Mike Goral, JD, LLM and Desmond Ward, Weaver, Dallas
Amid declining international prices, oil and gas companies in the United States have dramatically reduced production. So many frack pumps, compressors, drilling rigs and other pieces of equipment now sit idle. That equates to lower market demand for equipment, and lower prices for various pieces of equipment.
Those lower equipment prices also mean that an oil and gas company's property is worth substantially less now than it was just a few years ago when higher international prices were spurring increased oil and gas production.
Depending upon the size of the company, differences between past property valuations and actual property value now may range from thousands to millions of dollars: Equipment that may have been valued at $1 million just a few years ago may now be worth just $500,000, based on the latest selling prices for used equipment. Current county property tax assessments, however, may not reflect that downturn in property value.
A failure by a county appraisal district to recognize that decline in property value means a company's property tax assessment could be much higher than what market conditions warrant. The possibility of having to pay more property tax than what is justified by market conditions makes it worthwhile for a company to accurately appraise its current property value and then consider whether or not to protest a property tax assessment.
Appraising current property value
How a company chooses to appraise the value of its property depends upon a variety of factors, including the complexity and scope of its operations, and its ability or willingness to pay for outside appraisal expertise.
There are certified property appraisal specialists within the oil and gas industry. These individuals have years of experience appraising oil and gas company property and have completed various educational and examination requirements that attest to their competence.
A company may also opt to internally assess the current value of its property. Companies maintain lists of assets for operational and tax reporting purposes. Various used equipment dealers also maintain online listings and current asking prices for an array of items used by oil and gas companies.
A listing of company equipment can be compared to the prices posted by used equipment dealers for the same items. That enables a company to determine the approximate current value of its property. With that knowledge, a company has the basis for determining whether or not its property tax assessment reflects market value.
Reviewing a current property tax assessment
For property tax purposes, appraisals and assessments are made by the county where the oil and gas company's equipment is sited. Property tax assessments are then mailed to the company. The rates and formulas used to calculate property taxes vary from county to county, but each property tax assessment includes details for the valuations of various items.
Those details can be compared to the assessment the company made of its property values. In some instances, the county's assessment may be close to a company's own property value assessment. In other instances, the difference in valuations makes protesting a property tax assessment worthwhile.
Protesting a property tax assessment
An oil and gas company has 30 days to file a protest once it has received its property tax assessment, with tax appeal deadlines varying among energy-producing states. Texas, for example, has a May 31 filing deadline, while California has a Nov. 30 deadline for most counties. Appeal deadlines in West Virginia may also vary by jurisdiction. It is important that oil and gas companies research appeal deadlines for the specific states and jurisdictions where property tax is assessed.
Depending upon the particular county, that protest may be submitted online or via mail. Once that protest has been filed, a hearing date is scheduled with a county appraisal review board (ARB), a group of citizens authorized to resolve tax disputes.
In some instances, a dispute may be resolved informally with the county's appraisal district. It is important, however, that a company not neglect to file a protest within the 30-day timeframe in the event a dispute cannot be resolved informally.
At an ARB hearing, an accountant, attorney or other counsel may represent the company. Supporting documentation should be presented to advance a company's claim that its property tax valuation is too high.
Once the hearing is completed, the ARB will send its ruling to the company. If the company disagrees with the ARB ruling, it may consider binding arbitration, a court hearing, or a state hearing.
Potential savings make the effort worthwhile
Amid difficult market conditions, oil and gas companies face the challenge of reducing costs whenever possible. Evaluating current property values requires attention and time, as does filing a protest and stating a company’s case before an ARB. The potential savings in property taxes, though, make such efforts worthwhile.
About the authors
Mike Goral, JD, LLM is partner-in-charge of state and local tax services and Desmond Ward is a manager in the state and local tax practice at Weaver, an independent accounting firm. Goral can be reached at Mike.Goral@Weaver.com and Ward can be reached at Desmond.Ward@Weaver.com.