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North Carolina Legal Battle Continues Over
Tax Depreciation

by Tom Cunningham, Atlanta, November 2012

 

What may be the longest running property tax saga in North Carolina history is far from being over. Durham County Manager Mike Ruffin says the county plans to take its 2001 valuation dispute with IBM Credit Corporation all the way to the North Carolina Supreme Court.

 

Background

 

The case centers on the tax value of more than 40,000 computers and related equipment leased to 364 customers in Durham County. More than a decade after the personal property was listed for taxation, the parties are still about $50 million apart in their valuations.

 

The North Carolina Court of Appeals previously ruled in IBM's favor twice and sent the cases back to the State Property Tax Commission to have Durham County prove that its depreciation arguments were better grounded than IBM's. The third ruling goes a step further. It orders IBM's numbers be used and a refund made.

 

If the county had settled after the second ruling in 2009, it would have owed IBM a refund of $5.2 million. The number has undoubtedly grown, as interest continues to accumulate.

 

Statewide Implications

 

The Court of Appeals ruling could have a wide range of implications for complex personal property throughout the state.

 

The court rejected Durham County's reliance on the Cost Index and Depreciation Schedules issued annually by the North Carolina Department of Revenue. These schedules are used by every county in the state to help determine the current market value and therefore, the tax value of all business personal property.

 

The explanatory memorandum that accompanied the 2001 version of the schedules suggested that they are only a guide. It said, "There will be situations where the appraiser may need to make adjustments for additional functional or economic obsolescence." Nevertheless, Durham and nearly every other county applied the 2001 depreciation schedules without adjustment.

 

The Appeals Court decisions say the state schedules do not account for all forms of obsolescence and if a taxpayer presents compelling evidence, the burden of proof must shift to the county.

 

A favorable ruling for IBM by the state Supreme Court could force Durham and all other counties to reexamine their personal property appraisal methodology. It could ultimately give taxpayers, who submit evidence of internal and external obsolescence, more equitable treatment in the valuation of their personal property assets.