Rec Solar Grade Silicon, LLC v. McKnight

• Decision Date: 13 October 2020
• Docket Number: No. 52975-1-II,52975-1-II
• Court: Washington Court of Appeals
• Parties: REC SOLAR GRADE SILICON, LLC, Petitioner, v. MELISSA McKNIGHT, Grant County Assessor, Respondent.

REC SOLAR GRADE SILICON, LLC, Petitioner, v. MELISSA McKNIGHT, Grant County Assessor, Respondent.

No. 52975-1-II

COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION II

October 13, 2020

UNPUBLISHED OPINION

SUTTON, A.C.J. — This appeal arises from the property tax valuation of a manufacturing facility owned by REC Solar Grade Silicon, LLC (REC). The superior court remanded the case back to the Board of Tax Appeals (BTA) after its initial decision. The BTA issued a final decision on remand, which the superior court affirmed. REC appeals.

REC argues that the BTA did not follow the court's remand instructions and erred by (1) rejecting REC's appraisal, and (2) classifying REC's machinery & equipment (M&E) as fixtures and not personal property. We hold that (1) the BTA correctly rejected REC's appraisal, and (2) the BTA correctly classified REC's M&E as fixtures. Consequently, we affirm the superior court's order affirming the BTA's final remand decision.

FACTS

I. FACTUAL BACKGROUND

REC's facility located in Moses Lake makes and sells solar-grade polysilicon. REC owns a sister plant in Butte, Montana.

When the Moses Lake facility was first built in 1984, it produced polysilicon using a technology known as the Siemens process. In 2006, REC began constructing a new polysilicon unit based on fluidized-bed reactor (FBR) technology. The FBR unit was more efficient than the Siemens process. However, it yielded a lower percentage of prime-grade material. REC chose to invest in the FBR technology based on a contract with an affiliate, REC Wafer, which promised to pay a high price per kilogram for everything that REC could produce.

Around this time, the polysilicon industry began to experience major distress, with stock prices falling drastically. In mid-2011, REC Wafer narrowed the quality of product it would purchase from REC, and it lowered the price per kilogram that it would pay.

In late summer and early fall of 2011, REC prepared a combined budget for both REC facilities. The budget reflected REC's goals for its prime-grade products for 2012 through 2016. The prices did not reflect REC's actual mixed-grade FBR production. REC's budget projections were intentionally aggressive to drive personnel behaviors and improve performance measures.

By August 2011, however, REC was faced with the following:

• a 90 percent chance of losing the contract with REC Wafer;

• a high probability that external customers would be unable to take all volumes produced by REC Solar;

• a high probability that the average sales prices for prime-grade polysilicon would drop to $30 per kilogram or below;

• a high probability that Chinese protectionism would favor polysilicon producers in China;

• a critical risk of [FBR and new silicone unit] production issues;

• a critical risk of problems related to the financial health of [REC Solar's] customers; and• a critical risk of issues with quality and market acceptance for the FBR products.

Clerk's Papers (CP) at 509 (Finding of Fact (FF) 55).

Soon after REC adopted its budget, polysilicon prices plummeted. Nonetheless, REC was still profitable in 2011, and it was still operating at full capacity as of January 1, 2012. During this time, United States solar panel makers sought tariffs against their Chinese competitors, and rumors began that China planned to respond with its own tariffs.

By January 1, 2012, REC Wafer had renegotiated its contract price, and REC had entered long-term volume agreements with two Chinese companies. As of January 1, REC was working to increase production and focusing on technological development on the FBR process, and no tariffs were imposed by China against REC or its customers.

II. PROCEDURAL BACKGROUND

In January 2012, REC received notice of the Grant County Assessor's¹ assessment for REC's taxable property during the 2011 assessment year. REC petitioned the Grant County Board of Equalization for review before the BTA on direct appeal.

Before the BTA, both parties presented appraisals on the facility. REC's appraisal was done by Kathy Spletter, Robert Clark, Timothy Landolt, and Larry Mott, all from Stancil & Co. McKnight, current Grant County Assessor, offered an appraisal from Carl Klingeman, appraiser for the Washington State Department of Revenue, and Lisa Brewer, Valuation Specialist for theWashington State Department of Revenue, as well as two appraisals from Neil J. Beaton, Managing Director at Alvarez and Marsal Valuation Services.

There are three approaches to determine valuation: the income approach, the cost approach, and the sales comparison approach. The appraisers all agreed the sales comparison approach did not apply. Under the income approach, appraisers value a business based on the estimated future earnings, and then subtract the value of exempt property and property not under appeal. The cost approach represents the cost to reproduce or replace the property minus physical depreciation and obsolescence affecting the facility. The biggest difference among the appraisers' cost approaches is external obsolescence, which is the loss in value due to external circumstances. Here, McKnight's appraisal recognized no external obsolescence, but Stancil's appraisal quantified external obsolescence.

The BTA rejected all of the appraisals and used its discretion to perform its own valuation, claiming that both parties' income approaches had unreliable estimates for the value of REC. The BTA concluded that the external obsolescence applicable to REC on January 1, 2012, was 35 percent, and the total market value of the subject property was $950,000,000; after subtracting the value of the tangible personal property, the resulting market value was $904,065,000. The BTA also concluded that REC's M&E were classified as real property rather than personal property.

REC filed a petition for judicial review in the superior court under the Administrative Procedures Act (APA).² The superior court reversed the BTA, ruling that the BTA erred by:

1. Applying an improper test to determine the admissibility of evidence of events occurring after the assessment date. This is an error under RCW 34.05.570(3)(d).

2. Rejecting the income and cost approaches performed by [REC] appraisal experts because of their limited reliance on the revenue forecast in [REC's] October, 2011, budget. This is an error under RCW 34.05.570(3)(e) because it is based on Findings 53, 70, and 95, which are unsupported by substantial evidence when the evidence in the record is considered as a whole and when Findings 49 and 50, which were unchallenged and are now verities, are considered. It is also an error under RCW 34.05.570(3)(c) because the [BTA] failed to explain the basis for rejecting the [REC's] approaches in light of its Findings 49 and 50 (finding that the [REC's] budgets are intentionally aggressive and that market conditions shifted in late 2011).

3. Failing to follow the procedure as required by RCW 34.05.461(3), which requires the [BTA] to explain how the evidence in the record supports the conclusion that [REC's] machinery and equipment are fixtures. This is an error under RCW 34.05.570(3)(c).

CP at 247-248.

The superior court remanded the case to the BTA with the following instructions:

1. Apply the correct test for admissibility of evidence of events occurring after the assessment date as described in Conclusion 6 (i.e., that evidence about later events may be considered if they confirm trends that a buyer or seller would reasonably consider on the assessment date); explain its application by first describing the evidence known by a buyer or seller as of January 1, 2012, and second, the evidence from after that date whether or not it came before or after July 2012; and consider the evidence in evaluating anew [REC's] appraisal assuming it finds that the events could reasonably have been expected.

2. Identify how market circumstances changed after [REC's] October, 2011, revenue forecast was prepared; then redetermine whether [REC's] appraisal experts were justified in placing only limited weight [10%] on that budget; and, if the [BTA] finds that the taxpayer's revenue forecast should have received more than 10 percent weight, explain how much weight would have been appropriate, particularly in light of Findings 49 and 50, which recognize that market conditions changed by the end of 2011 and that [REC's] revenue forecast was intentionally aggressive to drive personnel and performance; reexamine the income and cost approaches of [REC's] appraisal experts with due consideration in light of this reevaluation of the evidence; use the external obsolescence calculated by [REC's] appraisal experts if the evidence in the record supports it as valid; and reconsider Conclusions of Law 10 through 13 accordingly.

3. Review the record and provide detailed findings explaining the basis for characterizing [REC's] machinery and equipment as real or personal property based on the factors in Conclusion 18.

CP at 248-49. Neither party appealed the remand order.

On remand, the BTA again used its own appraisal, concluding that the total valuable of REC's tangible real and personal property was $820,000,000. After subtracting the tangible personal property value, the BTA determined that the total market value of the real property was $774,000,000. It also concluded, as it did in its initial final decision, that the 18,000 M&E items at issue were real property rather than personal property.

REC again petitioned the superior court for APA review, and the court affirmed the BTA's final decision on remand. REC appeals.

ANALYSIS

I. LEGAL PRINCIPLES

A. TAX VALUATION

Annually as of January 1, the county assessor determines the value of all locally assessed taxable real property in the county. RCW 84.40.020. The assessed value becomes the basis for the taxes that are payable the following year. The market value of the property is the value for tax purposes. RCW 84.40.030(1); see Welch Foods, Inc. v. Benton County, 136 Wn. App. 314, 325-26, 148...