT NO. 1: Mr. Harold Blattie, Executive Director, Montana Association of Counties thanked the department for developing the rule and that it was very helpful but he did not think that the rule went far enough to addressing the issue.

Mr. Blattie also provided a spreadsheet that he developed showing the difference between the existing practice and if the rule were effective. The spreadsheet identifies two taxpayers, "Taxpayer A" who filed a timely AB-26, CTAB (county tax appeal board) appeal, or a district court appeal and "Taxpayer B" who did not file any of those items. The spreadsheet shows the VBR (value before reappraisal) amount for each of the six years in the appraisal cycle as well as other values, but in the example both of the taxpayer's taxable value is the same amount in year 6 of the appraisal cycle.

The values used in this spreadsheet represent real information from a parcel of his own property. He indicated that in the column heading 2009 Year One, without the proposed rule the value is $11,927, which is the value that is in the department's system and is what the most recent appraisal notification shows. With the proposed rule, that number will change to $6,668 and that is the reappraisal value for 2008 representing the full phase-in value. Without the proposed rule that amount is being fully phased in during the first year and with the rule, that amount is being phased in over the remaining five years of the phase-in process.

He stated that he believes that the proposed rule accurately provides direction in the application of the phase-in values on properties that saw no change other than the productivity change. However, the rule should also include properties where there were acreage changes that in fact were not acreage changes. For example, on the same assessment sheet as this particular piece of property, also lies an additional 320 acres that prior to this year was shown as 320 acres, but is now 320.23 acres, although the ownership did not change. The change is simply due to the digital mapping system which allows for a more accurate measurement of the land. He stated the rule should also apply to those type of changes.

Mr. Blattie further stated in the case where a parcel of land had a change of use to a portion of it, this should also be allowed. For example, 320 acres of native range land that had 40 acres broken out and the use was changed to crop land. The proposed rule should also be applied to the remaining 280 acres that were not changed.

RESPONSE NO. 1: The department appreciates Mr. Blattie's support of this rule, that will correct the agricultural value before reappraisal for productivity-only lands, together with the detailed analysis that Mr. Blattie presented that indicated the rule treats both groups of taxpayers fairly and accurately.

Regarding Mr. Blattie's comments on phase-in for properties that experience even small acreage changes, the proposed rule will not apply to those properties with an acreage change or a classification change, because doing so would violate ARM 42.20.605.

Addressing the specifics, in the first example of the more accurate acreages presents an interesting circumstance for both the landowner and the department. In the past when landowners discovered that the department was assessing the lands in roads, ditches, etc., the same as the surrounding farm land, the landowner asked the department to remove it from the assessment or at the very least, to assess it as some low-valued grazing land. The department began using the geographic information system (GIS) on a consistent basis. The landowner is requesting the department to consider the land as similar land contained within a delineated field.

The department began the process of delineating field boundaries based on Farm Service Administration (FSA) maps. The FSA maps identified the different fields based on their (FSA) standards and in most cases, the department's delineation of the fields closely approximates information obtained from the FSA data. FSA data represents the amount of farmed acres for cropped fields. One distinct difference between department land information and the FSA information is the department's requirement to identify the legally described acres for a parcel. The FSA has no such requirement.

For the second example where there was a land use change, there are multiple steps that were considered by the department before taking any action.

(1) The 2003 value associated with the 320 acres of range land is a total value for that particular land classification. The 2009 reappraisal values are the total value of 280 acres of range land and 40 acres of crop land.

(2) The 2003 classification and productivity information is not available on the new 40 acres of crop land so a value must be calculated. To calculate the value, the department has to rely on the information it has on hand, namely the new classification and productivity information. By using the income inputs from the 2003 reappraisal (commodity price and crop share arrangement) and the new classification and productivity inputs from the 2009 reappraisal, a value before reappraisal (VBR) can be determined for the 40 acres.

(3) For the remaining 280 acres of range land, the department needed to consider:

(a) The 2003 reappraisal information is tabular information only. The provenance of the 2003 acreage information is only largely unknown because:

(i) The tabular information was acquired using a land measurement technique based on a "dot grid." A dot grid is a simple measurement tool comprised of a clear plastic sheet containing numerous evenly spaced dots. Each dot represents an acre and the dot grid is based on a map scale of 1 inch to the 1/4 mile, or 4 inches per mile or typical section of land. The dot grid is placed on whatever available appropriately scaled map or aerial photograph and dots are counted to determine the acreage within a field by land use classification.

(ii) The hard copy maps initially used in conjunction with the dot grid have not been maintained in a comprehensive fashion and are either completely or partially missing, or are outdated in most locations.

(iii) The available hard copy maps are in a wide variety of formats and map scales including black and white aerial photos from the 1960s or 1970s; hand drawn mylar maps; and/or hand drawn paper maps. The most recent updates or maintenance of these maps/photos is unknown but is assumed to be in the early 1980s. The final potential source of the acreage information could come from "commissioners' books" which also have an unknown maintenance date, however, the last maintenance is assumed to be in the late 1960s or early 1970s.

(iv) If the department were to use the hard copy maps, manual intervention and review of the maps would be required on a parcel by parcel basis. A dot grid would have to be used to try and identify the associated acres reflected in the tabular data. Matching the acreages as shown on the 2003 appraisal record with the acreage determined through the use of a dot grid would require multiple attempts to match the acreage exactly. Without this manual intervention there is no other way to determine which of the prior acres associated with the grazing land were converted to the crop land use.

(b) The time and effort associated with manual intervention is not cost-effective.

(c) The 2003 range land productivity information is a broad indication of the overall carrying capacity of the land. The 2009 productivity is a specific soil by soil determination of the carrying capacity.

(d) Determining which of the remaining 280 acres contained in the 2003 information corresponds to the 2009 soil specific acres requires manual intervention outlined above.

(e) Determination of the correct value before reappraisal for these 280 acres would require a manual calculation using the 2003 valuation inputs. The current Property Valuation Assessment System (PVAS, commonly known as Orion) does not contain a program for calculating these values and the calculation of the value of the 280 acres would have be done manually and external to the Orion computer system.

(f) The calculated value associated with the new 2003 acres (280 acres) would not correspond to prior assessment notice valuation information received by the landowner.

COMMENT NO. 2: Mr. Dale Hawks, Chester, Montana testified that he does not believe the rule is necessary at this time, due to the fact that there are already administrative rules in place to deal with increases in valuation from prior reappraisal cycles.

Mr. Hawks further stated if the department feels they must move forward with this action, he feels that the rule is incomplete because it only takes into account "productivity-only changes" as it relates to correction of the VBR. He stated that there is a broader picture to consider. If the proposed rule is left as is, it will remove a vast majority of parcels of agricultural land from any meaningful phase-in of their increase in value.

Mr. Hawks stated that if the department continues forward with the position that any "change in use: or "change in size" would require a recalculated VBR for phase-in purposes, the those parcels of land that in reality didn't have either size or use changes, would be removed from any meaningful phase-in of increased valuation.

The instances of actually having a change in use or change in size are addressed in current law. The problem with the latest reappraisal cycle is that the process used with the mapping system of the parcels of land is flawed. This cycle delineated county roads out of parcels and changed them from tillable land to grazing land (change in use). This in itself then changed the acres of tillable land from the last cycle to this cycle (change in size). Also along these lines, the mapping system also considered a change in size. The reality is, nothing has changed on the ground in real life, only the reappraisal process making, supposedly, more accurate acreage changes.

Mr. Hawks questioned whether it is the department's intent to close taxpayers out of any meaningful phase-in, when a great number of these changes in size and changes in use are not real, just appearing to be real by looking at a map.

He further stated that not even the FSA maps and the department's reappraisal maps have the same acres on a parcel of ground.

Mr. Hawks requested the department to not adopt this rule, but instead find a way to address the issue of VBR without adding more administrative rules.

RESPONSE NO. 2: As mentioned in Response No. 1, the proposed rule is necessary to correctly phase in productivity-only lands. The department correctly phased in lands with acreage changes and classification changes in accordance with ARM 42.20.605. Furthermore, the proposed rule does not apply to county roads. This question poses an interesting circumstance for the department. In addition to the response in Comment No. 1, a consideration of the number of changed acres must be discussed. Or to be more specific, how many acres are required before a classification change is considered to have taken place?

As noted in the response to Comment No.1, the department has no means to accurately and efficiently compare the changes that occurred between the appraisal cycles by using prior maps. As a result, the department would have to rely on some electronic means of comparing the acreage change between appraisal cycles. While the math to make the comparison seems straightforward, the results can cause significant differences.

Early on in the reappraisal process, the department considered different scenarios. The first scenario included a determination of a percentage of changed acres on a parcel. If some fixed percentage of acres has changed between appraisal cycles, then a classification change would be deemed to have taken place. If an acreage change has occurred that is less than the established fixed percentage, then a classification change would not be deemed to have taken place. The determination of the fixed percentage is highly speculative and results in an uneven application of the standard. For example, if the fixed percentage is deemed to be 1%, then a 640-acre parcel of grazing land would need to exhibit a change of 6.4 acres or more before being considered as having undergone a classification change.

A roadway is typically 60 feet wide. If half of the roadway is 30 feet wide and is deducted from the full mile length associated with the above section of land (on one side only) then 3.6 acres would be separately identified (5,280 X 30' = 158,400 square feet; 158,400 ÷ 43,560 square feet per acre = 3.6 acres). In this example the land would not be considered to have undergone a reclassification since less than 6.4 acres were changed. If there is a road on two sides of the section then the land would have been considered to have undergone a classification change as 7.2 acres would have been changed.

But, consider a smaller tract of land of 40 acres. For a quarter-quarter section a change of .4 acres or more would be considered a reclassification. A quarter-quarter section is 1/4 of a mile long. Following the same calculation but using 1,320 feet for road deduction, the affected acreage is .91 acres (1,320 X 30 = 39,600; 39,600 ÷ 43,560 = .909 acres). Since anything larger than a .4-acre change would be considered a classification change, this 40-acre parcel would be considered to have been reclassified.

As can be seen, a fixed percentage change does not treat all landowners equally. If the fixed percentage of change is higher or lower than the example, the same results occur. Which leads to the second concern - "why choose one percentage over any other?" If the fixed percentage is 1%, why wouldn't 1.25% be better, or 1.5%, or 1.75%? Any determination of a fixed percentage change is arbitrary and is not a defensible mechanism for recognizing classification changes.

Consideration must also be given to legitimate classification changes. For example, many nonirrigated hay fields are small and can easily be less than 6 acres in size. For the section of land identified above, a 6-acre hay field would have to be physically identified and excluded from the provisions of classification changes. A simple math equation would either not work or would improperly identify the parcel as having no change in classification.

A third consideration was to establish a fixed acreage change which has the same arbitrary effect based on parcel size. For example, 6.4 acres is 1% of a normal section of land but is 16% of a 40-acre parcel of land. Again an inequity of the application of a fixed acreage causes concern and the decision on the fixed acreage amount becomes arbitrary.

The department conducts appraisal on a statewide basis and all potential circumstances must be reflected in any decision to accommodate classification changes. Creating a means to identify parcels that have or have not had classification changes is a slippery slope and one that would need much more detailed investigation. The department determined that a reappraisal, as mandated by 15-7-111, MCA, will result in changes to agricultural land use. Among other purposes a reappraisal is a means to provide compliance with other Montana statutes related to the current classification of land. A classification change, no matter how minor, should be treated in a consistent and equitable manner as described in law.

3. The department adopts New Rule I (42.20.607) as proposed.

4. An electronic copy of this adoption notice is available through the department's site on the World Wide Web at www.mt.gov/revenue, under "for your reference"; "DOR administrative rules"; and "upcoming events and proposed rule changes." The department strives to make the electronic copy of this adoption notice conform to the official version of the notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the notice and the electronic version of the notice, only the official printed text will be considered. In addition, although the department strives to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems.

/s/ Cleo Anderson /s/ Alan Peura

CLEO ANDERSON DAN R. BUCKS

Rule Reviewer Director of Revenue

Certified to Secretary of State June 1, 2010