BEFORE THE Department of REVENUE
OF THE STATE OF MONTANA
In the matter of the amendment of ARM 42.21.154, 42.21.155, 42.21.158, and 42.22.1311 pertaining to trended depreciation schedules for valuing personal property
NOTICE OF AMENDMENT
TO: All Concerned Persons
1. On October 18, 2019, the Department of Revenue published MAR Notice No. 42-1007 pertaining to the public hearing on the proposed amendment of the above-stated rules at page 1838 of the 2019 Montana Administrative Register, Issue Number 20.
2. On November 13, 2019, a public hearing was held to consider the proposed amendment. No proponents or opponents were present, no proponent or opponent oral testimony was received, and the department received no written comments in support. The following person appeared as an interested person to the rulemaking and provided oral and written comments: Bob Story, Montana Taxpayer's Association (Montax). A written comment was also received by the department from State Representative Llew Jones, which the department answered directly to Representative Jones and is summarized in this adoption notice.
3. On December 27, 2019, the department filed an Amended Notice of Public Hearing on Proposed Amendment to address errors in the Industrial Machinery and Equipment Trend Table Lookup located on page 18 of the Proposed 2020 Personal Property Depreciation Schedules and Trend Tables publication. In accordance with 2-4-305(8)(c), MCA, the department allowed additional time for the public to provide oral or written comment to the rulemaking until January 3, 2020.
4. The department amends ARM 42.21.154, 42.21.155, 42.21.158, and 42.22.1311 as proposed.
5. The department has thoroughly considered the comments received. A summary of the comments received, and the department's responses are as follows:
COMMENT 1: Mr. Story comments that Montax concurs with the department's plan to move the actual trended depreciation schedules (schedules) from the body of the ARM and placing them on the department's website with the caveat that schedules are placed so they are easily accessed, and the previous year's schedule is placed so comparisons can be made. The current placement of the schedules should be maintained, at least. The department may consider using the same format as was used when the schedules were contained in previous rule notices where old numbers were crossed out and the new numbers inserted.
RESPONSE 1: The department thanks Mr. Story for the comment. The department understands Mr. Story's formatting request pertaining to past rulemakings; using interline and underline to distinguish what is proposed for amendment and assures Montax that this will be the only instance of this type of formatting. Since the 2020 schedules are new - in this independent format - and the 2019 schedules are in rule, the department determined it best to propose the adoption and incorporation of the 2020 schedules as a new document; this would show all text without editing. The department feels this more accurately reflects the requirements of 2-4-307, MCA.
COMMENT 2: Mr. Story questioned whether it is the department's intention that an annual rule notice will be posted to notify the public of the adoption of the new schedules or are they automatically adopted once they are posted on the department's website? Or in other words, will ARM 42.21.155 be amended each year as the new schedules come into play?
Representative Jones forwarded similar comments from an individual who is an accountant and member of the tax review group asking about the department's intention in publishing the trend tables.
RESPONSE 2: The department followed the requirements of 2-4-307, MCA, and ARM 1.2.210 pertaining to the adoption and incorporation by reference of a resource or publication. In doing so, the department intentionally titled the schedules and their placement in ARM 42.21.155 to keep the annual amendment of the schedules subject to the posting, notification, and public comments requirements of the Montana Administrative Procedure Act (MAPA).
In approximately September of each year, the department will prepare the upcoming year's schedules and valuation tables and will interline and underline the prior year's version to illustrate what changes are being made and will watermark the schedules as "Proposed." The department will initiate a MAPA-compliant rulemaking to propose adoption of the new schedules and will follow MAPA and its internal procedures as it has done in the past with other rule proposals.
COMMENT 3: Mr. Story commented that Montax has concerns with the department's proposed amendments in ARM 42.21.154(7). While Montax agrees with the changes represented in (7)(a) through (c), it questions in (d) whether there should be some due process practice in place if the property owner has certified the value, but the filing amounts to providing a false statement if the certified value is not accurate.
RESPONSE 3: The department's proposed amendments in (7)(d) address situations where a taxpayer fails to provide the required information needed for the department to fairly value the equipment, or the department believes the information provided was not indicative of fair market value based upon an open arm's length transaction between a willing buyer and willing seller. Due process is provided through the normal appeals and AB-26 - Request for Informal Classification and Appraisal Review processes when taxpayers disagree with the department's assessment or classification. If the taxpayer still feels aggrieved with the department's appraisal after the informal review, they can file a formal review with the county tax appeal board and then the state tax appeal board as outlined in 15-7-102, MCA.
COMMENT 4: The last of Montax's comments concern the actual trended depreciation schedules and trend factor tables. Mr. Story comments that like 2018, Montax does not see the logic in the numbers that appear in many of the new schedules compared to the old schedules. The pertinent changes appear to be in the trend factors. This results in a change in the final wholesale trended good number. Some of these trend factors are increasing, some are decreasing, and some stay the same for the same type of equipment depending on the age of the equipment. Some of the changes are small, less than 1%, and some are large at
4 or 5%. The whole process is complicated and seems not very transparent. It seems that there would be a benefit in a simpler process where there are not so many moving parts, some of which cancel the others out.
RESPONSE 4: Trending is a common and accepted appraisal practice and is part of the cost approach to valuation for personal property.
Trending is a method of estimating a property's current cost, as if new, where a trend factor is applied to the property's historical cost to convert it into an indication of current cost. Trending is intended to reflect the movement of prices over time. This "trended" cost is then depreciated to recognize the subject property is not new and has a lesser value than a new item of the same type of property.
The department uses cost index information from Marshal & Swift to develop its trend factors. Cost indexes allow for comparisons of costs between two years - a prior year to the current year. Each year's trend is an independent value and reflects the difference in cost for each year compared to the current year. Different market forces in one year compared to another year can result in non-linear trends.
To simplify the calculations, the department applies the trend factor to the depreciation percentage for each year instead of trending the acquired cost of each of the thousands of individual personal property items reported annually.
Support for the trending and depreciating methodology employed by the department can be found in authoritative appraisal texts such as "Appraising Machinery and Equipment" sponsored by the American Society of Appraisers.
COMMENT 5: Representative Jones' forwarded comment described in Comment 2 also states that the schedules the department changed for 2019 raised personal property taxes. The commenter contends that many taxpayers are unhappy about the increases.
RESPONSE 5: The department did receive feedback from taxpayers concerned with the original proposed trended depreciation table updates for the 2019 tax year. Based upon public comment and feedback, the department extended the rulemaking process and revised the schedules' values, where appropriate, to help alleviate these concerns. The department observed that property owners were generally very understanding once the issues were identified and the revisions were made.
/s/ Todd Olson /s/ Gene Walborn
Todd Olson Gene Walborn
Rule Reviewer Director of Revenue
Certified to the Secretary of State January 7, 2020.