I. The Constitutional and Statutory Basis.
Property taxes, generally referred to as ad valorem taxes, are the oldest source of revenue used by the State of Georgia and its political subdivisions. The origins of ad valorem taxation can be traced at least as far back as Medieval England with the imposition of feudal fees or levies as a condition on the privilege of continued use or enjoyment of an owner's land (fee). Indeed, the very term used in Georgia to describe such taxes harks back to this origin. The utilization of the Latin phrase "ad valorem" to describe this kind of tax refers to a tax based "upon the value" of the interest held by the taxpayer.
Whether the interest in the property is real or personal is not dispositive -- rather it is the value of the interest which triggers the liability for the tax. See for example Wells v. Mayor of Savannah, 87 Ga. App. 397, 13 S.E. 442 (1897) [Land purchased from the city on condition of a perpetual ground rent or, alternatively, upon payment of the stated purchase price was currently taxable to the tenant/"owner" even though rents were reserved payable to the City and such rents might affect the tax by reducing the value of the property.] Property taxes have been, and continue to be, a mainstay of the economic viability of local governments.
A. Constitutional Authority.
The constitutional authority to tax property is founded in the Georgia Constitution Art. VII, §1, ¶3. This section provides that all such taxes must be levied and collected under general laws and for public purpose only and must be uniform within the same class within the applicable jurisdiction.
"All taxes shall be levied and collected under general laws and for public purposes only. Except as otherwise provided in subparagraphs (c), (d), and (e), all taxation shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax. . . ."
B. Scope of Tax.
In general, all tangible property (both real and personal) is subject to tax unless it is exempted. Thus, O.C.G.A. §48-5-3 provides
"All real property including, but not limited to, leaseholds, interests less than fee, and all personal property shall be liable to taxation and shall be taxed, except as otherwise provided by law. Liability of property for taxation shall not be affected by the individual or corporate character of the property owner or by the resident or nonresident status of the property owner."
This general rule is unaffected by character of the property owner or the resident or non-resident status of an owner. Thus, for example, an attorney's law library is taxable. Clayton County Board of Tax Assessors v. King, 260 Ga. 495, 397 S.E.2d 293 (1990)
C. Requirement of Uniformity.
As Chief Justice Marshall remarked so long ago, "That the power to tax involves the power to destroy . . . [is a] proposition not be denied". McCullouch v. Maryland, 17 U.S. 316 (1819). Because of the intensely local, and often highly political, nature of property taxes, the constitutional requirement of uniformity of taxation is of great importance to protect against wanton exercise of that power. This uniformity requirement is the vehicle that protects the property owner from arbitrarily being singled out. The theory, of course, is that the political process will protect the taxpayer/property owner from arbitrary and discriminatory taxes. T.W. Colvard v. Ridley, 218 Ga. 490, 128 S.E.2d 732 (1962); Lott Investment Corp. v. City of Waycross, 218 Ga. 805, 130 S.E.2d 741 (1963). The constitutional requirement of uniformity is so compelling that it even outweighs the statutory mandate of taxation at fair market value. McLennon v. Undercofler, 222 Ga. 302, 149 S.E.2d 705 (1966).
To ensure administratively that equalization of valuation of property on taxation is maintained, it is monitored now by requirements of uniformity of assessment. These are now enforced by O.C.G.A. §48-5-341 et seq. These sections require the Revenue Commissioner to review and approve (or reject) tax digests as prepared by the local taxing authorities. If defective, the Commissioner is obligated to withhold substantial grants from the local government as well as to impose penalties under O.C.G.A. §48-5-346.
In the presentations today, you will see several times how ad valorem taxation is an unusual tax in part because of its unusual administrative structure. Although the laws creating the tax and specifying the operative rules are state laws, the determination of the rate of taxation (the millage rate) and administration of the tax is a matter of local administration and local budgets.
II. Federal Constitutional Limitations.
A. Interstate Commerce.
The taxation of property by Georgia and the other states is subject to federal constitutional limitations on the ability of the states to impose such taxes. These limitations are perhaps most telling in the context of limitations imposed by the Federal Commerce Clause on taxation of movable property. The leading case in this area, Complete Auto Transit, Inc. v. Grady, 430 U.S. 274 (1977) although a sales tax case, indicates that the states have considerable latitude as to nondiscriminatory application of ad valorem taxation to property used in interstate commerce. The concept that movable property used in interstate commerce can be subject to ad valorem taxation and can be taxed in the state where regularly and habitually employed has long been recognized. Union Tank Line Co. v. Wright, 249 U.S. 275 (1919).
Under the Georgia Code, railroad equipment owned by a railroad company and aircraft equipment owned by an airline company are taxed on a special basis. The ad valorem tax on railroad equipment is prorated based on car-wheel mileage. O.C.G.A. § 48-5-519. Airplanes are similarly taxed on a ratio of "plane hours" within and without Georgia. O.C.G.A. §§ 48-5-540 through 48-5-546.
Apparently some form of apportionment is constitutionally mandated for property used in interstate commerce. East West Express, Inc. v. Collins, 264 Ga. 774, 449 S.E.2d 599. Thus, ad valorem taxes on motor vehicles used in interstate commerce may be apportioned by demonstrating to the local taxing authority that the vehicles have acquired tax situs in other states. Although not specifically authorized by statute, apportionment is not prohibited. Therefore, lack of apportionment under statutes regarding ad valorem taxation of motor vehicles and mobile homes does not make these statutes unconstitutional. O.C.G.A. §§ 48-5-442 through 48-5-445, § 48-5-471.
B. Foreign Commerce.
Similarly, the Foreign Commerce Clause also imposes some limitations on the authority of the states to tax property in foreign commerce. Generally, the issue is whether the goods in question are still in the chain of international commerce. Thus, for instance, in Michelin Tire Corporation v. Wages, Tax Commissioner, et al., 423 U.S. 276 (1976), the Supreme Court upheld Georgia's imposition of a nondiscriminatory property tax on imported goods, so long as these were no longer "in transit".
By statute, Georgia has provided for some liberality in this regard, at least with respect to foreign property imported through a Georgia port. Thus, O.C.G.A. §48-5-5 provides
"Foreign merchandise in transit shall acquire no situs so as to become subject to ad valorem taxation by political subdivisions of this state in which the port of original entry or the port of export of such merchandise is located. Such property shall not acquire situs by virtue of the fact that while in the warehouse the property is assembled, bound, joined, processed, disassembled, divided, cut, broken in bulk, relabeled, or repackaged. The grant of "no situs" status shall be liberally construed to effect the purposes of this Code section."
The liberality of this rule should not be overestimated however. See e.g. Seaboard Corp. v. Chatham County Board of Equalization, 195 Ga. App. 730, 394 S.E. 2d 796 (1990) [Imported stone tile and slabs which were stored at the taxpayer's convenience for sale to anyone who might wish to purchase them are not in transit to a final destination within the contemplation of this section so as to meet the definition of foreign merchandise in transit]; Los Angeles Tile Company v. Chatham County Board of Tax Assessors, 209 Ga. App. 245, 433 S.E.2d 82 (1993) [Ceramic tile imported from Japan stored in a warehouse in Chatham County which has no specific identified destination is taxable]; Pier 1 Imports v. Chatham Board of Tax Assessors 199 Ga. App. 294, 404 S.E.2d 637 (1991) [Property imported through Charleston, South Carolina but transported to Savannah and stored there, did not qualify for the exemption because the Port of Charleston was not within the State of Georgia]. See also "Freeport Exemption from Property Taxes for Inventory Stored in Georgia But Destined for Shipment Out-of-State", 28 Ga. St. B.J. 108 (1991).
C. Equal Protection and Due Process.
Finally, the equal protection clause of the Fourteenth Amendment to the United States Constitution requires that similar taxpayers be treated similarly. However, as the recent case of Nordlinger v. Hahn, U.S. , 113 S.Ct. 2326 (1992) sustaining California's Proposition 13 "welcome stranger" provision indicates, the states have considerable freedom to draw the lines in the ad valorem area without infringing upon these limitations.
As discussed above, the Legislature is authorized to provide for the assessment and taxation of various classes of property. Currently these consist of the following:
- Trailers (Georgia Constitution, Art. 7 §1 ¶3(b)(2)(A));
- Mobile homes, other than mobile homes which qualify for homestead exemption for ad valorem taxation (Georgia Constitution, Art. 7 §1 ¶3(b)(2)(B));
- Heavy duty equipment owned by non-residents (Georgia Constitution Art. 7 §1 ¶3(b)(2)(C));
- tangible real property, but not more than 2,000 acres for a single property owner, which is devoted to bona fide agricultural purposes; (Georgia Constitution, Art. 7 §1 ¶3(c));
- public utilities; (Georgia Constitution, Art. 7 §1 ¶3(f))
- tangible real property which is listed on the national registry of historical places or a state historic register; (Georgia Constitution, Art. 7 §1 ¶3(d)); and
- "bona fide conservation use" and "bona fide residential transitional property" according to a formula based on current use, annual activity and real property sales data to encourage the preservation, conservation or protection of such property. (Georgia Constitution, Art. 7 §1 ¶3(e)). Conservation use of property for these purposes includes agricultural and timber land that does not exceed 2,000 acres per single owner. Residential transitional property includes private single family residential owner occupied property located in transitional development areas not to exceed 5 acres of any single owner.
Although uniformity is mandated as among the respective classifications, within the classifications, assessments and valuation methodologies may vary. Generally, under O.C.G.A. §48-5-7 the assessment is imposed at a rate of 40% of the fair market value according to the property's fair market value. O.C.G.A. §48-5-7(a). However, as we shall see, "fair market value" does not have the same meaning for all classes of property.
Equally important, the assessment base for the various classes of property varies. Thus, for instance, agricultural property within the meaning of §48-5-7(b) is assessed for ad valorem property tax purposes at 75% of the value which other tangible real property is assessed.
As to historic property under O.C.G.A. §48-5-7(c) and (c)(i), the definition of fair market value is a modified definition, discussed below, which appears in O.C.G.A. §48-5-2. Finally, under §48-5-7(c.2) and (c.3) relating to bona fide conservation use and bona fide residential use transitional property, the valuation is tied to current use value, rather than the property's fair market value. The current use value definition is contained at O.C.G.A. §48-5-2(1) and (2).
IV. Fair Market Value.
As noted at the outset of this outline, the term ad valorem taxation derives from the concept of taxation based on fair market value. However, matters of taxation are seldom as simple as they seem. Ad valorem taxation is no exception.
For starters, the concept of "fair market value" which is contained in §48-5-2(3) contains some inherent internal contradictions. The definition is of such significance as to merit recapitulation here.
- "(3) 'Fair market value of property' means the amount a knowledgeable buyer would pay for the property and a willing seller would accept for the property at an arm's length, bona fide sale. With respect to the valuation of equipment, machinery, and fixtures when no ready market exists for the sale of the equipment, machinery, and fixtures, fair market value may be determined by resorting to any reasonable, relevant, and useful information available including, but not limited to, the original cost of the property, any depreciation or obsolescence, and any increase in value by reason of inflation. Each tax assessor shall have access to any public records of the taxpayer for the purpose of discovering such information.
- (A) In determining the fair market value of a going business where its continued operation is reasonably anticipated, the tax assessor may value the equipment, machinery, and fixtures which are the property of the business as a whole where appropriate to reflect the accurate fair market value.
- (B) The tax assessor shall consider the following criteria in determining the fair market value of real property:
- (i) Existing zoning of property;
- (ii) Existing use of property, including any restrictions or limitations on the use of property resulting from state or federal law or rules or regulations adopted pursuant to the authority of state or federal law;
- (iii) Existing covenants or restrictions in deed dedicating the property to a particular use; and
- (iv) Any other factors deemed pertinent in arriving at fair market value."
The inherent schizophrenia is important. The opening paragraph clearly states the classic formulation of the concept of fair market value -- i.e. the concept of what a willing buyer would pay and a willing seller would sell in an arms length bona fide sale. However, subparagraph 3(B)(ii) contains a concept which is at odds with the classic definition of fair market value as it appears to contradict the notion of highest and best use. Indeed, the role of "highest and best use" is clearly limited for ad valorem tax purposes in Georgia. See Dotson v. Henry County Board of Tax Assessors, 155 Ga. App. 557, 271 S.E.2d 691 (1980). Finally, the statute specifically contemplates the utilization of original cost valuation with an allowance for depreciation or obsolescence as well as inflation as a permissible methodology for tangible personal property.
V. Special Problems in Ad Valorem Taxation.
A. Taxation of Usufructs and other Interests in Real Property.
Georgia is unique among the American common law jurisdictions in that it recognizes an estate or interest with respect to the utilization of land referred to as a usufruct. A usufruct is a mere license to use or enjoy the use of property without conveyance of an interest in the land. It is to be distinguished from a leasehold estate or an estate for years which is an interest in land. In the world of legal niceties and distinctions, a usufruct is a mere right to use property, not an interest in that property. O.C.G.A. §44-7-1.
Over the years there has been repeated and extensive litigation, largely growing out of the utilization of various facilities at Hartsfield International Airport, in which the airlines have, generally successfully, contended that contractual arrangements for 30, 35 and 40 years under various lease agreements to do not give rise to leasehold estate but, instead, to a mere usufruct. Under these circumstances, the airlines' interests in the subject estate cannot be taxed as it does not rise to a level of taxable "property". This is true even though the value of such concessions may in fact be quite significant. Not surprisingly, the revenue authorities, generally in Clayton County, have been quick to challenge every "lease" negotiated by one of the major airlines as giving rise to a taxable leasehold estate instead of a usufruct interest. For examples, see Camp v. Delta Airlines, Inc. 232 Ga. 37, 205 S.E.2d 194 (1974); Clayton County Board of Tax Assessors v. City of Atlanta 164 Ga. App. 864, 298 S.E.2d 544 (1982).
The issue of usufruct versus estate for years can also arise as to purely private litigants. Here, however, the issue is not only whether the tenant's interest is separately taxable as a leasehold estate, but rather whether the landlord's retained interest as landlord is taxable. Again, the courts generally find what most of us think to be "leases" to create non-taxable "usufructs". See e.g. Searcy v. Peach County Board of Tax Assessors, 180 Ga. App. 531, 349 S.E. 2d 515 (1986). Similarly, an instrument which uses the terminology of "lease" may be subject to characterization as a non-taxable security interest. United States v. DeKalb County, 729 F.2d 738 (11th Cir. 1984).
On the other hand, in the case of a life estate, the life tenant is liable for the taxes on the property. O.C.G.A. § 48-5-9.
B. Taxation of Computer Software.
As the American economy has continued to evolve from an economy principally devoted to manufacturing to today's service economy, issues have emerged that were not anticipated by the drafters of the existing ad valorem tax regime. Specifically, an issue of continuing interest and concern for the high tech industry in Georgia has been the taxation of computer software for ad valorem tax purposes.
Administratively, certain Georgia taxpayers have been assessed with respect to the book value of the capitalized costs of their software. Certain assessors in certain counties took the position that capitalized software is tangible personal property and is therefore subject to tax under the personal property assessment procedures to be discussed today.
Whether software was taxable as "tangible personal property" for ad valorem tax purposes was highly debatable. Historically for instance, the Revenue Department itself has drawn a distinction between a so-called "custom" or "canned or prewritten software" for purposes of whether such assets constitute tangible personal property for sales tax purposes. The Revenue Department's current position is that "canned" or "prewritten" software is taxable for sales tax purposes, but that "custom" software is not. What is "custom" as opposed to "canned" is less than clear.
More generally, there was a fundamental question as to why software would not be properly categorized as an intangible. Specifically, pursuant to O.C.G.A. §48-6-21(9) even as it existed prior to amendment described below, intangible personal property included a category of property including "patents, copyrights, franchises, and all other classes and kinds of intangible personal property not otherwise enumerated." There was no Georgia case law or interpretation with respect to whether the concept of intangible property should include software. It did not take a vast extension of existing case law to argue that the physical embodiment of software in a tangible form, such as in a diskette, should make the underlying software no more taxable as tangible personal property than embodiment of the words of Gone With the Wind in the covers of the book or in the form of a videotape makes the copyright of Gone With the Wind taxable as tangible personal property. Cf. Turner Communications Corporation v. Chilivis, 239 Ga. 91, 236 S.E.2d. 251 (1971). [Videotapes are tangible personal property for sales tax purposes even though they consist of a least three different components: tangible medium, intangible contents, and limited right to use the encoded program.]
The Revenue Department had indicated, at least informally, that custom computer software should constitute intangibles and not be subject to the ad valorem regime. However, the Revenue Department also had indicated that the county administrative offices were free to examine the issue and would not preclude their efforts to assess taxpayers.
Some commentators had urged that the line could be drawn between software inventoried physically in diskettes for sale, which would be subject to taxation based upon the rules applicable to inventory, versus the intangible residual inherent in the software as intellectual property. See Beaudrot, "Current Issues in State Taxation of Computer Software -- The Georgia Experience" The Atlanta Lawyer, Volume 40, No. 1 (1993).
The high tech industry in Georgia made a top priority for the 1993 legislative session an effort to obtain relief in this area. In this, the industry was most fortunate to enlist the support of Governor Miller. The result, H.B. 350, which is codified in O.C.G.A. §48-1-8 and amendments to O.C.G.A. §48-6-21 represents an interesting grafting of several concepts. First, computer software is defined in O.C.G.A. §48-1-8(a) for the first time.
- (a) As used in this Code section, the term "computer software" means any program or routine, or any set of one or more programs or routines, which are used or intended for use to cause one or more computers or pieces of computer related peripheral equipment, or any combination thereof, to perform a task or set of tasks. Without limiting the generality of the foregoing, the term "computer software" shall include operating and application programs and all related documentation.
Second, computer software is defined to constitute personal property for ad valorem and intangible tax purposes only to the extent of the medium which stored.
- Except as otherwise provided in subsection (c) of this Code section, for the purposes of Chapters 5 and 6 of this title, computer software shall constitute personal property only to the extent of the value of the unmounted or uninstalled medium on or in which it is stored or transmitted.
Finally, amendments to O.C.G.A. §48-6-21 classify computer software as an intangible, thus removing it from the domain of the county tax assessors.
The net result is that software is valued only to the extent of the medium and is taxed as an intangible. This "double whammy" means that in most cases, little or no tax will ever be due with respect to software.
One of the most interesting aspects of O.C.G.A. §48-1-8(c) is the "inventory" exception to this rule.
- (c) Nothing herein shall be deemed to affect the taxation under Chapter 5 or Chapter 8 of this title of copies of computer software held as inventory in a tangible medium ready for sale at retail by one who is a dealer with respect to such property and the sale of which is subject to sales and use taxation.
Thus, such inventory is subject to normal rules. This section also has interesting implications, particularly in the context of the Georgia Sales and Use Tax.
C. Taxation of Personal Property.
Taxation of tangible personal property raises its own host of issues. Some of the most difficult arise from issues involving the multi-county assessment procedure and the correlative requirement that all property be assigned a situs for purposes of assessment of ad valorem tax.
As a general rule, real property is taxed and returned to the tax commissioner or tax receiver in the county where the property is located. Personal property, however, is taxed under a rather more complex regime.
Initially, bear in mind that under O.C.G.A. §48-5-42
"All personal clothing and effects, household furniture, furnishings, equipment, appliances, and other personal property used within the home, if not held for sale, rental, or other commercial use, shall be exempt from all ad valorem taxation. All tools and implements of trade of manual laborers and all domestic animals shall be exempted from all ad valorem taxation in an amount not to exceed $300.00 in actual value for each of the two categories."
Thus, personal household effects are exempt from ad valorem taxation.
If the owner is a Georgia resident individual, the personal property is taxed in the county where the owner maintains his personal domicile. It is for this reason that one's automobile is properly subject to taxation in Fulton County, not in Glynn County, where one has one's vacation home, even if the vehicle is maintained year round at Sea Island. O.C.G.A. §48-5-444. Vehicles of non-residents on the other hand are taxable where situated. Id.
Effective July 1, 1993 this result changed for boats. These are now assessed and taxable where "functionally located," i.e., docked. O.C.G.A. §48-5-16(d). And effective January 1, 1995 aircraft are taxed where the aircraft has its "primary home base" unless it has none, in which case situs follows the owner's permanent legal residence. Mobile homes, not surprisingly, are also taxed in the county where located, unless associated with a regular business enterprise. O.C.G.A. §48-5-444.
Under O.C.G.A. §48-5-12 personal property of non-residents of Georgia is taxed where the property is located.
"Unless otherwise provided by law, all real and personal property of nonresidents shall be returned for taxation to the tax commissioner or tax receiver of the county where the property is located."
Finally, under O.C.G.A. §48-5-16 business tangible personal property is taxed in the county where the business is located.
Return of tangible personal property in county where business conducted.
(a) Any person who conducts a business enterprise upon real property, which is not taxable in the county in which the person resides or in which the person's office is located, shall return for taxation the tangible personal property of the business enterprise to the tax commissioner or tax receiver of the county in which is taxable the real property upon which the business enterprise is located or conducted.
(b) When the agent in this state of any person who is a resident of another state has on hand and for sale, storage, or otherwise merchandise or other tangible property, he shall return the property for taxation as provided in Code Section 48-5-12. . . ."
A special set of rules applies to public utilities and certain other companies which is outside the scope of today's discussion.
The kinds of problems that this regime can present are well illustrated by the case of Collins v. Mills 198 Ga. 18, 30 S.E.2d 866 (1944). In that case, lumber had been cut, sold and stocked in various counties using portable saw mills. The lumber was held assessable to the owner of the lumber in the county of the owner's residence, not the county in which the lumber was physically located. In order to achieve the result of taxability in the county in which located, the court indicated that the property would have had to have acquired a situs for taxation in that other county by being connected with a business enterprise that was situated more or less permanently in such county. Merely transitory or temporary locations do not generate such situs. Contrast Macon Coca-Cola Bottling Company v. Evans, 214 Ga. 1, 102 S.E. 2d 547 (1958) where the several coke vending machines were held taxable in each separate county. See also Cornett Bridge, Inc. v. Hall County (Ga. Ct. of App. Feb. 23, 1995, Case No. A94A2231) [Headquarters of construction company located in Hall County, but construction equipment stored in Banks County. The court concluded that Banks County was a separate place of business for these purposes, but remanded for trial as to whether the equipment was connected with headquarters in Hall County or the construction yard in Banks County.]
The fact that the tax liability arises on January 1 of each year also raises some pragmatic issues from a liability point of view. On a pragmatic side, the property which is in transit on the first of the year is not taxable until it comes to rest in Georgia. Thus, no matter how many vehicles and new mobile homes are in transit but not actually delivered and taken into inventory on the first work day of each year, these are not taxable. See O.C.G.A. §§48-5-472 and 48-5-491. A different rule applies by virtue of O.C.G.A. §48-5-500 and §48-5-501 to certain heavy duty equipment used for construction owned by non-residents brought into this state after January 1 from states which tax equipment brought into such states by non-residents after January 1. Such taxes are prorated based upon the number of months remaining in the year.
D. Successor Liability.
The nature of the liability for ad valorem taxes is also significant. Although we generally think of the property taxes as being in rem, i.e. as a tax on the property, in fact the owner of the property is personally liable for the taxes. O.C.G.A. §48-5-9. It is the remedy, however, of sale of the property by tax execution which is so frequently used that causes taxpayers often to lose sight of the personal liability issue.
Equally important, because the assessment matures on January 1 of each year, the resulting liability follows the property into the hands of the successor in interest, even with respect to the prior mortgage interest. See for example Teachers Retirement System of Georgia et al. v. City of Atlanta, Georgia et al. 241 Ga. 196, 288 S.E. 2d 200 (1982) in which the court held that even though the Retirement System was administered by a public corporation, it was held liable for ad valorem taxes assessed on January 1 of 1975 when the corporation acquired the property by foreclosure on April 8, 1975. The taxes attached to the property on January 1 and the public corporation acquired such property subject to such liability.
In summary, the ad valorem tax regime, though an old and settled body of law, continues to evolve and change as it confronts issues not foreseen by its creators. During the remainder of today's session, we will see in more detail current issues of interest as well as reviewing in detail the major procedures for taxpayers to protect their interests.