Is Real Assessment Equalization Dead in Tennessee?

July 1st, 2009

Could you get your assessment and taxes reduced if your neighbors’ assessments and taxes are lower?

Ask any taxing authority if you, as an owner and taxpayer, may compare your property’s assessment (per sq. ft. or other basis) to your neighbors’ or business competitors’ assessments in order to receive a similar assessment. The answer would probably be this process is not allowed. These authorities assert that this procedure is an improper basis for protest and appeal.

Sound unfair? It is! After all, we always thought we were supposed to be equal in the taxation of our property. To compare to similar properties and equalize assessments and taxes is a basis that taxpayers can understand and feel is fair.

Nevertheless, in the present system, you cannot use such as a basis for equalization.

Some years ago you could compare assessments to achieve fairness in taxation, and it worked well. In recent times, the State Board of Equalization has held, and enforced in the various counties, that equalization is achieved through application of an “overall sales ratio”.

Unfortunately, Tennessee is not alone in this application. Numerous states do the same, i.e. Florida. On the other hand, others, such as Texas specifically permit practical comparisons of assessments as a basis for appeal.

Now what does overall sales ratio mean and how does it work?

The Division of Property Assessments, under the guidance of the State Board of Equalization, performs sales ratio studies for each of our 95 counties. Simply put, this process is nothing more than comparing the assessor’s appraisals of properties which have sold to the sales prices and developing a percentage. For example, if the assessor’s appraisal is $95,000 and the property sold for $100,000, the sales or appraisal ratio for that property is 95%.

They also mix commercial, industrial, and residential sales all together and calculate an overall ratio. The State performs this function every two (2) years.

Once the ratio for a county is published, the taxpayer is technically stuck with only one way to a reduction; which is, prove that the assessor’s appraisal is above market value. Then, the taxpayer is entitled to the State’s form of equalization consisting of multiplying the proven market value times the overall sales ratio for the taxpayer’s county.

It is easy to see that if the ratio is 100%, and many are, then the taxpayer gets nothing in the way of equalization, only the market value. If the ratio is 95%, then the taxpayer gets a 5% reduction from the market value, but only after having first proved the market value of the property.

What a bad deal for the taxpayer! If the taxpayer cannot prove the taxpayer’s property is appraised at more than market value, even though his neighbors or competitors enjoy lesser assessments and taxes, the taxpayer loses. Practical fairness is no longer a factor.

What is wrong with using only an overall sales ratio method of equalization? Let us review a few things:

The overall part is clearly erroneous. We have classification in our State. Commercial and Industrial properties are assessed at 40% of value, Residential and Farms at 25% of value. There should be separate ratios applied from separate sales studies. There are clearly many more sales of residential properties than commercial and industrial properties. To mix all the sales of all the classes of properties together will produce an erroneous distorted result. That result is usually a higher ratio which favors the local governments over the taxpayers.

The studies are performed only every two (2) years. Several years ago the procedure was changed from every year presumably because as real estate values increase (at least on a historical basis recent economic downturn not considered) each year, the ratio would go down each year and would favor the taxpayer.

The assessors have the right to challenge and eliminate sales from the studies. Each county taxing jurisdiction desires a high ratio, so the pressure is there to eliminate those sales which would lower the ratio. Otherwise, the county could lose revenue through having a lower appraisal ratio applied to values. Please keep in mind that the appraisa ratio is automatically applied to all tangible personal property assesments. Therefore, there is even more pressure on the ratio.

The method for selecting sales to include in the study may be flawed because a review of the State’s sales ratios for 2008 indicate that most fall within 90% to 100%. This is a clear disadvantage to a taxpayer who feels that the taxpayer has been discriminated against in the appraised value.

Use of only the sales ratio method of equalization has relieved the assessors from the burden of explaining why a taxpayer’s neighbors may be assessed on a lower basis.

By eliminating practical comparison equalization, therefore the assessors do not have to justify to anyone any unequal appraisals. This has opened the door for possible political favoritism for some taxpayers over others. Before the market value and appraisal ratio system, the taxpayers were the best watchdogs of the property tax system by exposing any unequal appraisals or assessments to the boards of equalization.

Our firm has developed a proprietary method for introducing as much direct comparable evidence as we can to help equalize our clients’ taxes. We recommend the taxpayer present as much information as any body hearing the tax case will allow. Even though this evidence may not be considered, it could persuade the hearing body to consider more closely your other arguments to value.

In fact, our Counsel advises us there may be a legal basis for overturning overall ratio only equalization.

First, they advise that the State statutes provide that boards are unlike courts and are not restricted to strict rules of evidence. Further, they point out that the Tennessee Constitution requires equality and uniformity of assessment ratios within each class or subclass of property.

Practical equalization is what taxpayers understand and is the only way the general public will be able to use our system effectively. Practical equalization will also ensure that all taxpayers are treated as equally as possible. If not, at least it can be pointed out to the boards of equalization in a form everybody can understand.

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