What You Should Know About ‘Betty’

(from Maine Townsman, January 2008)
Douglas Rooks, Freelance Writer

At the end of the 2006 legislative session, leaders of both houses and both parties announced that they had repealed the personal property tax on business equipment, a long-time goal of Gov. John Baldacci, who had included it in his first legislative package four years earlier.

But as Maine’s municipal assessors well know, repeal of the tax is not exactly what happened. Instead, the legislation provides a tax exemption for qualifying businesses. It retains the assessment of the tax and adds a municipal reimbursement program alongside and ultimately replaces the existing BETR program ( short for Business Equipment Tax Reimbursement), which has been operating since 1995, shortly after Gov. Angus King took office.

The new program, know as the Business Equipment Tax Exemption, became effective after April 1, 2007 meaning that the program will be part of the April 1, 2008 assessments.  Municipal assessors have been working hard to let local businesses know about the changes it will bring. The BETE program (pronounced “Betty,” on the model of “Better”) represents a new job for municipalities, and there are varying opinions about how smooth the transition will be.

“This is a new responsibility for the towns,” said Anne Gregory, assessor in Falmouth. “It’s not an area in which a lot of us have much expertise.”

The ‘Repeal’ Movement

The removal of the tax on business equipment (called “personal property” in most states, to distinguish it from “real” property, that is, land and buildings) began with a campaign pledge by Gov. King. The idea is that by not taxing the means of production, a state can encourage new investment in manufacturing, something political leaders in Northeastern states were particularly anxious to do. States in the “rust belt” around the Great Lakes repealed or offered major exemptions for personal property in the 1980s; by contrast, southern and western states generally still assess business equipment at full value.

The BETR program became controversial in the Legislature as the cost of the program began to mount; qualifying business investment earned a 100 percent reimbursement from the state for taxes paid to the municipality. Since BETR applied only to new investment, it was, at first, a minor element in the state budget. By the end of the decade, however, its annual cost exceeded $60 million a year, and various proposals were made to cut back the program. In 2004, the Legislature reduced reimbursements to 90 percent for one year.

Gov. Baldacci’s four-year quest to eliminate the BETR program and repeal the tax was supported by legislative leaders, but followed a circuitous course. In the end, the Legislature decided to retain BETR for the property already enrolled. Qualified property was scheduled to exit the program after 12 years, but instead will become tax-exempt, along with new business equipment.

All new property eligible for BETR, first subject to taxation on or after April 1, 2008, will now be covered under BETE. The key difference is that, instead of reimbursing businesses, the state will now reimburse towns and cities – and will do so at a lower rate. In the first year of the program, the state will offer 100 percent reimbursement, but that percentage will decline by 10 percent a year until it reaches 50 percent – the constitutionally required minimum.

Municipalities that disproportionately depend on personal property taxes, those with large manufacturing facilities such as paper mills or potato processing plants, will be eligible for additional reimbursement. That’s a feature that David Ledew, director of the Property Tax Division of Maine Revenue Services, figures will become relevant for some communities in the third year of BETE, as the reimbursement percentage drops.

How it Works

Ledew says that BETE does represent a change for municipalities, but that the Legislature clearly put the onus on businesses if they want to take advantage of the program.

“The law is quite clear that businesses must apply for the exemption,” he said. “If they don’t, the property is taxable, and the town is entitled to collect it.”

The theory, however, is belied for some assessors by their previous experience with personal property tax collection. “A lot of smaller businesses don’t return the forms as it is,” said Anne Gregory. “We just calculate a percentage we figure is average for that type of business, and send them the bill.”

In Hermon, Assessor Elizabeth Bowdoin agrees. The growing town, she said, has 250 personal property tax accounts “and we should probably have a lot more.” In general, “The number of those that choose to report is smaller than those that choose not to report,” she said.

Anne Gregory says her attempts to figure out who should be paying taxes on business equipment usually involves driving around town for several days to see who’s set up shop recently. Like most taxes assessed on non-retail transactions, the personal property tax is heavily dependent on voluntary reporting, in the form of a “706” inventory that’s supposed to be returned each year.

The assessors say they understand that businesses must apply for an exemption in order to avoid paying the tax. But they worry that the widespread impression of a “repeal” of the tax means that some small business owners figure they can just ignore the personal property tax issue.

“They may not feel the same incentive to apply,” Gregory said.

Most larger business will handle the change in stride, Ledew said, and the assessors seems to agree. “There are employees at a lot of firms whose job is to do this kind of thing every day,” he said. “Understanding and dealing with the program won’t be hard for them.” It may be different for smaller companies and sole proprietorships, however.

The mechanics of state reimbursement are fairly simple, Ledew said. The municipal assessor will add up the value of all real and taxable personal property, and then create a second figure, representing exempt property, that will be reported to the state but not used in calculating the tax rate. The line item for exempt personal property will then become the basis for the town’s application to the state for reimbursement.

Exempt or not?

MRS and its Property Tax Division have been conducting meetings for assessors and, where requested, business groups, over the past year. Ledew said that many of the questions at meetings focus on what items might be taxable and which are exempt.

“That’s not the right way to look at it,” he said. “The law doesn’t cover specific items, but who’s using them.”

Most industrial and other types of non-retail personal property introduced in the state after April 1, 2007 will be eligible for the tax exemption program (BETE) rather than the tax reimbursement program (BETR). Most retail personal property (retail stores, gas stations, restaurants, etc.) which will continue to be eligible for the BETR reimbursement program but will not be eligible for the outright exemption under BETE. The exception to that general rule is the personal property installed in the “big box” retail stores that are greater than 100,000 square feet in size which is ineligible for either the BETR or BETE benefits.

Some other businesses that are also not eligible for BETR reimbursement or the tax exemption of BETE include telecommunications firms and utilities, such as cable television and wireless companies.

Wholesale operations that do not provide goods or services to an end user (defined as “retail”) do qualify for BETE.

Since the law was passed nearly two years ago, both state and municipal officials have been working to ensure that its provisions are well understood, and that the procedures and forms used to comply are adequate.

Andrew Kriger, who assesses personal property for South Portland and Westbrook in a unique arrangement where Liz Sawyer is assessor for both cities, said that the law presents few problems for those experienced in the area, since the definitions are the same under both BETR and BETE. But assessors who lack training in the personal property area will now be reviewing applications for exemptions, and that will take both training and experience.

“In the annual assessing school that our association conducts, this was one of the leading topics,” he said. “It will take some time to get everyone up to speed.

Beth Bowdoin said that she has already included notices about BETE is other mailings concerning property taxes, and both forms and an explanatory letter will go out with all “706” inventory forms this spring. “It’s more important than ever that we try to get businesses to focus on this,” she said.

The state’s workshops have been held mostly by request, and have involved travel to most counties and regions of the state, David Ledew said. “We’ve held workshops for all the larger cities and towns, who often have a group of people who will be involved. For smaller communities, it’s good to invite surrounding towns to the meeting.”

Mike Rogers, municipal services supervisor for MRS, has been at a lot of the sessions, and said that businesses are interested, too. “We’re willing to attend just about all the meetings people want to have, within reason,” he said.

Rogers said that municipalities shouldn’t worry about the exemption in cases where a business is not filing to claim one. “We can get the information out, but ultimately it’s the business’ responsibility to make the claim,” he said.

Assessors have been critiquing the state’s model application form (information about BETE, including the application form is available on the Maine Revenue Services website, on the Property Tax Division page www.maine.gov/revenue/propertytax/propertytaxbenefits/bete.htm) for towns to use. Anne Gregory said she’d like to see spaces for account numbers on the form, and Rogers said some of the larger municipalities want to provide room for identifying numbers for properties, since many businesses have operations at multiple locations,

“Each municipality can revise the form to meet their individual needs,” he said. Before sending out the forms, though, they need to be reviewed and approved by MRS to make sure they are consistent with the law, however.

By the Numbers

For most municipalities, the personal property tax is a fairly minor source of revenue – which is not to say that it isn’t significant.

Statewide, personal property amounts to about 5.6 percent of all the property taxed by municipalities, which in 2007 amounted to $214.8 billion, according to Michael Allen, research director at MRS.

Real property (land and buildings) is still the biggest source of tax revenue for both commercial and residential categories.

Last year, the state estimates that residential property totaled $169.8 billion ($96.5 for buildings and $73.3 billion for land) while business property totaled $34.8 billion ($21.1 billion for buildings, $13.7 billion for land.) So while the total personal property assessed – $10.2 billion – does not represent a huge proportion of total property, it is more significant when weighed against business assessments. There, personal property represents 23 percent of the total, against 77 percent for real property.

As required by the state budget process, MRS prepares estimates of funding needed for the BETR program and the new BETE program, which will appear on the books for the 2009 fiscal year that starts July 1, 2008.

In the current fiscal year, BETR costs the state $68.5 million – and is now listed as a tax credit rather than a General Fund expenditure. It should peak in fiscal 2009 at $69.1 million. After that, BETR should decrease to $65.7 million in fiscal 2010 and $60.0 million in 2011 as no more equipment is enrolled and the value of existing equipment depreciates.

In the first year of BETE, the state expects to pay $11.4 million in reimbursements to municipalities. That will jump to $21.5 million in 2010 and to $27.5 million in 2011. The program may soon represent the third largest transfer from the state to municipalities, after General Purpose Aid for schools and municipal Revenue Sharing.

For assessors, the BETE program is clearly a big deal, and one that will take some time to absorb into their routines. The program has yet,  for instance, to be integrated into the software programs most of them use for assessing. Jay Taranto of Vision Appraisal Technology said that there’s not much to report yet. “We’re talking to assessors and finding out what they need. We’ll need to make sure we have the true and accurate components” for BETE before adding them to the program, he said.

It would probably be wise for assessors to expect a few calls – and perhaps more than a few – when the first personal property tax bills reflecting BETE go out.

“We’ll be ready in some fashion,” said Anne Gregory, “because we have to be. It’s the law.”

David Ledew said that BETE is “a very, very significant change” in Maine’s system of valuing property, but he’s confident that municipal assessors will be able to master it once they get down to work. “Once they dive in, they shouldn’t be intimidated by the process,” he said.