Am. Bus. Supply v. Tenn. State Bd. of Equalization

• Docket Number: M2022-01411-COA-R3-CV
• Decision Date: 27 October 2023
• Parties: AMERICAN BUSINESS SUPPLY, INC. ET AL v. TENNESSEE STATE BOARD OF EQUALIZATION
• Court: Tennessee Court of Appeals

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AMERICAN BUSINESS SUPPLY, INC. ET AL v. TENNESSEE STATE BOARD OF EQUALIZATION

No. M2022-01411-COA-R3-CV

Court of Appeals of Tennessee, Nashville

October 27, 2023

Session May 16, 2023

Appeal from the Chancery Court for Davidson County No. 20-1098-IV Russell T. Perkins, Chancellor

This case concerns the procedure used by the Tennessee State Board of Equalization when it determined the 2018 appraisal ratio for Shelby County. In 2017, Shelby County real property was reappraised. Accordingly, the Board of Equalization set the County's 2017 appraisal ratio at 1.000. In 2018, the Board of Equalization used the 2017 reappraisal to set the Shelby County 2018 appraisal ratio at 1.000. Appellants-owners of commercial tangible personal property in Shelby County-challenged the Board's methodology as violative of Tennessee Code Annotated sections 67-5-1605 and 67-5-1606 and unsupported by substantial and material evidence. Following review under the Uniform Administrative Procedures Act, the trial court determined that: (1) the Board did not violate Tennessee Code Annotated sections 67-5-1605 and 67-5-1606 when it set the County's appraisal ratio at 1.000 in 2018; (2) the Board's decision was supported by substantial and material evidence and (3) the Board's decision was not arbitrary or capricious. Discerning no error, we affirm.

Tenn R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed and Remanded

Caren B. Nichol, Andrew H. Raines, Andrew M. Raines, William H Raines, David C. Scruggs, Memphis, Tennessee, for the appellants, American Business Supply, Inc., d/b/a American Business Solutions, Inc., Carpet Tech, Inc. d/b/a Artisent Floors, and Continental Awards &Trophies, Inc.

Jonathan Skrmetti, Andree Sophia Blumstein, Joseph R. Longenecker, Nashville, Tennessee, for the appellee, Tennessee State Board of Equalization.

KENNY ARMSTRONG, J., delivered the opinion of the court, in which FRANK G. CLEMENT, JR., P.J, M.S., and J. STEVEN STAFFORD P.J., W.S., joined.

OPINION

KENNY ARMSTRONG, JUDGE

I. FACTS AND PROCEDURAL HISTORY

The gravamen of this lawsuit is whether, under Tennessee Code Annotated sections 67-5-1605 and 67-5-1606, the Tennessee State Board of Equalization (the "Board") erred by setting the 2018 appraisal ratio for Shelby County (the "County") at 1.000 based on the County's 2017 reappraisal. The relevant facts are not disputed.

On April 19, 2018, the Board met to determine county appraisal ratios, i.e.., the ratio of the appraised value to the current market value of real property, for each Tennessee county. The Board based its determinations on the recommendations of the Division of Property Assessments (the "DPA"), which derived the ratios from each county's most recent reappraisal or appraisal-ratio study. In counties where an appraisal-ratio study was conducted in 2018, the ratio was set as determined by the study. A ratio of 1.000 was set for all counties where property was reappraised in 2018. In counties that conducted a reappraisal or appraisal-ratio study in 2017 but not in 2018, the DPA relied on the 2017 results and carried over the 2017 ratio. According to the Board, "[t]his reliance on the most recent reappraisal or appraisal ratio study is a standard operating procedure" and, because real property is not reappraised annually, "[d]ivergence between appraised value and market value of real property is expected[.]" Other classes of property-including commercial and industrial tangible personal property-are reappraised annually.^[1] In conformance with Tennessee Code Annotated section 67-5-1509, the Board uses the real property appraisal ratios to equalize the annually-appraised personal property with the less-frequently appraised real property.^[2] The purpose of this procedure "is to ensure that within each taxing jurisdiction all properties of all types are valued on the same basis." Tenn. Op. Att'y Gen. No. 20-10 (May 20, 2020). As explained by the Board:

For example, if the Board determines that the appraised value of real property in a county is 92% of its current market value, the appraisal ratio will be .9200 and annually-appraised property in that county will be taxed based on only 92% of its appraised value.

The County is on a four-year reappraisal cycle, and a reappraisal was conducted in 2017. Accordingly, the County's appraisal ratio for 2017 was set at 1.000 (or 100 percent). Because the County did not conduct a reappraisal or appraisal-ratio study in 2018, the Board carried over the County's 2017 appraisal ratio of 1.000 to 2018.

In the meantime, the Board received a petition dated April 12, 2018. Acting through legal counsel associated with Evans Petree, P.C. ("Evans Petree"), the "Taxpayers' Petition for Equalization in Shelby County" did not name any specific taxpayers or allege a specific incorrect assessment. However, it asserted that "the presumed 1.000 ratio [was] insufficient to effect the equalization of assessments in Shelby County[]" and requested a .8800 equalization ratio or, in the alternative, a formal sales-ratio study by the DPA. The unnamed petitioners asserted that "[i]n reviewing the tax assessments of Petitioners for tax year 2017, Evans Petree[,] PC found that a significant number of the properties reviewed were undervalued by more than 10%." The petition relied on a study conducted by Chandler Reports, "a real estate information provider based out of [the County]," which determined that the median appraised value of combined commercial and residential property was 88 percent. The petition also relied on a Memphis Daily News article stating that the County expected to have a revenue surplus of $18 million to $25 million at the end of the fiscal year. The article stated that, according to the County's chief administrative officer, the unexpected surplus was "largely the result of fewer appeals of property tax assessments than anticipated following the [2017] reappraisal[.]" The County administrator cited "a 40 percent drop in appeals from prior reappraisal years[.]" After hearing arguments from an attorney with Evans Petree, the assistant director of the DPA, and the DPA state valuation manager, the Board voted unanimously to use the 1.000 appraisal ratio for the County based on the 2017 reappraisal.^[3]

Following the Board's April 2018 decision, Evans Petree compiled a "sales file" based on real property transactions from January 1, 2017, through December 31, 2017.^[4]Based on the file, in June 2018, real estate expert Dr. Mark Sunderman performed an independent sales-ratio study.^[5] Dr. Sunderman concluded that the County's 2018 sales ratio was .9440. In August 2018, Evans Petree filed an action in the Davidson County Chancery Court seeking review of the Board's decision as a "contested case." American Business Supply, Inc., d/b/a American Business Solutions, Inc., Carpet Tech, Inc. d/b/a Artisent Floors, and Continental Awards &Trophies, Inc. (collectively, "Appellants"), entities that own commercial and/or industrial tangible personal property in the County and appealed their tax assessments to the Board, were named as petitioners.^[6] In September 2018, the trial court dismissed the action for lack of subject-matter jurisdiction. Specifically, the trial court held that the action was not a "contested case" under Tennessee Code Annotated sections 4-5-102 or 4-5-322 because the "Taxpayers' Petition" submitted to the Board did not identify any aggrieved party.^[7] In its order, the trial court stated that

to the extent Petitioners were affected by the Board's April 19, 2018 Resolution and Order, they could arguably have filed a Petition with the Board under Tenn. Code Ann. § 4-5-223, requesting a declaratory order regarding the Resolution and Order given that the determination of each county's appraisal ratio may be "within the primary jurisdiction of the agency" under Tenn. Code Ann. § 67-5-1606. (footnotes omitted)

In October 2018, Appellants filed a petition for a declaratory order with the Board. In their petition, Appellants challenged the 1.000 appraisal ratio and requested that the Board declare its April 2018 order to be invalid. Appellants asserted that Dr. Sunderman's study indicated a ratio of .9440, and they attached Dr. Sunderman's study and the April Taxpayers' Petition to their petition. Appellants requested an appraisal ratio "based on evidence" or, in the alternative, that the matter be referred to an administrative law judge ("ALJ"). In November 2018, the Board referred the petition to an ALJ; the ALJ heard the matter in April 2019.

In August 2019, the ALJ entered its order. The ALJ noted that Appellants challenged the 1.000 ratio and asserted that the .9440 ratio determined by Dr. Sunderman should be adopted by the Board. The ALJ found that nothing in the record suggested that Dr. Sunderman's study was flawed and that, "[o]n the contrary, Dr. Sunderman appears to have closely followed the methodology of the [DPA] in preparing his study." The ALJ also noted Dr. Sunderman's testimony that he had never seen a sales-ratio study that found a ratio of exactly 1.000. The ALJ determined that the Board fulfilled its statutory duty at the April 2018 meeting and validly adopted a sales ratio of 1.000. Appellants filed an appeal to the Board. In September 2020, the Board entered its final order, wherein it declined review.

In November 2020, Appellants filed a petition for review in the trial court. In their petition, Appellants asserted that the Board acted without statutory authority when it adopted a 1.000 appraisal ratio for the 2018 tax year based on the 2017 reappraisal, to-wit:

Although the DPA is only required to perform these appraisal ratio studies a minimum of once every two years, Tenn. Code Ann. §

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