Administrative Rules of the State of Montana

BEFORE THE Department of REVENUE

OF THE STATE OF MONTANA

In the matter of the amendment of ARM 42.20.173, 42.20.504,

and 42.20.516 pertaining to property reappraisal cycles, assessment review deadlines, electronic classification and appraisal notices, agricultural land regions, and bona fide agricultural operation determinations (Montana Tax Appeal Board ruling)

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NOTICE OF AMENDMENT AND REPEAL

TO: All Concerned Persons

1. On August 19, 2016, the Department of Revenue published MAR Notice No. 42-2-956 pertaining to the public hearing on the proposed amendment and repeal of the above-stated rules at page 1416 of the 2016 Montana Administrative Register, Issue Number 16. On September 2, 2016, the department published an amended notice of public hearing on the proposed amendment and repeal at page 1537 of the 2016 Montana Administrative Register, Issue Number 17.

2. On September 13, 2016, a public hearing was held to consider the proposed amendment and repeal. Jaret Coles, Montana Legislative Services Division, and Robert Story, Montana Taxpayers Association, appeared and testified at the hearing. The department also received written comments from Alice Ammen, Missoula; Michael Christianson, Montana Forest Owners Association; Paul R. McKenzie, F. H. Stoltze Land & Lumber Company; Larry Robertson, Montana Grape and Winery Association Ex Officio member; and William Woessner and Jean Woessner, Montana Grape and Winery Association members.

3. The department amends ARM 42.20.504, 42.20.505, and 42.20.604 as proposed.

4. The department amends ARM 42.20.601 and 42.20.745 and repeals ARM 42.20.502, 42.20.503, and 42.20.516 as proposed, effective January 1, 2017.

5. Based upon the comments received and to include an additional amendment presented by the department at the hearing eliminating the colony count requirement on apiaries for classification as agricultural land, the department amends ARM 42.20.173 and 42.20.683 as proposed, effective January 1, 2017, but with the following changes, new matter underlined, deleted matter interlined:

42.20.173 STATUTORY DEADLINE FOR CLASSIFICATION AND APPRAISAL REVIEWS (1) through (6) remain as proposed.

(7) The department will deny a property owner's Form AB-26 request if no response to the department's final written request to either schedule an appointment or provide additional documentation is received within 14 15 working days from the date on the request. The final written request will only occur after the department has attempted to contact the property owner several times either by telephone, by e-mail, or with a property site visit. The letter denying the taxpayer's Form AB-26 request will inform the property owner that they may appeal the department's decision to the county tax appeal board and that if they fail to respond to the department's denial they may lose their right to appeal.

42.20.683 SPECIALTY AND UNIQUE CROPS (1) and (2) remain as proposed.

(3) The sale of honey and other products from bees will be considered agricultural income. For valuation as agricultural land, the owner of the land must provide proof that:

~~(a)~~ the landowner is registered with the Montana Department of Agriculture as an apiary~~; and~~

~~(b) the apiary must have at least 25 bee colonies annually sited on the land continually from May 1 through August 31~~.

(4) through (15) remain as proposed.

6. The department has thoroughly considered the comments and testimony received. A summary of the comments received and the department's responses are as follows:

COMMENT 1: Jaret Coles, staff attorney for the Montana Legislative Services Division, appeared at the hearing and testified on behalf of the Revenue and Transportation Interim Committee (RTIC), and also provided written comments. Mr. Coles explained that pursuant to 2-4-402, MCA, legislative administrative rule committees are required to review all proposed rules filed with the Secretary of State. Mr. Coles further explained that the RTIC is specifically charged by 5-5-227, MCA, to review proposals from the Department of Revenue and has statutory powers to submit written recommendations regarding the amendment of a proposed rule at a rulemaking hearing.

Mr. Coles stated that the RTIC reviewed MAR 42-2-956 and expressed concern with the proposed amendment to ARM 42.20.173(7), which states the department will deny a property owner's Form AB-26 if no response to the department's final written request to either schedule an appointment or provide additional documentation is received within 14 days of the date of the request.

He further stated that after considerable debate, including a series of questions and answers from Department of Revenue Director Mike Kadas, and Property Assessment Division Administrator Cynthia Moore, the RTIC passed a motion to submit comments to the department regarding the proposed amendments to ARM 42.20.173(7). Mr. Coles summarized the RTIC meeting and eventual motion as follows:

The RTIC requests that the department amend ARM 42.20.173 in a manner that ensures a taxpayer will know when a written notice asking for an appointment or for additional information is the taxpayer's "final written notice," and that the failure to respond to the notice will result in issuance of a denial letter that can be appealed to the county tax appeal board. Additionally, the committee expressed a concern that the first written notice a taxpayer receives should not be the "final written notice." The language of the final notice should be clear that it is indeed a final notice and that the appeal rights will terminate.

Mr. Coles also commented that in the discussions by the committee and also with the department that some counties do provide written notice to taxpayers informing them that this is their last notice, and if they do not respond, they will lose their appeal rights. However, some counties do not do this. Some of the committee members testified that the department should work to make sure all taxpayers know that if they do not respond to the notice, they could potentially lose those rights.

RESPONSE 1: The department appreciates Mr. Coles' and the Revenue and Transportation Interim Committee's comments. The department has further amended ARM 42.20.173(7) to clarify that the final written request will only occur after the department has made attempts to contact the property owner. The department has also added language in (7) that the denial letter will contain language that clearly informs the property owner that they have the right to appeal the department's decision denying their informal review and that if they fail to respond to the department's denial, they may lose their right to appeal.

COMMENT 2: Regarding the proposed amendment of ARM 42.20.173, Robert Story, Executive Director, Montana Taxpayers Association, commented that they are concerned that the allowance of 14 working days may be an inadequate amount of time for some taxpayers to respond. The timeframe between the receipt of the appraisal notice and the final notice could be difficult for some taxpayers to comply with if they are not regularly receiving mail due to work or travel. They may need to be informed more about the process and be aware that they can respond to the department's requests without having all of the information they feel that they need to complete their objection. The final notice should be clearly identified and follow initial notices or requests for information.

RESPONSE 2: The department appreciates Mr. Story's comments. Property owners have 30 days following receipt of a classification and appraisal notice to file a Form AB-26, request for informal review. Once an owner files a Form AB-26 request, the department will contact the property owner to schedule an appointment or request additional documentation. If the property owner fails to respond after attempts to contact them, the department will issue a final written request. The department has further amended ARM 42.20.173(7) to specify 15 instead of 14 working days. This means the property owner will have a full three weeks following the time allowed for filing a Form AB-26 request and providing additional information or scheduling an appointment to respond to the department's final written request. If the property owner fails to respond to the department's final written request and the department denies the Form AB-26 request, the property owner will have an additional 30 days to file an appeal to the county tax appeal board.

COMMENT 3: Paul R. McKenzie, Lands and Resource Manager for F. H. Stoltze Land & Lumber Company in Columbia Falls, commented that with regard to the repeal of ARM 42.20.503 and 42.20.516, his organization has no objection but contends that the reasons provided for the repeal of these rules is inaccurate and requires modification. The repeal notice states the reason is that class ten land valuation changed from a six-year to a two-year cycle in accordance with Senate Bill 157 and phase-in is not needed. However, the valuation of class ten land remains on a six-year reappraisal cycle and phase-in is important to implementation. Therefore, ARM 42.20.503 is redundant with ARM 42.20.745 and could be repealed if ARM 42.20.745(2)(c) is corrected to show the correct phase-in value of .3332 for year two.

RESPONSE 3: The department appreciates and agrees with Mr. McKenzie's comments and his suggestion that the department amend ARM 42.20.745(2)(c). The department further agrees that the original statements of reasonable necessity provided for repealing ARM 42.20.503 and 42.20.516 were incorrect.

After filing the initial Notice of Public Hearing with the Secretary of State on August 19, 2016, and prior to the public hearing date, the department filed an amended Notice of Public Hearing, on September 2, 2016, to further amend ARM 42.20.745. In the amended notice, the phase-in value in (2)(c) changed from .3342 to .3332. The department also amended the statements of reasonable necessity relating to its proposal to repeal ARM 42.20.503 and 42.20.516, to remove the erroneous reference to a legislative change in the reappraisal cycle for class ten property.

COMMENT 4: Michael Christianson, President of the Montana Forest Owners Association, commented that their organization supports the proposed changes in the amended version of the public hearing notice, MAR Notice No. 42-2-956, which includes the minor corrections to ARM 42.20.505 and 42.20.745, and they also support the repeal of ARM 42.20.502.

RESPONSE 4: The department thanks Mr. Christianson for his comments in support of the proposed changes to ARM 42.20.505 and 42.20.745, and the repeal of ARM 42.20.502.

COMMENT 5: Regarding ARM 42.20.683, Mr. Story commented that they concur with the proposed changes and agree with the Montana Tax Appeal Board ruling regarding what the statute actually says and their assessment that the department does not have the authority to impose the limitations that are being repealed. Mr. Story commented that there are, however, going to be people concerned when they find out that they do not have five years to develop a cherry orchard and he encourages the department to start looking at how they are going to deal with that in a public relations manner to let taxpayers know what is going to happen to them and their tax bills.

RESPONSE 5: The department agrees that the Montana Tax Appeal Board's ruling and subsequent impact to property owners needs to be communicated to the public. At a minimum, the department intends to make this information available on its website and in its local county Department of Revenue offices. The department is also considering further measures it may take to provide additional information to taxpayers.

COMMENT 6: Alice Ammen, of Missoula, commented that the proposed changes to ARM 42.20.683 contain an error that should be corrected to include language pertaining to vineyards. Specifically, Ms. Ammen stated that the last line pertaining to vineyards has been omitted from the rule. It should be similar to the last line for orchards in (13) which states "a vineyard shall be considered agriculture if the provisions of (14) are met" because, like fruit trees, it takes several years for vines to reach maturity.

Ms. Ammen recommends that the department insert a new (15) into the rule stating "the property owner must include with the application documentation sufficient to prove that the vineyard produces and the owner or the owner's agent markets at least $1,500 in gross annual income once the trees reach production maturity" and subsequently renumbering the following section as (16).

RESPONSE 6: The department appreciates Ms. Ammen's comment that rule changes appear incorrect. The department proposed the rule amendments to implement the Montana Tax Appeal Board (MTAB) ruling in the Matter of State of Montana, Department of Revenue v. Yeager Family Trust. In that case, the MTAB determined that the only requirement for agricultural eligibility is that the land produces $1,500 in gross income. The MTAB ruling prevents the department from adopting classification criteria or establishing benefits beyond those allowed in statute. Therefore, the stricken language is no longer applicable.

COMMENT 7: Regarding the proposed amendment of ARM 42.20.683, Larry Robertson, Ex-Officio member and technical advisor to the Montana Grape and Winery Association, employee of USA Natural Resources Conservation Service, and private vineyard/winery owner, commented that he is glad the department eliminated the acreage requirement because it is irrelevant for specially crops, and that he also agrees with the need to show annual revenue of $1,500.

Mr. Robertson further commented, however, that the elimination of the provisional agricultural classification for five years during the start-up time for the initial crop of vines to reach saleable maturity is extremely detrimental to the growth of a grape and wine industry in Montana. Vineyards are very expensive to establish and maintain. They require extensive trellis and fencing construction costing over $10,000 per acre and roughly 750 hours of labor per acre per year to manage properly. Mr. Robertson also commented that the elimination of the provisional start-up classification greatly increases the risk to establish a vineyard and will severely inhibit the growth of the vineyard industry. He stated that he would hope that the department will encourage growth of the grape and wine industry in Montana, which will bring in more revenue in the future, and not deter it.

William Woessner and Jean Woessner, members of the Montana Grape and Winery Association, also commented, with regard to ARM 42.20.683, that they strongly oppose the proposed amendment and repeal of the provisional agricultural classification for five years during the start-up to allow time for the initial crop of vines to reach saleable maturity from the rule, because vineyards require considerable upfront investment and five years of husbandry before realizing an economically viable crop. This provision facilitates investment in this emerging industry that will be populated by a large number of small businesses.

RESPONSE 7: The department appreciates and understands Mr. Robertson's and the Woessners' comments relating to the elimination of the one-acre requirement for agricultural eligibility, to the requirement that a taxpayer show $1,500 in gross annual income, and suggestion that the department retain the provisional classification for five years to allow for a viable crop. The Montana Tax Appeal Board (MTAB) ruled in the Matter of State of Montana, Department of Revenue v. Yeager Family Trust, however, that the department's authority is limited by statute and that it may only require proof of $1,500 in annual gross income for agricultural eligibility. Under the MTAB's analysis, the department may not require a minimum acreage for agricultural eligibility nor grant provisional agricultural classification because both extend beyond the department's limited statutory authority.

COMMENT 8: Mr. Robertson commented that he strongly disagrees with the department's determination that the amendment and repeal of these rules will not significantly and directly impact small business, and asked what experience the department has in a vineyard operation to make such a statement. Elimination of the provisional agricultural classification for five years during the start-up time for the initial crop of vines to reach saleable maturity will hurt small specialty crop businesses.

The Woessners commented that the department's claim that elimination of this provisional agricultural classification will not significantly and directly small business is completely without merit.

RESPONSE 8: The department recognizes the benefit of a provisional classification to small businesses. However, the Montana Tax Appeal Board (MTAB) ruling in the Matter of State of Montana, Department of Revenue v. Yeager Family Trust, has limited the department's discretion with respect to classifying and appraising specialty crop businesses. As a result of that case, in the same way the department is not able to require at least one acre for crop production, the department can no longer allow for provisional agricultural status where there is no income from the property. The MTAB noted to do so would be "an exercise of power constitutionally reserved to the legislative branch." Therefore, the department must remove the provisional classification to comply with the ruling.

The department recognizes there may be a small business impact to companies like theirs; however, the department based its determination upon its analysis of the MTAB's ruling in the Yeager Family Trust matter noted above. Therefore, regardless of the impact, the department is required by law to implement the MTAB's ruling.

COMMENT 9: Regarding the proposed language in ARM 42.20.745, Mr. Story commented that he is concerned about the use of the value before reappraisal (VBR) in the appraisal process. He stated that while it is necessary to establish a VBR in long appraisal cycles, many times when a taxpayer looks at a new value and compares it to the value of the last appraisal, they do not know that the listed old value is a VBR and not the value that was on their old appraisal notice. The result of this may be that they do not realize the actual effect of the new appraisal until they receive their tax bill. Mr. Story stated that the department should clearly identify the VBR as such and include an explanation of what a VBR is. There should be some easy way for the taxpayer to be able to compare what their actual previous appraised value was with their new appraised value. The explanation of the VBR is an education issue because it is very confusing to the average taxpayer.

RESPONSE 9: The department agrees that the value before reappraisal concept is confusing and difficult to understand. Forest land is the only remaining cyclically appraised property that is on a six-year cycle. The department is including a statement on the classification and appraisal notice reminding taxpayers that it is on a six-year cycle and directing them to the department's website. The website explains in detail how forest land is reappraised and specifically addresses the concept of the value before reappraisal.

/s/ Laurie Logan /s/ Mike Kadas

Laurie Logan Mike Kadas

Rule Reviewer Director of Revenue

Certified to the Secretary of State October 31, 2016.