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Retailer in-stock taxes get scrutiny

State task force weighing repeal

Leaders of the Legislature's tax overhaul task force said Wednesday that they're tossing around the possibility of recommending repealing the property taxes levied on business inventory.

And Sen. Missy Irvin, R-Mountain View, told fellow lawmakers that they need to change state law to assist school districts that have property owners appealing certain property tax assessments and bills.

The business inventory tax raises about $65 million a year with about $50 million going to public schools and the rest going to cities, counties and other forms of local government, said Chris Villines, executive director of the Association of Arkansas Counties.

Ten states, including Arkansas, tax business inventory and four additional states impose partial taxes, said Randy Bauer, project manager for the task force's consultant PFM Group Consulting, based in Philadelphia.

Business inventory taxes are considered burdensome on retail stores and other businesses that store large amounts of merchandise, Bauer told the task force. Business inventory taxes are levied at the local level and can be difficult to estimate, he said.

Arkansas businesses estimate the average value of their inventories for the previous year, and property taxes are based on those assessments, according to state officials.

Task force co-chairman Rep. Lane Jean, R-Magnolia, said in an interview that he wants to consider eliminating the business inventory tax because "I have had people in the industry say it is unfair so I think we are going to look at it."

During the task force's meeting Wednesday, the other task force co-chairman, Sen. Jim Hendren, R-Sulphur Springs, said, "I know there has been a lot of discussion about the inventory tax.

"There would be a $50 million hit to school districts if we just exempted it," he told the task force.

"Would that difference be made up through the [public school] foundation formula because now those mills are generating less? Would the state be taking the hit and still make the districts whole, or would the districts just really see a cut?"

State Education Commissioner Johnny Key said, "Anything that changes at the local level with respect to foundation [per-student] funding, if they take a hit at the county and district level, the state is responsible, and the laws are set up and our budgeting process is set up so they are made whole with respect to the foundation funding."

Lindsey Bailey, legal counsel for the Association of Arkansas Counties, subsequently told lawmakers that she believes voters would have to approve a constitutional amendment to Article 16, Section 5 of the Arkansas Constitution to make business inventory an "added exemption." The section specifies what is subject to property taxes and what is exempt.

Meanwhile, Robyn Keene, a consultant for the Arkansas Association of Educational Administrators, said one of the association's concerns about property taxes is the appeals process for property owners.

"If the property owner is wanting to appeal their assessed value, they can appeal that without having to pay their taxes until that is resolved," she said.

"A solution that we see is if real property [collections] could be treated the same as personal property," she said. "With personal property, a taxpayer pays the undisputed amount of the personal property and the amount that they are disputing goes into escrow with the county until that appeal process is resolved."

Pangburn School District submitted its budget to the state in September, but it was notified in October that Southwestern Energy Co. had appealed its assessed value in Cleburne and White counties, Keene said. About 30 percent of the school district's total assessment is from that company and that equates to about $1.2 million in property tax revenue, she said.

"Since they were first notified, the company has paid approximately 41 percent of what their assessed value is," Keene said. To help the district during the appeal period, the state will have to pay more than $400,000, she said.

"The district will still have a loss of approximately $290,000 on their debt service mills above the 25 [uniform rate of taxation]," Keene said. "I believe there are approximately 10 other districts in these two counties that will be affected by this particular large corporation."

"This same company has filed an appeal on their 2017 taxes that will affect additional counties besides Cleburne and White counties, which would include Faulkner, Conway [and] Van Buren [counties]," Keene said. She said solutions to this problem would be to expedite the appeal process in the courts and require that school districts be notified as soon as possible regarding filed appeals.

Key said the Education Department sets aside $35 million a year to "make sure that districts are whole," and its expenses are typically in the low $20 million range, so "Pangburn and the other districts as to their foundation funding for this year we are fully budgeted, so they are going to be fine.

"But we don't do anything when it comes to their debt service millage, so they are still on the hook for that," Key said.

Southwestern Energy Co. is contesting valuations of reserves in the ground during this period of declining natural-gas prices, and the next step in the appeal of the 2016 valuations in Cleburne and White counties will be a lawsuit in circuit court, company spokesman Christina Fowler said after the meeting.

If the company paid the full amount of assessed taxes, there would be no way for the company to be paid back under state law, she said. The company is trying to find the fairest and most equitable way to get this matter resolved, she said.

During the task force's meeting, Irvin said, "It really threw these school districts into a really horrible situation.

"I am very happy that the settlement was reached and the attorneys have worked very hard in trying to reach that, and I appreciate the company and the folks working towards that," she said.

"This is something that needs to be fixed, and we need to be able to put that disputed amount into escrow," Irvin said. "The notification has to occur with these school districts so they have more time to understand what is happening and adjust. But a lot of it has to do with our state really taking control of our assessment process and being clear with this is what we have before us."

Metro on 12/07/2017

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