LOS ANGELES TAX RULED UNCONSTITUTIONAL

Philip Krevitaky, CPA Coopers & Lybrand L.L.P.

In General Motors Corporation vs. City of Los Angeles (42 Cal, Rptr. 2nd 430, June 26, 1995), the California Court of Appeals invalidated the Los Angeles Business License Tax on manufacturers and wholesalers because it impermissibly discriminated against commerce among the cities and counties in California and between the states in violation of both Federal and state constitutional law.

The tax applies to out-of-city manufacturers selling in Los Angeles (the City), while in-city manufacturers selling in the City are not subject to such tax.

The Chevrolet and Pontiac divisions of GM operated an assembly plant in the city's Van Nuys district. The vehicles assembled at this plant were sold and shipped to dealers in both the City and the rest of California. Other GM divisions sold motor vehicles in the City that were manufactured outside of the City. The Chevrolet and Pontiac divisions reported and paid tax on 100% of the gross receipts from the sale of the vehicles manufactured at Van Nuys and sold within California. The other divisions paid taxes measured by the apportioned gross receipts from the sales of motor vehicles within the City.

GM filed refund claims to recover the taxes on account of a) gross receipts from the sale of motor vehicles manufactured in the City and b) gross receipts from the in-city sales of motor vehicles manufactured elsewhere.

The court concluded that this tax interferes with the flow of commerce as discussed in Armco v. Hardesty (467 U.S. 638, 1984) and Tyler Pipe Industries (483 U.S. 232, 1987). It further evaluated the tax under the Complete Auto Transit internal consistency test (see Complete Auto Transit, 430 U.S. 274, 1977) and also found it lacking. The court applied the traditional interstate commerce clause analysis, substituting the cities and counties for the states in its evaluation of the City. When the court applied the assumption that every other California local taxing authority had an identical tax scheme, it found "discriminatory interference with the flow of commerce."

It's likely that the City will appeal the decision; however, a decision from the California Supreme Court isn't expected before early next year.

Since the statute of limitations of refund claims in three years from the date of payment and most businesses file fairly close to the February 28 due date, there appears to be time for most taxpayers to evaluate the filing of a refund claim. Companies can qualify for refunds regardless of where their manufacturing plants are located, as long as the plants are in a different location than their customers. Thus a company manufacturing in the City but selling outside the City will qualify, as will a company manufacturing outside the City but selling within the City. *

THE REAL PROPERTY ASSESSMENT PROCESS

By Robert A. Kande

For far too long, in my opinion, CPAs have taken a back seat when it comes to the real property tax assessment process, failing to capitalize in an area that offers tremendous potential for reducing building expenses as well as building client loyalties.

There's good reason for much of the industry-wide reticence and confusion relating to the accountant's "appropriate" role in New York City's tax assessment process. Too many accountants may have bought into the rhetoric of old-school tax certiorari attorneys, who for years have promoted the notion that challenging real property tax assessments in New York City should and could only be carried out by a member of its "club."

While an interesting and, no doubt, effective marketing approach, it is not supported either by the city or fact. By statute, an owner, or anyone authorized by the owner, can appear before the Tax Commission, or the assessor, to protest or provide information about a real property tax assessment. Indeed, in reality, the most successful tax reduction attorneys are those who collaborate with their clients' accountant throughout the year to develop and implement a strategy to achieve and maintain a fair assessed value over time.

There are two key points here. First, real estate owners are always best served by the collaborative efforts of tax attorneys and accountants working effectively together. Second, given the magnitude of real property taxes and their impact on real estate's bottom line, tax reduction can no longer be treated as a seasonal pursuit. Clearly, it's a year round endeavor.

If you doubt that, consider that, in New York City today, real property taxes can exceed direct operating costs and be the single largest element of operating expenses after debt service. It is the rare owner, therefore, who can afford to relegate attention to the real property tax bill to a brief appearance before the City's Tax Commission each spring. Rather, achieving and maintaining reasonable assessed values is the result of vigilance exercised throughout the year, coupled with the sound tax planning.

One of the keys to making this combined effort successful is accurate information about building operation‹the very information provided to owners by their accountant on a quarterly or semi-annual basis.

In recent years, the City's assessor has relied, almost exclusively, on capitalizing net operating income to set assessed values. Understanding this basic fact has been critical to the success of tax reduction advisors who have counseled their clients to work with the assessor in analyzing the down market of the 1990s. Owners who have followed this path have seen the assessor reduce their assessed values based on actual operations and have not had to go through the seemingly endless, and uncertain, process of going to the Tax Commission and the City's the city Department in an effort to get their day in court and, eventually, realize some relief.

A CPA, particularly one familiar with the particular idiosyncrasies of presenting information for real property tax assessment purposes, has the opportunity today to assume a far greater role than ever before in helping a tax burdened client keep assessed values in line with current market values.

First, the CPA can aggressively and creatively quantify his client's problems and develop the supporting data that can help establish a property's true value for assessment purposes. These functions include verifying data submitted to the assessor; identifying and quantifying physical, functional, and economic obsolescence; separating the value of real, personal, and intangible property to avoid double taxation; and finally, identifying existing inequities among taxpayers.

Second, the CPA can develop and implement, with a clients' in-house staff, record keeping systems that will generate first class documents that are accurate, reliable, and readily available for use when needed in the tax reduction process.

Third, the CPA can include a review of a client's real property tax situation as part of the annual management report on company operations.

Fourth, and most important, because of familiarity with actual building operations, the accountant can be the conduit for bringing together the client and an expert tax reduction attorney to develop the strategic approach needed to effectively represent real estate owners today in property tax proceedings before the assessor, the Tax Commission, or the court.

By taking the initiative and moving in both of these directions, the accountant can and will take his rightful place in the real property assessment process--in the front seat along side a key teammate, the tax reduction attorney. *

Robert A. Kande, JD, a former Commissioner of New York City's Office for Economic Development, is of counsel to Kaye, Scholer, Fierman, Hayes & Handler, where he heads the firm's real estate tax reduction practice.

State and Local Editor
Kenneth T. Zemsky, CPA
Ernst & Young LLP

Interstate Editor
Marshall L. Fineman, CPA
David Berdon & Co. LLP

Contributing Editors
Henry Goldwasser, CPA
M.R. Weiser & Co. LLP

Leonard DiMeglio, CPA
Coopers & Lybrand L.L.P.

Steven M. Kaplan, CPA
Konigsberg Wolf & Co. , P.C.