City of Valdez v. State, Department of Revenue, 111813 AKTAX, 3VA-00-00022 CI

Docket Nº:3VA-00-00022 CI, 3VA-10-00084 CI, 3AN-11-07874 CI
Opinion Judge:William F. Morse Superior Court Judge
Case Date:November 18, 2013
Court:Superior Court of Alaska

CITY OF VALDEZ, Appellant,



Nos. 3VA-00-00022 CI, 3VA-10-00084 CI, 3AN-11-07874 CI

Superior Court of Alaska, Third Judicial District, Anchorage

November 18, 2013


          William F. Morse Superior Court Judge

         I. Introduction.

         These consolidated administrative appeals concern the taxability of numerous marine vessels associated with the Valdez Marine Terminal ("Terminal") and the procedures by which the State of Alaska, Department of Revenue ("DOR") handles taxability disputes. The City of Valdez ("City") contends the DOR has adopted a test that differs from the statutory definition of taxable property, thus depriving the City of tax revenue.

         The Terminal is a facility at the southern end of the Trans-Alaska Pipeline System. Oil that has been transported through the pipeline is stored at the Terminal and then loaded onto tankers to be shipped to refineries outside of Alaska. There are separate oil spill response plans required for the operation of the Terminal and the tankers.1 The plans require that certain marine vessels2 be on call to respond in the event of an oil spill.

         To be taxable, property must have a defined relationship to the production or pipeline transportation of oil or to facilities used in that production or transportation. Whether property is taxable depends upon its "primary use." The statutory definition of primary use is amplified by regulation. In general, property primarily associated with the Terminal is taxable, whereas property associated with tankers is not. Prior to 1997 the DOR considered property used at the Terminal to be taxable but excluded oil spill response vessels.

         In 1997 the DOR changed its policy and determined that taxable property would include some, but not all, oil spill response vessels. It adopted a bright line test to determine the primary use of oil spill response vessels. If the vessel is required by a Terminal oil spill response plan, then it is taxable. If it is required by a tanker oil spill response plan, then it is not taxable. The City of Valdez argues that this test is unfaithful to the statutory and regulatory definitions of taxable property.

         The parties also have a procedural dispute over what governmental entity is authorized to hear the City's appeal of the DOR's taxability decisions. The City argues that the State Assessment Review Board ("SARB") has jurisdiction over taxability disputes. The DOR contends that SARB has jurisdiction over questions of the valuation of taxable property, but not over questions of taxability. The DOR contends taxability disputes should go to its administrative hearing and appeals process.

         Finally, the City contends the DOR erred by not permitting it to conduct more discovery regarding the nature of disputed property. The DOR allowed the City only limited discovery once it concluded that the question of the validity of the bright line test was a question of law. Once it determined that the use of the spill response plans to determine if vessels were taxable complied with the statutory and regulatory definitions of taxable property, the DOR concluded that there were no remaining factual questions about which to conduct discovery since there was no dispute about what vessels were included in the oil spill response plans.

         The Court concludes that the DOR was correct in its interpretation of the jurisdiction of the SARB. However, the DOR erred in its substitution of its bright line test for the statutory definition of taxable property, although the DOR may use the test and the oil spill response plans to assist in the application of the statutory definition. Finally, the Court concludes that the DOR erred in not permitting the City to pursue more extensive discovery.

         Before addressing the substance of the disputes, the Court will briefly summarize the taxation scheme and mechanism as defined by statute and regulation. It will then chronicle the parties' litigation odyssey. For fifteen years the City has been challenging the DOR's annual taxation decisions in various administrative forums and in two appeals to the superior court. Along the way the City has changed its arguments and focus somewhat. There have been subtle, but significant changes in the reasoning of the DOR. Thus, the Court will trace the parallel developments in some detail.

         II. Statutory and Regulatory Framework.

         The Alaska Constitution grants the legislature authority to set "[s]tandards for the appraisal of all property assessed by the State or its political subdivisions[.]"3 Alaska Statute 43.56.010-43.56.210 defines taxable property used in oil and gas exploration, production, and the pipeline transportation of oil or gas; establishes a procedure for the assessment of the taxability and valuation of property; and authorizes municipalities to tax property that the DOR deems taxable and for which it sets a value.

Subject to specific exemptions, 4 "taxable property" is defined to be real and tangible personal property used or committed by contract or other agreement for use within this state primarily in the exploration for, production of, or pipeline transportation of gas or unrefined oil (except for property used solely for the retail distribution of liquefaction of natural gas), or in the operation or maintenance of facilities used in the exploration for, production of, or pipeline transportation of gas or unrefined oil[.]5

         The DOR has adopted a regulation that defines property with the requisite "primary use" to be property:

(1) which is dedicated to purposes described in AS 43.56.210(5)(A) by contract, specification, or other expressed intentions of the property owner: or

(2) which is actually used more than 50 percent of its total operational time in the year preceding the assessment year for purposes described in AS 43.56.210(5)(A).6

         Municipalities may levy a tax on the taxable property.7 But it is the DOR that determines whether property is taxable, and, if so, its value.8 The DOR may require property owners to file an annual return describing taxable property.9It may investigate the status of property whether or not included on a return.10 The DOR identifies taxable property and its value in an annual assessment roll.11

         If the DOR learns of taxable property not included in the initial assessment roll for a particular year, then it may issue a supplementary assessment roll.12 The supplementary roll is subject to the same objection procedures that are applicable to the initial roll.13

         A municipality "may object to the assessment"14 and the DOR "may adjust the assessment and the assessment roll."15 If dissatisfied by the DOR's response to its objection, a municipality may appeal to the State Assessment Review Board (SARB).16

         However, the SARB has limited authority. "The only grounds for adjustment of assessed value is proof of unequal, excessive, or improper valuation or valuation not determined in accordance with the standards set out in [AS 43.56], based on facts stated in a written appeal timely filed or proved at the hearing."17 If dissatisfied by the SARB's decision, a municipality may appeal to the superior court and is entitled to a trial de novo.18

         The City contends the SARB may hear its appeal of a taxability decision. The DOR contends the SARB does not have jurisdiction over taxability issues but is restricted to valuation disputes.

         III. Proceedings Below.

         A. 1997 Supplemental Assessment.

         The City objected to the DOR's December 1997 supplemental assessment roll.19 The City alleged that property on the supplemental roll was undervalued, 20 and that taxable property had been left off the roll.21

         The DOR denied the valuation objections and directed the City to appeal to the SARB.22 The DOR denied the taxability objections. It reasoned that some vessels could be used for either or both oil spill prevention and oil spill cleanup either around or away from the Valdez terminal. Vessels not sufficiently related to the terminal were not taxable property.23 Furthermore, the DOR concluded that "[t]o the extent that the City of Valdez is arguing that [certain taxpayers] have other property that should be taxed under the auspices of AS 43.56, this is not the proper forum for an appeal because there is no appropriate provision under the governing statutes and regulations for the relief requested."24The City appealed the valuation and taxability decisions to the SARB.25

         B. 1998 Assessment.

         The City made a similar objection to the DOR concerning the 1998 assessment roll.26 Again it alleged the DOR had undervalued property27 and left property off the roll.28 In response, the DOR increased the value of one vessel nearly tenfold.29 It denied the taxability objection. 30 Despite its 1997 statement that there was no forum for a taxability challenge, the DOR advised the City that if it did "not agree with this determination, " then the City should appeal to the SARB.31 The City did.32

         In May 1998 the City and DOR stipulated to withdraw these two appeals from the SARB.33 They agreed that the SARB "does not have jurisdiction to decide issues of whether property should be designated as taxable property under AS 43.56."34 They stipulated that:

in a future judicial action regarding issues of whether property should be determined taxable property under AS 43.56 for the 1997 Supplemental Assessment Roll or the 1998 Assessment Roll, [neither party] will assert or raise as a defense that the [other party] failed to exhaust administrative remedies by withdrawing their appeals...

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