In re Harris Teeter, LLC

271 N.C.App. 589

845 S.E.2d 131

In the MATTER OF the APPEAL OF: HARRIS TEETER, LLC, Appellant,

From the decision of the Mecklenburg County Board of Equalization and Review.

No. COA 19-927

Court of Appeals of North Carolina.

Filed: June 2, 2020

Bell, Davis & Pitt, P.A., by John Cocklereece, Winston-Salem, Justin Hardy, Winston-Salem, and Kyle F. Heuser, for Appellant Taxpayer.

Ruff Bond Cobb Wade & Bethune, LLP, by Ronald L. Gibson and Robert S. Adden, Jr., Charlotte, for Appellee Mecklenburg County.

ARROWOOD, Judge.

Harris Teeter, LLC ("taxpayer") and Mecklenburg County ("the County") both appeal from the Final Decision of the North Carolina Property Tax Commission ("the Commission") upholding the County's 2015 ad valorem property tax valuation of taxpayer's personal property. For the following reasons, we affirm.

I. Background

This case arises from the County's 2015 ad valorem tax assessment of taxpayer's business personal property, namely, the equipment in its grocery stores within the county ("the property" or "the equipment"). In disagreement with the County's assessment, taxpayer filed several Notices of Appeal and Applications for Hearing to the North Carolina Property Tax Commission. On 6 February 2019, the County moved to dismiss taxpayer's appeal on the grounds that the signatory of taxpayer's notices of appeal was not a proper person to represent it before the Commission. The Commission denied the County's motion and heard the appeal on its merits at a hearing on 5 March 2019.

On appeal to the Commission, taxpayer and the County stipulated that they would present evidence regarding the equipment at six of taxpayer's stores in Mecklenburg County that were exemplary of various store models used by taxpayer, and the resulting valuations would be extrapolated to the rest of taxpayer's stores within the county.

Taxpayer's evidence before the Commission included the following. Mecklenburg County Assessor Kenneth Joyner, Jr., testified regarding the process by which he reached his valuation of the property. He testified that, using the replacement cost approach to determining true value, the County assessed taxpayer's property in these six locations at $21,434,313.00. Considering the value of each item of equipment as part of taxpayer's operations as a going concern, he took the original cost of the equipment as reported by taxpayer and went "into the cost index and [North Carolina Department of Revenue] depreciation schedules and identif[ied] the proper categories to apply" to the property and "us[ed] the values that come out of the original cost and ... appl[ied] those to the trending schedules within the software to arrive at value." He testified that he did not deviate from the values reached by application of the depreciation schedules by making any additional adjustments for other considerations. In relevant part, the Department of Revenue depreciation schedules noted that they "have been prepared ... as a general guide to be used in the valuation of business personal property utilizing the replacement cost approach to value." They also noted that they "are only a guide" and "[t]here may be situations where the appraiser will need to make adjustments for additional or less functional or economic obsolescence or for other factors.

Taxpayer then presented the expert testimony of its own appraiser, Mitchell Rolnick ("Mr. Rolnick"). Mr. Rolnick conducted his own assessment using the replacement cost approach and appraised the property at $13,663,000.00. He testified that he applied his firm's preferred depreciation schedules to the original cost of each item of equipment and then adjusted the output values from the schedules based upon actual data he derived from market sales of comparable used equipment.

According to Mr. Rolnick, these market sales tended to show that used grocery store equipment equivalent in age and specifications to taxpayer's property sold for prices drastically below the County's appraised values. He testified that these low market prices for used grocery store equipment necessitated downward adjustment of any values produced by depreciation schedules to reflect additional economic and functional obsolescence not captured by the schedules used by the County. He testified that these further adjustments resulted in appraisal values more in line with true value.

James Turner ("Mr. Turner") testified for the County regarding why such additional depreciation adjustments were inappropriate considerations in an application of the cost approach to taxpayer's property. He noted that, during 2015, the grocery industry was in a period of consolidation marked by increased store closures. These store closures caused a glut in the supply of used grocery store equipment that drove prices down, as grocers prefer to throw away their equipment or sell it in individual units on the open market rather than sell their fully installed and operative equipment to a competitor as a going concern. He further noted that taxpayer and other grocers in the industry only bought new equipment and did not deal in the used market.

Mr. Turner stated that transactions in the used market were thus more akin to forced sales reflecting liquidation values, rather than the true value of the equipment as fully functioning and installed into an integrated and operational grocery store. He therefore opined that adjusting depreciation to reflect the low prices fetched by individual units of grocery store equipment in the used market would not produce true value, because used market transactions were not from a "willing seller" as mandated by N.C. Gen. Stat. § 105-283 (2019).

Mr. Turner testified that adjustment for depreciation additional to the rates incorporated into the depreciation schedules was inappropriate for the property. He noted that for most of taxpayer's equipment, he observed no economic or functional obsolescence that would necessitate any additional downward adjustment in value. However, he noted that he did adjust downward for certain classes of equipment quickly rendered obsolete by rapid technological advancements, such as electronic scanning equipment and computers. Furthermore, he accelerated depreciation on certain classes of equipment that taxpayer indicated it replaced on a more frequent basis than the timelines listed in the depreciation tables. Mr. Turner's independent appraisal methodology valued the property at $22,100,00.00.

Mr. Turner also questioned the validity of Mr. Rolnick's appraisal methodology on additional grounds. For example, he questioned Mr. Rolnick's failure to incorporate delivery and installation costs into observed market sales, which he said would overstate the depreciation of an item of equipment when compared against its original cost, which included such costs.

On 30 May 2019, the Commission rendered its Final Decision upholding the County's assessment of taxpayer's property. In its Final Decision, the Commission determined that taxpayer met its burden of producing evidence sufficient to shift the burden to the County to prove that its assessment reflected true value. The Commission concluded that the County met its burden, based on the following findings of fact.

The Commission found no evidence of functional obsolescence affecting taxpayer's property, with some exceptions accounted for in Mr. Turner's appraisal. The Commission found that the equipment in taxpayer's stores does not become functionally obsolescent due to periodic renovations of each store. The Commission also "f[ou]nd no evidence in the record to suggest that the equipment in question (collectively) is failing to perform adequately the job for which it was intended due to design or economic factors."

Furthermore, the Commission found that economic obsolescence did not affect the property. The Commission found that both appraisal experts utilized the cost approach to appraise taxpayer's property because the sales comparison approach would not be viable without significant adjustment. Yet, Mr. Rolnick's methodology relied upon sales of used equipment without any adjustments to develop his schedules for calculating the level of depreciation applicable to the equipment. The Commission found it "illogical to determine that sales are too unreliable to be useful in developing value using the sales comparison approach, but then to use the same or similar sales, directly and without adjustment, under the cost approach to determine the appropriate level of depreciation to apply to original installed cost in order to arrive at current, true value."

The Commission also found that the market prices for used grocery store equipment in the secondary market were an inappropriate consideration for economic obsolescence, based on the following finding:

[W]e struggle to accept the argument that the market for new, installed equipment is the same as the market for used, uninstalled equipment that has been effectively discarded through store closures or even remodels. Clearly, the Appellant has chosen the new product over the old for a reason; if the used equipment were truly the equivalent of the new, there would be no rational reason to incur the removal and installation costs of a remodel. And, given that the options for used equipment disposal are either to trash it or sell it, it is reasonable to conclude that the marketplace for used equipment, even at the upper end of sales, is closer to a liquidation value for the equipment than to the true value of installed, adequately functioning equipment.

The Commission also found that, even if the secondary market provided relevant information for sales of equipment comparable to taxpayer's property, taxpayer's suggested appraisal methodology using such sales for downward adjustment of value was improper because it failed to consider delivery and installation costs not built into the prices fetched in the secondary market, thus inflating depreciation estimates derived from a comparison to original...