In re Harris Teeter, LLC

• Decision Date: 13 August 2021
• Docket Number: No. 311A20,311A20
• Citation: 378 N.C. 108,861 S.E.2d 720
• Court: North Carolina Supreme Court
• Parties: In the MATTER OF the Appeal of: HARRIS TEETER, LLC from the decision of the Mecklenburg County Board of Equalization and Review

378 N.C. 108

861 S.E.2d 720

In the MATTER OF the Appeal of: HARRIS TEETER, LLC from the decision of the Mecklenburg County Board of Equalization and Review

No. 311A20

Supreme Court of North Carolina.

Filed August 13, 2021

John A. Cocklereece, Justin M. Hardy, Winston-Salem, and Kyle F. Heuser, for appellant-taxpayer Harris Teeter, LLC.

Ruff Bond Cobb Wade & Bethune, LLP, by Ronald L. Gibson and Robert S. Adden, Jr., Charlotte, for appellee Mecklenburg County.

ERVIN, Justice.

¶ 1 This case requires consideration of the extent to which the Court of Appeals erred by holding that an assessment that Mecklenburg County made of the business personal property owned by Harris Teeter, LLC, at six grocery stores reflected the "true value" of that property as required by N.C.G.S. § 105-283, which defines "true value" as the price "at which the property would change hands between a willing and financially able buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of all the uses to which the property is adapted and for which it is capable of being used." After careful consideration of the record in light of the applicable law, we conclude that the Court of Appeals’ decision should be affirmed.

¶ 2 In 2015, Mecklenburg County completed an ad valorem tax assessment of Harris Teeter's business personal property, with the property in question having included shelving, coolers, freezers, point-of-sale systems, computers and computer equipment, forklifts, trash compactors, and other items used in the operation of six of the Harris Teeter grocery stores located in Mecklenburg County.¹ Although the County assessed the value of the business personal property utilized at the six stores at $21,434,313.00, Harris Teeter contended that the "true value" of the property in question was only $13,663,000.00. As a result, Harris Teeter noted an appeal from the County's tax assessment to the North Carolina Property Tax Commission. On 5 March 2019, the Commission, sitting as the State Board of Equalization and Review, conducted a hearing concerning Harris Teeter's appeal.

¶ 3 At the hearing, Kenneth Joyner, a tax assessor employed by Mecklenburg County who had worked on the initial assessment of the value of the relevant property, testified that, in order to generate this initial valuation, the County had identified the appropriate cost indices and depreciation schedules and utilized computer software to apply those indices and schedules to the original cost of Harris Teeter's property. Mr. Joyner testified that, in performing this analysis, the County adhered to North Carolina Department of Revenue schedules and did not include any depreciation-related allowances for obsolescence or consider any other market value-related information. Mr. Joyner acknowledged that the North Carolina Department of Revenue advised that the relevant schedules had "been prepared [ ] as a general guide to be used in the valuation of business personal property" and that there "may be situations where the appraiser will need to make adjustments for additional or less functional or economic obsolescence or for other factors."

¶ 4 Mitchell Rolnick, a machinery and equipment appraiser, testified on behalf of Harris Teeter. Mr. Rolnick stated that he had completed a separate appraisal of the subject property at Harris Teeter's request using market value-based depreciation schedules developed by Landmapp, a private appraisal company, in order to determine the true value of the property in question. The depreciation schedules developed by Landmapp rested upon information concerning sales of used equipment that were primarily made on eBay or other similar e-commerce websites. Mr. Rolnick testified that he took the original cost of the equipment, "index[ed] it to today's dollar," and applied Landmapp's depreciation schedules "to come to the fair market value installed." Mr. Rolnick refrained from including additional depreciation based upon considerations relating to functional or economic obsolescence on the theory that such factors were captured in the prices reflected in the underlying market transactions. Although Mr. Rolnick agreed that the Department of Revenue's schedules would capture physical deterioration, he believed that the marketplace was "the only place you're going to find" functional and economic obsolescence, which explained why Landmapp had used the prices resulting from market transactions in developing its depreciation schedules. Mr. Rolnick acknowledged that, in general, used grocery store equipment either went "to liquidation or [ ] in the dumpster" at the end of its useful life.

¶ 5 According to Mr. Rolnick, in completing his appraisal, he and his colleagues had conducted a physical inventory of the property located at the six stores that were at issue in this case and then searched the Landmapp database, along with information available in other publications and on the internet, for the purpose of identifying sales of comparable property. Mr. Rolnick stated that he did not utilize a "sales comparison" approach given that "significant amounts of adjustments would need to be made" in order to make it viable, but that he used a "market-derived cost approach," in which he compared the price obtained for the property in question in the marketplace to the price of the same piece of equipment when purchased new, given that this approach "took less adjustments to be credible."

¶ 6 James Turner, the president of a business appraisal company, provided rebuttal testimony for the County. After conducting an appraisal of the relevant property, Mr. Turner concluded that the property had a "true value" of $22,100,000.00. In order to reach this result, Mr. Turner went to the relevant grocery stores, photographed the equipment that was located at those facilities, and collected information about the equipment from the store managers. Mr. Turner used depreciation tables developed by Marshall & Swift to account for the physical deterioration of the equipment, indexed the cost of the equipment using the Producer Price Index, and developed values for the equipment using (1) the cost approach; (2) the market, or "comparable sales," approach; and (3) the income approach.

¶ 7 Mr. Turner testified that he had been able to use the market, or "comparable sales," approach to appraise the value of some of the equipment, such as shopping carts and forklifts, given that such items were relatively mobile, self-contained, and occasionally re-sold on an individual basis. Mr. Turner testified that, on the other hand, larger items of equipment, such as refrigerated cases, coolers, and shelving, were "tethered to the rack compressor system" and had to operate using the same refrigerant, resulting in the existence of higher installation costs and fewer incidences of re-sale that served to make the market approach "less reliable" in valuing these items.

¶ 8 In describing his use of the cost approach, Mr. Turner testified that he used Marshall & Swift valuation tables to account for physical deterioration and for functional obsolescence relating to certain computers, point-of-sale systems, and other computing equipment. Mr. Turner used the income approach to determine whether an additional adjustment needed to be made as the result of economic obsolescence and found that "the subject stores return[ed] a rate of return on their assets and on equity that [we]re above industry standards" and that the available information concerning the Harris Teeter stores "reflected a robust return on invested capital." In view of the fact that the return that Harris Teeter earned on the subject property was "above industry norms," Mr. Turner concluded that the "equipment didn't suffer any external obsolescence," i.e. economic obsolescence.² After stating that he had not "consider[ed] [Harris Teeter's] earnings when [he] was valuing the equipment independently," Mr. Turner acknowledged that he "did use [Harris Teeter's] earnings to determine whether or not there was economic obsolescence within the cost approach."

¶ 9 On 12 March 2019, the Commission entered an order in which it requested that both parties provide written answers to several questions, including the extent to which delivery and installation costs "are or are not an appropriate component of true value" and the "degree [to which] obsolescence is reflected in your opinion of value, and the dollar value attributed to any such obsolescence." In responding to the Commission's question regarding delivery and installation costs, Harris Teeter cited to a manual concerning "Personal Property Appraisal and Assessment" that had been published by the North Carolina Department of Revenue in 2007.

¶ 10 On 30 May 2019, the Commission entered a Final Decision affirming the County's initial assessed valuation. The Commission noted that both parties had used the cost approach to generate values for the subject property by determining the "original installed costs for each item of the subject property" and adjusting those costs "to reach an estimate of true value as of January 1, 2015." According to the Commission, the principal explanation for the varying valuation amounts provided by the parties stemmed from differing cost adjustment and depreciation methodologies. In addressing these methodological issues, the Commission found that Mr. Rolnick "had relied upon the sales of used equipment, without making any adjustments," to calculate depreciation, despite the fact that he had "abandoned the sales comparison approach" for the purpose of valuing the relevant property in light of the significant adjustments that would be necessary in order to utilize such an approach. The Commission described Mr. Rolnick's approach as "illogical" given that, on the one hand, he "determine[d] that sales [were] too unreliable to be useful in developing value using the sales comparison approach" while, on the other...