State Assessed Properties: Air Flight, Railroads, and Utilities
December 2010
In Minnesota, the Commissioner of Revenue is required by law to annually assess certain types of real and personal property. These properties include: air flight property; operating property of railroad companies; pipeline systems of gas, water, and petroleum companies; and tools, equipment, and machinery as well as transmission and distribution lines of electric companies. The valuation and classification of these properties are based upon specific assessment/appraisal procedures and information required from all companies. The tax collected from these properties provides significant revenues to both state and local taxing authorities.
What types of state assessed properties are subject to assessment and taxation?
The Commissioner of Revenue is responsible for assessing some forms of transportation, specifically air flight and railroad operating properties. All gas, water, and petroleum pipelines and rural electric transmission and distribution lines are also assessed by the Commissioner. These valuations are called Commissioner Assessed Values and are found in a report called “Order of the Commissioner”. Additionally, recommended values for some electric power and light utilities comprised of tools, implements, and machinery are provided as a service to the county assessor. These values appear in the report entitled, Notice of Recommended Valuations of Utilities”.
Air Flight Property
Air flight property is personal property that consists of all aircraft and flight equipment owned by, or is leased, loaned, or made available to an airline company which engages in air commerce. It includes computers, computer software used in operating, controlling, or regulating aircraft, and flight equipment. Aircraft with a gross weight of less than 30,000 pounds and used intermittently are excluded from assessment and taxation. The Commissioner estimates the value of this property, calculates the tax according to adopted rules and required revenues, and bills the carrier. Local government units do not receive any of this tax revenue because it goes directly to the State Airports fund at the Department of Transportation. All real and personal property of an airline company, except for air flight property, is assessed and taxed like other properties as provided by law.
Operating Railroad Property
The Commissioner determines what is operating and non-operating railroad property for assessment purposes. In making this determination, information and opinions are solicited from the railroad companies, assessors, and all interested persons. Only the operating property is assessed by the Commissioner. It is all property used by the railroad for transportation services, such as the franchises, rights-of-way, bridges, trestles, shops, docks, buildings, and structures. A value is calculated for each railroad company and a portion of the value is allocated to each county based upon the amount of operating property within that county. The property taxes are levied and collected in the same manner applied to commercial/industrial property. (Note: The non-operating property is assessed by the county assessor. This property is identified as real property that is leased or made available for lease to anyone who is not a railroad company; vacant land presumed to be available for lease if it has not been used for a period of at least one year prior to the assessment date; land that is not used on a regular or continual basis because it is not an integral part of or necessary in the performance of the transportation functions; and that part of a corporate office building and its land which is not used for railway operations.)
Utility Property
The assessment of personal property consisting of systems of mains, pipes, and attached equipment of pipeline companies transporting gas, water, and petroleum products is performed by the Commissioner. Furthermore, the task of assessing some real and personal property---tools, implements, and machinery as well as transmission and distribution lines of electric companies is divided between the Commissioner and county assessor. The Commissioner assesses the transmission and distribution lines outside of city limits and recommends values for electric power and light utilities to the assessor. Utility property that includes land and structures (i.e. offices, garages, warehouses, electric substations, generating stations, transformer stations, switching stations, fences, etc.) and real estate held for future use or not used for utility purposes is locally assessed. Since the Commissioner has general oversight responsibilities for all property assessments, valuation estimates for each utility company operating within the state are rendered for the entire system to achieve equalization. Both the Commissioner’s ordered and recommended values of property are allocated to each county and distributed to various taxing districts through an apportionment process. The property taxes of utilities are levied and collected as class 3a commercial/industrial real or personal property. The state general property tax levy does not apply to electric generation machinery of utility properties, but it applies to all other utility properties.
Does regional railroad authority operating property get valued and taxed?
No, regional railroad authorities are exempt from taxation because they are owned by government agencies like a county or a township association. They usually own the land and tracks that are being used by an operating railroad. Typically, the railroad company is purchasing the rail line on a contract for deed. In these cases, the land and tracks are owned by the regional railroad authority and are subject to an exemption by law.
Are privately-owned owned utility systems assessed?
Yes, the real and personal property owned by privately-owned gas, water, sewer, and heating companies are assessed by the assessor where the property is located similar to other commercial/industrial property.
Are municipally-owned utility systems assessed?
No, the real and personal property associated with municipally-owned light, heat, power, gas, and water systems are usually exempt from taxation as public property used for a public purpose unless they are leased to private companies. If these utilities extend beyond the boundaries of the municipality to service private customers, they are still considered to be exempt from taxation should there be a surplus of energy and its sale is secondary to the public purpose. However, if these services are conveyed by a substantial number of customers outside the municipality, they may be assessed like other property.
Are cooperative electric light and power associations exempt from taxation?
Although a majority of the cooperatively-owned electric utilities are financed by the federal government under the Rural Electrification Administration, they are not exempt from taxation. Their property is assessed and taxed on the same basis as other real and personal property of privately-owned electric light and power utilities.
How are state assessed properties valued for tax purposes?
Every airline, railroad, and utility company doing business in Minnesota must file a report each year with the Commissioner of Revenue that sets forth the information used to value their property in accordance with adopted rules. The Commissioner has the authority to review any records and materials relevant to the valuation of state assessed properties.
Valuation of Air Flight Property
The market value of air flight property represents the company’s operations for the prior calendar year and is apportioned using three equally-weighted operating factors: (1) the total tonnage of passengers, express, and freight that is first received by the airline company in Minnesota plus the tonnage of passengers, express, and freight finally discharged by the carrier within the state as compared to the total tonnage first received and finally discharged at the system-wide level; (2) the equated plane hours or the total time the carrier’s aircraft are in flight within Minnesota compared to the in-flight hours at the system-wide level; and (3) the number of revenue ton miles of passengers, mail, express and freight flown by the airline company in the state as compared to the total number of revenue ton miles flown at the system-wide level.
Valuation of Operating Railroad Property
The Commissioner uses generally accepted appraisal principles and practices including the unit method of valuation to estimate the market value of operating property as of the January 2nd assessment date. Once the overall market value for the railroad is established from available cost, income, and market data, it is apportioned to each county and to its taxing districts based upon specific rules and standards that consider the physical situs of all buildings and structures with an original cost over $10,000 along with the proportion that the length and type of all tracks used by the railroad in such county and taxing districts bears to the length and type of all the tracks used in the state. After the apportionment is made, the Commissioner determines the equalized valuation of the property in each county by applying the estimated current year median sales ratio for commercial/industrial property in that county to the apportioned market value.
Valuation of Utility Property
For each utility company, the Commissioner establishes a unit value by using data relating to the cost of the property, the earnings of the company owning or operating the property, as well as other indicators of value if applicable. The exempt and/or locally assessed value of property is subtracted from the market value before it is apportioned to the various counties and districts within the state. The apportioned market value is also equalized based upon the annual commercial/industrial assessment sales ratio determined by the Department of Revenue before it is made available to the assessor.
Can the valuation and/or classification of state assessed properties be appealed?
Yes, the property assessment completed for state assessed properties can be appealed, but the policies and procedures for appealing the valuation and/or classification varies from the appeals process for other properties subject to taxation. In regards to air flight property, there are no provisions for an administrative review. If an airline company disagrees with its valuation or the application of the apportionment methods, it may petition the Commissioner to use another method of valuation or apportionment. An airline company can appeal the net tax capacity notice and/or the tax order directly to the Minnesota Tax Court. An appeal by a railroad or a utility company concerning property that the Commissioner of Revenue provided the county assessor with ordered or recommended values must be brought against the Commissioner rather than the county or taxing district where the property is located unless the property was locally assessed, the taxable net tax capacity of the property was different from that established by the Commissioner, or the tax rate applied to the property was incorrect. A railroad or utility company may appeal administratively to the Commissioner. This appeal must be submitted in writing within 10 days after the date of the valuation certification or notice to the company of by May 15th, whichever is earlier. A court action against the Commissioner may also be brought before the Minnesota Tax Court by a railroad or utility company claiming that property has been unfairly or unequally assessed, or an assessed valuation in excess of its market value, is misclassified or is exempt from property taxation.
If you have any questions regarding this information or suggestions for a future column, please contact me.
Stearns County Assessor’s Office
Administration Center, Room 37
705 Courthouse Square
St. Cloud, MN 56303
Phone: 320-656-3680
or e-mail: gary.grossinger@co.stearns.mn.us