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| Montana Administrative Register Notice 42-2-999 | No. 4 02/22/2019 | |
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BEFORE THE Department of REVENUE OF THE STATE OF MONTANA
TO: All Concerned Persons
1. On December 7, 2018, the Department of Revenue (department) published MAR Notice No. 42-2-999 pertaining to the public hearing on the proposed amendment and repeal of the above-stated rules at page 2369 of the 2018 Montana Administrative Register, Issue Number 23.
2. On December 28, 2018, a public hearing was held to consider the proposed amendment and repeal. No proponents, opponents, or other interested persons were present at the hearing and no oral or written comments or testimony were received at that time.
3. On January 25, 2019, the department filed an Amended Notice of Public Hearing on Proposed Amendment and Repeal to address additional revisions of the trended depreciation schedules proposed in ARM 42.21.155(4)(g) and (4)(h). 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 February 4, 2019. The department timely received written comments from Bob Story, Executive Director for the Montana Taxpayers Association (Montax); Donna Lawrence of Denbury Resources, Inc; Tim Robertson, President of Century Companies, Inc.; Chuck Roady, Vice President of F. H. Stoltze Land & Lumber Company; Kevin Esser, Chief Financial Officer for Idaho Forest Group, LLC; Bud Clinch, Executive Director for the Montana Coal Council; Nicole Rolf, Director of National Affairs for the Montana Farm Bureau Federation; David Smith, Executive Director for the Montana Contractor's Association; Jason Todhunter of the Montana Logging Association; Steve Marks, President of Marks Lumber; and Bridger Mahlum, Government Relations Director for the Montana Chamber of Commerce.
4. The department has amended ARM 42.21.154, 42.21.158, and 42.22.1311, and repealed ARM 42.21.113, 42.21.123, 42.21.131, 42.21.132, 42.21.137, 42.21.138, 42.21.139, 42.21.140, 42.21.151, 42.21.153, 42.21.156, and 42.21.157 as proposed.
5. The department has amended ARM 42.21.155, but with the following changes from the original and amended proposals, new matter underlined, deleted matter interlined:
42.21.155 CATEGORIES FOR PERSONAL PROPERTY; TRENDED DEPRECIATION SCHEDULES; TREND FACTOR CALCULATION (1) through (3) remain as proposed. (4) The trended depreciation schedules for the categories of personal property are as follows: (a) through (f) remain as proposed. (g) Farm Machinery and Equipment - a twenty-year depreciation and a residual percentage will be applied to farm machinery and equipment. A
Farm Machinery and Equipment
(h) Heavy Equipment - a twenty-year depreciation and a residual percentage will be applied to heavy equipment. A
Heavy Equipment
(5) remains as proposed.
AUTH: 15-1-201, 15-23-108, MCA IMP: 15-6-135, 15-6-138, 15-6-202, 15-6-207, 15-6-213, 15-6-219, 15-8-111, MCA
6. 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's initial remarks criticize the scheduling of the December 28, 2018 administrative rules hearing and the formatting of the department's electronic mail correspondence notifying its interested parties of new rulemaking events as contributing to Montax's non-response to the original proposal notice for MAR Notice No. 42-2-999. Messrs. Clinch, Marks, and Mahlum also made comments regarding the scheduling of the public rules hearing on December 28, 2018. Mr. Roady commented that the administrative rule hearing was scheduled to minimize attendance at the hearing.
RESPONSE 1: The department agrees with all commenters that late-year scheduling of department business is, occasionally, unavoidable; such was the case here. The department determined that there would be potentially fewer conflicts for a December 28 hearing versus during the opening days of the 66th Montana Legislature. The department sent its interested persons notices more than the required 20 days before the hearing and the hearing and comment deadline comply with 2-4-302, MCA. The department appreciates these comments and will consider them should any similar scheduling issue arise in the future. As for Mr. Story's comments regarding the configuration of Montax's email receipts and a failure to open email, the department disagrees that Montax's no review or dismissal of the correspondence is the department's fault through a deficient or unclear notification. All the necessary and pertinent information relative to the rulemaking was clearly present in the department's December 6 email notification to its interested persons list and the department has received no other similar criticism. While the department can format email content, it cannot configure email delivery systems; those are user-interface considerations. The department is also uncertain that separate emails for each rule notice or multiple emails inherently improve the quality of notification. The department does agree that information processes - including external communications - can be improved, and we will continue to review and improve, where necessary, our processes and communications. The department disagrees with Mr. Roady's comments regarding the December 28 rules hearing. Notwithstanding the legal requirements which it met, the department invites and encourages interested persons in the department's rulemaking to provide their comments and concerns within the prescribed comment period, whether at the public hearing or not, and to have the remarks fully considered by the department and receive a formal reply. Should Messrs. Marks and Roady, or any other party desire to be added to the department's list of interested persons to receive independent notification of future administrative rulemaking, they may go to the department's webpage at https://mtrevenue.gov/resources/government/administrative-rules and complete the brief registration, or they may contact Todd Olson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-7905; fax (406) 444-3696; or e-mail [email protected].
COMMENT 2: Messrs. Story and Mahlum, and Ms. Rolf, commented that their organizations support the format and organization of the department's rulemaking, which makes the use and understanding of the depreciation tables more taxpayer friendly and in future years will ease comparison of proposed changes from the current.
RESPONSE 2: The department thanks the commenters for the comments.
COMMENT 3: Mr. Story comments that Montax is concerned with the amount of increase in several of the trend factors. He states. . . "it is hard to understand why the trend factors on almost all types of equipment are increasing from last year's tables to this year's even with the adjustment for the change in year. In many cases, for any given category the trend factor, especially for equipment less than 8 years old, is higher than it would have been for the same year equipment in the previous rule." Messrs. Esser and Robertson also commented on the significance of 8-year-old equipment proposed trend factoring compared to the previous depreciation schedule. Mr. Robertson provided an example for a 2011 excavator, where the assessed taxable value appears to increase in tax year 2019 versus 2018. Mr. Smith provided examples from his association that calculated valuation percentages for heavy equipment purchased in 2015, and by comparison, potential increases in valuation for the same equipment if purchased in 2013.
RESPONSE 3: The change or increase reflected in trend factors for some types of equipment is the result of switching the source of the cost indexes used in calculating the trend factors for all personal property types to the Marshall & Swift Valuation Service Guide (Marshall & Swift). Historically, the department reviewed cost indexes and determined trend factors for some property types based on information taken from the Producer Price Indexes published by the United States Department of Labor, Bureau of Labor Statistics, while other property types followed a similar process using Marshall & Swift. To provide greater consistency in the valuation of all types of personal property, the department switched to Marshall & Swift cost indexes to calculate all the trend factors.
COMMENT 4: Several commenters questioned why heavy equipment has trend factors that increase as the equipment ages, and other categories have decreasing trend factors as the equipment ages. And some categories increase, then decrease, then increase again. Commenters opined that trends should be long term and consistent.
RESPONSE 4: 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 fact that the subject property is not new and has a lesser value than a new item of the same type of property. As discussed in Response 3, the department uses cost index information from Marshal & Swift to develop its trend factors. The department believes this resource best provides cost index information for Montana's numerous industries, allowing different trends to be developed based on the type and use of the property being valued. It is also significant to note that 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 when viewing a depreciation schedule. Additional information related to the source and development of our trends can be found in ARM 42.21.155(2) and (3).
COMMENT 5: Several commenters provided commentary on the department's choice and use of Marshall & Swift versus other valuation authorities, particularly with the application to farm equipment and heavy equipment valuation. The commenters remarked about the perceived accuracy of Marshall & Swift in farm equipment and heavy equipment valuation and whether it is the best resource and reflective of current values. Mr. Clinch similarly commented on the department's use of Marshall & Swift as being a matter of convenience and asks why the department does not adopt the "Iron Guides" valuation reference for heavy equipment, which he asserts is more universally accepted and will lead to fewer appeals of valuation. Mr. Todhunter commented that the department's valuation guides do not include specialized logging equipment that is provided in the logging industry's "Green Book," and recommends its adoption, as Marshall & Swift valuation appears to result in valuation increases.
RESPONSE 5: The department thanks all commenters for these comments. The department uses several methods and sources of information in the valuation of farm machinery and equipment and heavy equipment. The first and preferred source used to value farm machinery and equipment and heavy equipment is the Equipment Watch valuation service (Equipment Watch). Equipment Watch provides current values for equipment based on recent sales and auctions of that equipment, when available, and is the historical resource the department has used for valuing heavy equipment. Previously, Equipment Watch provided value information for heavy equipment only, so Iron Guides was used to value farm equipment. However, in recent years, Equipment Watch began providing values for farm equipment, at no additional cost to the department, so the department began utilizing Equipment Watch in 2018 to value both farm and heavy equipment to cut costs and increase efficiency. When current values are not available from Equipment Watch, the department must use different methods and sources of information to determine current value. The process for doing so was proposed in this rulemaking in the department's amendments to ARM 42.21.154(6) and are being adopted as proposed. Further, neither Equipment Watch nor Iron Guides provides trend factors or depreciation schedules. The department directs the commenters to Responses 3 and 4 regarding the department's prior use of multiple sources for cost indexing, calculating trend factors, and how the department develops its depreciation schedules using Marshall & Swift, all with the goal to increase accuracy, efficiency, and consistency in the valuation of all types of personal property. As to Mr. Todhunter's comments advocating for the use of the logging industry's "Green Book," the department acknowledges that there are niche valuation resources that may hold certain industry preferences. However, the department cannot achieve consistency in the valuation of all types of personal property if it were to accede to preferences. The department will continue to review and improve our processes and, where necessary, look to improved valuation resources.
COMMENT 6: Several commenters remarked that they applaud the actions taken by the department in its amended proposal notice to further revise the wholesale factors in the trended depreciation schedules described in proposed ARM 42.21.155(4)(g) and (h), but also say more downward adjustment to the factors is needed to limit the adverse effect on business equipment owners. Mr. Smith commented similarly to the reduction in wholesale factors in the amended proposed notice but continued, "While the revision of the wholesale factor column values is reduced from 80% to 60%, the secondary change in calculation for the proposed wholesale trended % good increases the value of aging equipment."
RESPONSE 6: The department agrees that additional revision is necessary. Based on the comments and additional analysis performed by the department, the department has further amended the wholesale factors in the farm machinery and equipment and heavy equipment trended depreciation schedules in ARM 42.21.155(4)(g) and (h) down to 50% from 60%. The department analyzed the Equipment Watch fair market values in comparison to the Equipment Watch forced liquidation value. This analysis resulted in our change in wholesale factor from 80% to 60%. We further analyzed the relationship between Equipment Watch's forced liquidation value and the original installed cost the subject piece of equipment. After the original cost of the equipment was trended to a current year cost, our analysis resulted in the wholesale factor being adjusted from 60% to 50%. As to Mr. Smith's wholesale trended % good comments, based on analysis we have conducted, the additional revision made to the wholesale factor will mitigate the instances of equipment being valued higher using the new method than what was used in the prior year. After further analysis made after the initial public comment period closed, the department found a formulaic error in the spreadsheet that was utilized to calculate the trend factors in the farm machinery and equipment schedule. The error has been corrected and the department further amends the trend factors in the farm machinery and equipment schedule in ARM 42.21.155(4)(g).
COMMENT 7: Mr. Roady commented that it is his belief that the department is arbitrarily raising the rates on equipment that is getting older, without any basis, simply to generate more revenue for the State. Mr. Roady also asked for an extension to comment so his company can evaluate the cost of the rule changes.
RESPONSE 7: The department thanks Mr. Roady for his comments. As to the comment regarding the arbitrary increase of rates (taxes) on older equipment, the department directs Mr. Roady to Responses 5 and 6. Regarding Mr. Roady's request that the department grant an extension of time for his company to conduct a comparison on the effects of the 2019 trended depreciation schedule, the department believes the additional amendments to ARM 42.21.155(4)(h) and Response 6 address Mr. Roady's concerns with 2019 heavy equipment category valuation.
COMMENT 8: In addition to his comments on the scheduling of department's rulemaking under MAR Notice No. 42-2-999 which are included in Comment 1, Mr. Marks expressed concern with how he could receive prior notification of department rulemaking that affects proposed trended depreciation of heavy equipment as his company prepares to pay annual assessments under the special mobile equipment registration decal provided in 61-3-431, MCA.
RESPONSE 8: The department thanks Mr. Marks for his comments. To best keep informed about the scheduling and status of department rulemaking, the department invites Mr. Marks to register for direct notices of the department's rulemaking, the instructions for which are provided at the end of Response 1. Regarding his comments about wholesale factors and general depreciation, the department refers Mr. Marks to Responses 3 through 6, which the department believes provide him adequate information and explanation. The department strives for timely and clear rulemaking and will consider Mr. Marks's comments in this annual rulemaking.
COMMENT 9: Ms. Lawrence commented that the department should consider amending the depreciation schedule and residual percentage applied to oil and gas field machinery and equipment in proposed ARM 42.21.155(4)(f) to a lower 14-year useful life. Her support for the change is based on the Internal Revenue Service's (IRS) Publication 946 (IRS Pub 946), Table B2 - Asset Class 13.2 (2017), regarding depreciation of such assets, and that the states of Wyoming and Mississippi have adopted this federal guidance.
RESPONSE 9: The department thanks Ms. Lawrence for the comment. However, at this time the department does not agree that a further adjustment to the life of oil and gas field machinery and equipment is warranted. Each property category's useful life span has been selected by the department to represent a specific life expectancy. When making this determination, the department considers various sources providing asset life information. One of the main sources the department uses in the development of its models and valuations is Marshal & Swift, which does report furniture, fixtures, and equipment data from IRS Pub 946. The department has considered the asset lives as reported by IRS Pub 946. However, the state of Montana segregates property into eight categories for commercial property, and into 32 categories for industrial property, where the IRS segregates property into hundreds of categories. In the case of petroleum exploration and production equipment, Marshal & Swift reports asset lives from 11 to 17 years, with 14 being the midpoint. The same asset lives apply for natural gas production equipment. This type of property falls within the oil and gas field machinery and equipment category that has been assigned a 15-year life, which the department believes is reasonable for this type of property.
7. The department will apply these rule amendments and repeals effective January 1, 2019.
/s/ Todd Olson /s/ Gene Walborn Todd Olson Gene Walborn, Director Rule Reviewer Department of Revenue
Certified to the Secretary of State February 12, 2019. |
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