Article
Understanding state-assessed property tax and appeals for energy industries
April 9, 2024 · Authored by Michael Clayton
Paying real estate taxes is familiar and expected. Typically, this obligation applies to residential property, vacant land, and all types and classifications of commercial property. In a handful of states, local assessment authorities can also value industries such as gas, electric, water transmissions companies, electric generation facilities, rural electric cooperatives, pipeline companies, airlines, telecommunications companies, and railroads.
In most states, these complex properties and industries are state or centrally assessed, meaning the local assessors and appraisers have no jurisdiction or responsibility to value such property. Instead, these properties are valued by state appraisers assigned to value specific complex industries within their state.
Understanding this state-level assessment process, how it applies to your organization, and how to navigate the appeal process can generate significant tax savings.
Approaches to state-assessed values
Assessing property tax on energy entities varies from state to state. Below is a summary of the most common approaches.
Cost approach
The cost approach to value assessment method involves taxpayers self-reporting assets which the central assessment authorities use to calculate obsolescence ultimately determining value.
Unit approach
The unit approach to assessment considers not only the cost approach to value, but also an income approach, and on rare occasions, a stock and debt approach to value. This approach is most frequently used in western states.
Unit valuation scenario
A typical unit value scenario involves the taxpayer filing a return, generally in the spring, listing taxable assets. The state determines a value based on this cost approach to value, generally relying on the company’s reported cost information and applying appropriate measures of accrued depreciation and obsolescence.
The state also reviews the entity’s income, often for a three-to-five-year period, using a weighted average and applying a cap rate to the net operating income which determines a property tax value based on an income approach to value.
The state then determines a weighting of percentages to be given to the cost approach and the income approach to ultimately arrive at taxable value.
Related sections
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.