The Complexities of BETE & BETR

(from Maine Townsman, February 2010)
By Douglas Rooks

On at least one point about the Business Equipment Tax Exemption program, better know as BETE (or “Betty”), the municipal assessors who administer it locally and the state officials who oversee the new program agree: It’s awfully complicated.

When the Legislature, responding to an initiative pressed by Gov. John Baldacci through four annual sessions, agreed in 2006 to repeal the existing personal property tax on business equipment, it did so by creating a whole new program, BETE.

Already on the books was BETR (Business Equipment Tax Reimbursement), installed in 1995 at the behest of then-Gov. Angus King. As the name implies, businesses were reimbursed by the state for the cost of the personal property taxes they paid to municipalities on all qualifying equipment put into service after April 1, 1995.

Since the law at first applied to relatively small amounts of taxable valuation, it occasioned little attention, but as the bill for reimbursements grew, so did the unhappiness of key legislators, who saw BETR as effectively reducing state revenues that could have been used for other programs. In 2005, lawmakers voted to cut BETR reimbursements from 100% to 90% for tax year 2007, a move that triggered a renewed push by business interests and the Governor’s office for outright repeal of the personal property tax rather than a reimbursement system.

What was finally agreed to at the close of the 2006 session was a three-part system: Business equipment put into service before 1995 remains taxable, and equipment installed from 1995-2007 would continue to be taxable and eligible for BETR reimbursement. And, for most equipment installed after April 1, 2007, businesses no longer would pay taxes, and the municipalities would be reimbursed by the state for this exempt property, at least for a certain percentage of their tax revenue losses.

Initially, those reimbursements were made at 100% for tax year 2008, but they decline by 10% a year until reaching the constitutional minimum of 50% by tax year 2013, though there are exceptions for towns unusually dependent on personal property tax revenue. [This exception only applies to communities where personal property accounts for more than 5% of the total tax base – the higher the percentage the higher the reimbursement rate].

Two years into the new program, BETE remains a hot topic among assessors and other municipal officials, who are still adjusting their approaches and figuring out how to explain the results to taxpayers.

Since the advent of BETR, assessors have been directly involved in the state’s personal property tax relief efforts. While Maine Revenue Services is the agency that approves the reimbursement to businesses for BETR property, it has been local assessors who have worked with businesses to help them determine their BETR eligibility.

But the municipal role changed significantly with the adoption of BETE. Not only did assessors have to administer a new program with different definitions and new application forms, but municipal budgets became directly dependent on another form of state transfer payments, along with revenue sharing, homestead exemption, tree growth, General Purpose Aid to Education and some others.

For both of these business tax relief programs, the local assessors establish valuation and depreciation for equipment, even under BETE where the property is exempt from taxation.

A Mill Town View

Roger Raymond, town manager of Bucksport, where the Verso paper mill is the leading taxpayer, is not sure the BETE law did mill towns a favor by the gradually decreasing subsidy levels. As it happened, Verso did some significant upgrades in the first year BETE was in force, adding $20 million to its valuation and bringing in $400,000 in state reimbursement.

But that reimbursement will soon diminish, and in a town the size of Bucksport, that will have a major impact on the budget. “I’m not sure how effectively I can explain that to the town council,” let along local taxpayers, Raymond said.

Then there is the anxiety that municipal officials feel in the midst of the state’s current budget problems, wondering about when, and whether, the state checks will come for the BETE reimbursement. BETR reimbursements, which go to businesses, will be reduced to 90% again for tax year 2010. So far, BETE reimbursements (to towns) remain intact.

Raymond said that last year, the first in which the state checks for BETE came in, Bucksport got its payment in December, and he worried about what might happen this year. When the check arrived on January 18, he felt a palpable sense of relief.

Bucksport is also one of those towns that will likely trigger the threshold for enhanced reimbursement, based on the proportion of personal property in its tax base. Raymond figures that the ultimate floor for Bucksport will be about 62%, though that depends on future valuations and the amount of new investment.

Somewhat surprisingly, even the drop to 90% reimbursement (for BETE) this year nearly triggered enhanced payments for one town, New Limerick, which has two major mills, according to state Property Tax Division Director David Ledew. Ultimately, Maine Revenue Services estimates that as many as 130 municipalities will receive more than the 50% minimum.

Part of the state’s motivation in enacting BETE was to reduce the burden on the biennial budget, though the effect has been scant so far.

Mike Allen, chief of research for MRS, said that in fiscal 2008, the last year without BETE, the state paid out $68 million in BETR reimbursements.

For fiscal 2009, the state paid $66 million for BETR and $8.2 million for BETE, a total of $74.2 million.

For fiscal 2010, actual reimbursements so far have totaled $49 million for BETR and $11.5 million for BETE. MRS projects that, for the full year, BETE payouts will be $15 million and BETR will cost $56.6 million, for a total of $71.6 million. In all, the programs are likely to cost the state more than $145 million for the last two fiscal years.

Time and Money

Then there is the impact at the municipal office, which the assessors judge to be substantial.

“This is a program that takes a lot of time to administer,” said Anne Gregory, Falmouth assessor who’s also past president of one of the state assessors’ associations (MAAO). She estimates that it takes an employee in her office two weeks to establish the valuations and eligibility for the BETR and BETE programs, and another four weeks to process applications.

“A lot of businesses don’t really understand what’s eligible,” she said, “so they end up applying for everything.”

The Falmouth assessor’s office determined BETR-eligible only 29 of the 42 applications it received last year, and it rejected an even higher proportion of the 71 BETE applications it received.

The paperwork crunch is so severe that Gregory said she won’t send out BETE forms next year with the business tax packet, as the town did for the first two years of the program, and instead let businesses make the decision to apply on their own.

It’s understandable that businesses might be confused about eligibility because the BETE program excluded retail businesses, including many that had been eligible for BETR. Eligibility for BETR by such big box retailers as Wal-Mart prompted the Legislature to cut back the program so that it only covers retail establishments occupying less than 100,000 square feet, but smaller merchants could still receive checks – as some still do, for amounts as small as $50.

The new rules might seem to simplify things, but in taxation things are never quite that easy. The new definition of retail property excluded in the BETE law emphasizes two points: the equipment is used at an establishment distributing products to the public, and payment is collected on site. Specifically, the excluded retail component is defined as “business activity associated with the selection and purchase of goods or services or the rental of tangible personal property by on-site retail customers.”

That definition, in the opinion of some municipal assessors, leads to some interesting results.

Brenda Cummings, assistant assessor in Bath, who deals with personal property, said that under her interpretation, lawyers do qualify for BETE but physician practices do not. The difference? Lawyers perform many of their services out of the office, and do not generally collect payment from clients on site. Doctors, on the other hand, provide services and collect fees in the office.

Not every local physician agreed, Cummings said, contending that the insurance company was the real payer for services. But even in those cases, a co-pay was usually required after a visit, she noted.

In another example, accountants can qualify for BETE, while tax preparers do not. The latter both serve clients and accept payments in their offices, she said.

Anne Gregory came up with an even more provocative distinction – by some estimates, newspaper racks displayed inside a store would be taxable under the retail definition, while racks on the sidewalk would be exempt.

Asked about these various interpretations, David Ledew at MRS said that the lawyer-doctor and accountant-tax preparer distinctions made sense, though he added the caveat, “It would depend a bit on what kind of law was being practiced.”

About the newspaper racks, though, he said that the inside-outside distinction wouldn’t apply. “Wherever they’re located, they’re still part of the same retail establishment under the law.”

But in case any taxpayer remains disgruntled, Ledew said they needn’t worry. Retail property excluded from BETE remains eligible for BETR, which was specifically extended by the legislation past 2007 for the sole purpose of covering retail, though the previous BETR exclusions still apply.

Ledew said that the existing “Guidance” memorandum from MRS issued in 2008 remains the key document for assessors, but he acknowledged that more specific descriptions of eligible equipment might be in order. “With two years under our belt, it might be a good time to go out and get the views of assessors about how it’s working,” he said. He noted that bureau officials remain available for public presentations on how the law works.

The different eligibility standards may explain why so many businesses file applications for both BETR and BETE, but Brenda Cummings still finds it frustrating. She will generally work with a local business trying to figure out the law, but doesn’t think it’s worthwhile for the out-of-state leasing companies that tend to “claim everything” on their applications. “It’s just not worth their while to figure out the details in every jurisdiction where they operate,” she said.

Big Ticket Items

There’s little question that personal property remains a big item on some municipal tax rolls, and that assessing it can be a bit trickier than establishing the value of buildings and lots.

South Portland is home to the Fairchild and National Semiconductor plants whose split and possible expansion in Maine helped prompt Gov. King to propose the BETR program after taking office. And personal property is still a big deal there, according to Bob Tripp, the deputy assessor who also serves Westbrook under the two cities’ cooperative arrangement.

For 2009, South Portland had 89 BETE accounts covering $125 million in valuation, which produced $1.84 million in state reimbursement for the city. Of the total valuation, $68 million is attributable to Fairchild and $39 million to National Semiconductor. “Computer plants are constantly upgrading,” Tripp said. “It’s the nature of their business.”

In Westbrook, by comparison, 74 BETE accounts cover $29.5 million in valuation, producing $493,000 in reimbursements.

Tripp hasn’t seen the difficulties reported by assessors in some of the smaller towns, for the most part. “Most of our BETE customers were also BETR-eligible,” he said. “They already understood the system, so it wasn’t a hard transition.”

Is It Worth Finding?

Going out into the rural areas where businesses are small, and often few and far between, it’s a different story, according to John O’Donnell, whose assessing firm, based in New Gloucester, serves more than 30 Maine communities. They range in size, at the smaller end, from Gilead, up to a cluster of medium-size towns such as Naples, Raymond, and Casco.

Generally, assessors in small communities are not professionally trained and many simply do not want to deal with personal property assessing, he said. The advent of BETR and BETE has certainly not changed that situation.

“It’s partly a matter of resources,” he said. “Given the municipal revenue stream, does it really make sense to devote a lot of time to bringing in a relatively minimal return?”

But O’Donnell advises all his clients to make the effort to identify personal property for taxation purposes, and said that including applications with the annual inventory forms can help compliance. The proprietary software he provides to his client towns has spreadsheets that make it relatively easy to calculate BETE eligibility, he says.

Don’t Forget TIFs

If assessors thought they were out of the woods at this point, they aren’t quite. There’s also the question of TIFs – the tax increment financing districts many towns and cities use to encourage new business investment and to fund necessary public infrastructure improvements. These TIF agreements shelter value from state assistance formulas that are valuation-based, such as GPA and revenue sharing, and county taxation.

The issue involves what will happen when the municipal reimbursements under BETE decline, and fall below the value of the TIF agreement presumed in the original plan. “That’s another separate calculation, and you’ve got to be ready to make it,” said Anne Gregory.

David Ledew notes that this scenario would only apply to TIFs where the municipality retains tax revenue from the TIF rather than returning it to the taxpayer.

Accountability Factor

Finally, there’s the question of whether these tax programs are really working as intended. The reimbursement of personal property taxes, first to business and now to municipalities under the new exemption, was supposed to stimulate investment and create jobs. Has it done so?

There’s no official state report or document that offers much guidance in that area.

“As assessors, we stay away from those debates,” Gregory said. “I might have a personal opinion on the subject, but our job is to apply the law as it exists, and however the Legislature might choose to change it.”

Roger Raymond is not so bashful on the subject. “At the time it was adopted, a lot of us were questioning the purpose,” he said. The TIF model, he said, is a good one. “It’s a specific agreement between two parties, and it can cover a lot of things, such as how many jobs are being provided and for how long.”

Programs like BETE and BETR, he said, don’t have that kind of accountability. “It’s intended to produce new jobs and new business, but there’s nothing that really tells us whether that’s happening.”

Public Understanding

For the assessors, the big question is whether the public can understand the law and whether businesses will apply for the right programs, eventually, easing the burden on assessors.

“It’s no problem for a business like BIW (Bath Iron Works), obviously,” said Brenda Cummings. “For a lot of others, though, it’s a different story.”

David Ledew believes that the admittedly complex law can still be manageable for local assessors, with enough time and practice. “If you take it step by step,” he said, “you should be able to come to the right conclusions.”

Douglas Rooks is a freelance writer from West Gardiner and regular contributor to the Townsman,