Rhode Island Supreme Court Decision Highlights Disproportionate Taxation of Business Personal Property

The Rhode Island Supreme Court recently struck down a challenge to the state’s method of calculation of depreciation for business personal property. In its July 3 decision, the Court held that a “plain and ordinary” reading of the legislation supports an accounting definition of depreciation and does not allow consideration of external forms of depreciation or obsolescence. As a result, the appellant, Verizon New England Inc., was liable for an additional payment of $21.3 million in property taxes over five years. The case highlights the disproportionate tax burden placed on business personal property in the state, as a result of tax policy and legislation.

In Rhode Island, municipalities can set different tax rates for residential and commercial real property and business personal property. As a result, commercial properties pay much higher taxes per $1 of property value than residential properties, and the rates paid on personal property are even higher.

Not only is the tax rate for personal property higher than real property, but also the assessed value used by the state is “book value,” rather than current market value, and does not account for all forms of depreciation. In the Supreme Court decision, Verizon New England Inc. challenged the state’s approach, arguing all forms of depreciation, including physical deterioration, functional obsolescence, and economic obsolescence.

A market value approach, which represents the most probable selling price of an asset as of the date of valuation, accounts for all forms of depreciation. The taxpayer argued that changes in the telecommunications industry since 2000 have caused the value of its equipment to rapidly decline and submitted appraisals supporting the reduced market value of its personal property.

In its decision, the Court held that the “plain and ordinary” meaning of depreciation, as expressed in the statute, would not include loss in value because of external factors. The decision referenced Black’s Law Dictionary, which defines deprecation as “total depreciation currently recorded on an asset. On the balance sheet, an asset’s total cost less accumulated depreciation = book value.”

This case hinged on the specific language in Rhode Island’s taxing statute. In other states, the taxable value of personal property can be determined based on its market value, rather than book value. With the increasing pressures and uncertainties facing businesses, Rhode Island’s commercial taxpayers may be asking their state representatives to consider changes to the legislation to alleviate the disproportionate property tax burdens they face.