AGO 1978 No. 23 - Aug 1 1978
TAXATION ‑- PROPERTY ‑- CURRENT USE VALUE OF FARM AND AGRICULTURAL LAND AS RELATED TO ITS VALUE BASED UPON HIGHEST AND BEST USE
(1) The fact that a county assessor's "current use value" for certain farm and agricultural land (i.e., land which has received current use classification under RCW 84.34.030 and 84.34.035) is higher than the value which the assessor would have assigned to the land had it not been so classified does not necessarily mean that the current use value is incorrect (i.e., too high).
(2) A landowner who has requested current use classification for his farm and agricultural land, pursuant to RCW 84.34.030, may then have such classification removed (a) after the assessor has approved such request but (b) prior to the date of the first payment of the property taxes which would be based upon such classification.
(3) Explanation of the property tax consequences of such a removal in a case in which the "current use" determination of value is properly higher than that which would have been assigned had the land not received current use classification.
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August 1, 1978
Honorable Hubert F. Donohue
Senate Committee on Ways and Means
Route 2, Box 13
Dayton, Washington 99328
Cite as: AGO 1978 No. 23
By letter previously acknowledged, you have requested our opinion on three questions which we paraphrase as follows:
(1) Does the fact that a county assessor's "current use value" for certain farm and [[Orig. Op. Page 2]]
agricultural land (i.e., land which has received current use classification under RCW 84.34.030 and 84.34.035) is higher than the value which the assessor would have assigned to the land had it not been so classified necessarily mean that the current use value is incorrect (i.e., too high)?
(2) May a landowner who has requested current use classification for his farm and agricultural land, pursuant to RCW 84.34.030, then have such classification removed (a) after the assessor has approved such request but (b) prior to the date for the first payment of the property taxes which would be based upon such classification?
(3) If the answer to the second question is in the affirmative, what are the tax consequences of such a removal in a case in which the "current use" determination of value is properly higher than that which would have been assigned had the land not received current use classification?
We answer question (1) in the negative, question (2) in the affirmative and question (3) as indicated in our analysis.
Constitutional and Statutory Background:
At the 1968 general election, the voters adopted Amendment 53 to the state constitution. This amendment added a new section (§ 11) to Article VII, reading as follows:
"Nothing in this Article VII as amended shall prevent the legislature from providing, subject to such conditions as it may enact, that the true and fair value in money (a) of farms, agricultural lands, standing timber and timberlands, and (b) of other open space lands which are used for recreation or for enjoyment of their scenic or natural beauty shall be based [[Orig. Op. Page 3]] on the use to which such property is currently applied, and such values shall be used in computing the assessed valuation of such property in the same manner as the assessed valuation is computed for all property."
The legislation implementing this constitutional amendment is contained in chapter 84.34 RCW. RCW 84.34.020, the definitional section of the chapter, establishes three categories of land which may be valued for tax purposes on the basis of "the use to which such property is currently applied." Those three categories correspond, generally, to the types of land mentioned in Amendment 53 itself; namely, "open space land" (defined in RCW 84.34.020(1)), "farm and agricultural land" (defined in RCW 84.34.020(2)) and "timber land" (defined in RCW 84.34.020(3)).
Of the remaining provisions of the implementing legislation (RCW 84.34.030-84.34.160), certain relate to all three categories while others relate solely to farm and agricultural land‑-and still others relate solely to open space land and timberland or to timberland alone. Our focus, here, will be upon those relating either to all three categories or to farm and agricultural land alone.
The first such provision is RCW 84.34.030. This statute, which establishes the procedures to be followed by the landowner in applying for current use classification, reads as follows:
"An owner of agricultural land desiring current use classification under subsection (2) of RCW 84.34.020 shall make application to the county assessor . . . Applications must be made during the calendar year preceding that in which such classification is to begin. . . ."
Next to be noted is RCW 84.34.035 which establishes the procedures to be followed by the assessor in approving or denying the application. It reads in pertinent part as follows:
"The assessor shall act upon the application for current use classification of farm and agricultural lands under subsection (2) of RCW 84.34.020, with due regard to all relevant evidence. The application shall be deemed to have been approved unless, prior to the first day of May of the year after [[Orig. Op. Page 4]] such application was mailed or delivered to the assessor, he shall notify the applicant in writing of the extent to which the application is denied. . . .
"The assessor shall, as to any such land, make a notation each year on the assessment list and the tax roll of the assessed value of such land for the use for which it is classified in addition to the assessed value of such land were it not so classified.
"The assessor shall also file notice of both such values with the county treasurer, who shall record such notice in the place and manner provided for recording delinquent taxes."
To illustrate the operation of RCW 84.34.030 and 84.34.035 if a landowner has submitted his application by December 31, of 1977, the assessor has until May 1, 1978 to deny the application in whole or in part. If the assessor does not notify the landowner of such a denial by that date, the application is automatically deemed approved. This approval, in turn, will affect the assessed valuation for purposes of taxes payable in 1979 and subsequent years.1/
RCW 84.34.065 then establishes the method for determining the value of farm and agricultural lands which have received classification. This section reads, in pertinent part, as follows:
"The true and fair value of farm and agricultural land shall be determined by consideration of the earning or productive capacity of comparable lands from crops grown most typically in the area averaged over not less than five years, capitalized at indicative rates. The earning or productive capacity of farm and agricultural lands shall be the 'net cash rental', capitalized at a 'rate of interest' charged on long term loans secured by a mortgage on farm or agricultural land plus a component for property taxes.
"For the purpose of the above computation:
[[Orig. Op. Page 5]]
"(1) The term 'net cash rental' shall mean the average rental paid on an annual basis, in cash or its equivalent, for the land being appraised and other farm and agricultural land of similar quality and similarly situated that is available for lease for a period of at least three years to any reliable person without unreasonable restrictions on its use for production of agricultural crops. There shall be allowed as a deduction from the rental received or computed any costs of crop production charged against the landlord if the costs are such as are customarily paid by a landlord. If 'net cash rental' data is not available, the earning or productive capacity of farm and agricultural lands shall be determined by the cash value of typical or usual crops grown on land of similar quality and similarly situated averaged over not less than five years. Standard costs of production shall be allowed as a deduction from the cash value of the crops.
". . .
"(2) The term 'rate of interest' shall mean the rate of interest charged by the farm credit administration and other large financial institutions regularly making loans secured by farm and agricultural lands through mortgages or similar legal instruments, averaged over the immediate past five years.
"The 'rate of interest' shall be determined annually by the revenue department of the state of Washington. . . .
"(3) The 'component for property taxes' shall be a percentage equal to the estimated millage rate times the legal assessment ration."
Next, for all three categories of land, RCW 84.34.070 fixes the period of time during which the land must remain under classification‑-and the consequences upon withdrawal from classification after the expiration of such period. This statute reads, in pertinent part, as follows:
[[Orig. Op. Page 6]]
"When land has once been classified under this chapter, it shall remain under such classification and shall not be applied to other use for at least ten years from the date of classification and shall continue under such classification until and unless withdrawn from classification after notice of request for withdrawal shall be made by the owner. During any year after eight years of the initial ten-year classification period have elapsed, notice of request for withdrawal of all or a portion of the land, which shall be irrevocable, may be given by the owner to the county assessor or assessors of the county or counties in which such land is situated. . . . The county assessor or assessors, as the case may be, shall, when two assessment years have elapsed following the date of receipt of such notice, withdraw such land from such classification and the land shall be subject to the additional tax due under RCW 84.34.108: . . ." (Emphasis supplied)
RCW 84.34.080 then establishes, for all three categories of land, the consequences stemming from a change in use and consequent withdrawal from classification, when such change and withdrawal occur before expiration of the period established in RCW 84.34.070,supra. RCW 84.34.080 reads as follows:
"When land which has been classified under this chapter as open space land, farm and agricultural land, or timber land is applied to some other use,except through compliance with RCW 84.34.070, or except as a result solely from any one of the conditions listed in RCW 84.34.108(5), the owner shall within sixty days notify the county assessor of such change in use and additional real property tax shall be imposed upon such land in an amount equal to the sum of the following:
"(1) The total amount of the additional tax due under RCW 84.34.108; plus
"(2) A penalty amounting to twenty percent of the amount determined in subsection (1) of this section." (Emphasis supplied)
[[Orig. Op. Page 7]]
Finally to be noted is RCW 84.34.108 which provides the method for computing the "additional tax due" referred to in RCW 84.34.070 and 84.34.080,supra. This statute reads, in pertinent part, as follows:
"(1) When land has once been classified under this 1973 amendatory act, a notation of such designation shall be made each year upon the assessment and tax rolls and such land shall be valued pursuant to RCW 84.34.060 or 84.34.065 until removal of all or a portion of such designation by the assessor upon occurrence of any of the following:
"(a)Receipt of notice from the owner to remove all or a portion of such designation;
". . .
"(2) Within thirty days after such removal of all or a portion of such land from current use classification, the assessor shall notify the owner in writing, setting forth the reasons for such removal. The owner may appeal such removal to the county board of equalization.
"(3) Unless the removal is reversed on appeal, the assessor shall revalue the affected land with reference to full market value on the date of removal from classification. Both the assessed valuation before and after the removal of classification shall be listed and taxes shall be allocated according to that part of the year to which each assessed valuation applies. Except as provided in subsection (5) of this section, an additional tax shall be imposed which shall be due and payable to the county treasurer on or before April 30 of the following year. The assessor shall compute the amount of such an additional tax and the treasurer shall mail notice to the owner of the amount thereof and the date on which payment is due. The amount of such additional tax shall be equal to:
[[Orig. Op. Page 8]]
"(a)The difference between the property tax paid as 'open space land', 'farm and agricultural land', or 'timber land'and the amount of property tax otherwise due and payable for the seven years last past had the land not been so classified; plus
"(b) Interest upon the amounts of such additional tax paid at the same statutory rate charged on delinquent property taxes from the dates on which such additional tax could have been paid without penalty if the land had been assessed at a value without regard to this chapter.
". . ." (Emphasis supplied)2/
Bearing all of the foregoing in mind we now may turn, directly, to your three questions.
First you have asked:
Does the fact that a county assessor's "current use value" for certain farm and agricultural land (i.e., land which has received current use classification under RCW 84.34.030 and 84.34.035) is higher than the value which the assessor would have assigned had it not been so classified necessarily mean that the current use value is incorrect (i.e., too high)?
Clearly, the statutory scheme described above contemplates a difference between the value of farm and agricultural land determined on the basis of current use classification and its value as determined without regard to such classification. For example, as above noted, RCW 84.34.035 requires the assessor to determine both values for classified farm and agricultural land‑-and to record both on the assessment roll. And RCW 84.34.108(3) envisions a situation in which these two different values will actually be used for different parts of the same assessment year.
[[Orig. Op. Page 9]]
Further, the statutory scheme also contemplates that the value based on current use classification will normally be lower, not higher, than that determined without regard to such classification. Thus, RCW 84.34.070, 84.34.080 and 84.34.108 both cover various situations in which a removal of classification will result in an "additional tax," the amount of which is to be computed on the basis of the higher value resulting from such a removal. Were the value based upon current use classification to be higher than the value determined without regard to such classification, no such additional tax would result.
That the value based on current use classification should normally be the lower value is also consistent with basic appraisal theory. As stated in WAC 458-12-330, a provision in the Department of Revenue's Rules for Assessors:
". . . Highest and best use is the most profitable, likely use to which a property can be put. It is the use which will yield the highest return on the owner's investment."
This same rule, however, then provides that:
". . . The present use of the property may constitute its highest and best use. . . ."
"The fact that the owner of the property chooses to use it for less productive purposes than similar land is being used shall be ignored in the highest and best use estimate. . . ."
For example, though the owner of land may actually be using his land for grazing cattle it might be suitable, by reason of its location, for industrial or commercial development. In such a case, valuation of the property on the basis of highest and best use would require that the actual use‑- cattle grazing‑-be disregarded and that the value be established on the basis of its potential for industrial or commercial development.
Further, any valuation of property on the basis of "comparable sales" will actually be on the basis of highest [[Orig. Op. Page 10]] and best use‑-for if the sales are truly "comparable" they will involve land which has a similar potential for industrial and commercial development, and this fact will be reflected in the sales price. Comparable sales, in short, are used to ascertain market value and, as recently explained by our state supreme court,
". . . Market value means the amount of money which a purchaser, willing but not obliged to buy, would pay an owner, willing but not obligated to sell, taking into consideration all uses to which the property is adapted and might in reason be applied. . . ." State ex rel. Morgan v. Kinnear, 80 Wn.2d 400, 405, 494 P.2d 1362 (1972). (Emphasis supplied)
While the general principles and criteria for determining true and fair value are thus well settled,3/ however, their application in any given case may present difficult problems of judgment. As the last sentence quoted above from WAC 458-12-330 suggests, the determination of true and fair value for a specific parcel of land is an "estimate." And, as stated inMorgan, supra:
"The law strives for certainty but has developed few, if any, absolutes. Even in the field of valuing and taxing real estate, it has failed to achieve more than a moderate degree of exactitude." 80 Wn.2d at 400.
Different appraisers‑-and therefore different assessors‑- may arrive at widely varying values for the same or closely similar pieces of property. Yet it cannot be said, as alegal matter, that any of those varying determinations of value are necessarily incorrect.
"Where it appears that the assessing officer endeavored honestly to get at the true value, and there is an honest difference of opinion as to the value, the judgment of the officer is conclusive. . . .'" Templeton v. Pierce Cy., 25 Wash. 377, 65 Pac. 553, quoted with approval inMason County Overtaxed, Inc. v. [[Orig. Op. Page 11]] Mason County, 62 Wn.2d 677 at 685, 384 P.2d 352 (1963).
A similar legal principle is embodied in RCW 84.04.0301(1) which provides as follows:
"Upon review by any court, or appellate body, of a determination of the valuation of property for purposes of taxation, it shall be presumed that the determination of the public official charged with the duty of establishing such value is correct but this presumption shall not be a defense against any correction indicated by clear, cogent and convincing evidence."
There is, in short, a range of permissible values. So long as the values determined by the assessor are within that range an appellate body will not upset the assessor's determination. Further, one can determine the upper and lower limits of the range only on a case‑by-case basis, taking into account what are essentially factual and judgmental, rather than legal, considerations. Moreover, this range exists, in our view, not only in the case of determinations of true and fair value based upon the criterion of highest and best use or comparable sales, but with respect to determinations made under RCW 84.34.065,supra, as well. Even under that statute, which establishes the criteria for valuation of farm and agricultural lands on the basis of current use, the assessor must make judgments similar to those which he must make in applying the highest and best use criterion.4/
Lastly, but perhaps most importantly, there is the very fact that RCW 84.34.065 exists and, by its existence, requires the assessor to use a special, and different, approach in valuing farm and agricultural land than he commonly uses in other cases. By capitalizing "net cash rental" as defined therein, RCW 84.34.065 embodies a type [[Orig. Op. Page 12]] of "income approach" to the valuation of farm land.5/ It thus is quite conceivable that in a given case, the leases actually used under this approach may reflect an historically high price level for the agricultural products involved while, at the same time, recent sales of agricultural land may reflect a view or feeling that the price level will decline.
For all of these reasons we thus simply cannot say, as a matter of law, that an assessor may in no case arrive at a value based upon the criteria contained in RCW 84.34.065 which is higher than that which he would determine on the basis of highest and best use or comparable sales. While such a case would, in our view, certainly not be a normal one, we cannot say that in such a case the assessor has necessarily, as a matter of law, exceeded the range of permissible judgment.
Moreover, in certain cases the reason for the current use value being the higher value may well stem from the assessor having exceeded the range of permissible judgment‑-but by making the value based on highest and best use too low and not by making the current use value too high.6/ And in such a case, we find in the statutory scheme no requirement that the current use value must be lowered to the erroneous value based on highest and best use. Nothing in chapter 84.34 RCW, either expressly or impliedly, requires that the erroneous values purportedly based on highest and best use constitute a ceiling upon an otherwise correct value based on current use.
Conversely, the assessor may have exceeded the range by making the current use valuation too high. But this would simply mean that the assessor has improperly, in this particular case, applied the criteria in RCW 84.34.065. It is RCW 84.34.065 itself which has been misapplied in such a case; and that fact, by itself, may entitle the taxpayer to relief, independently of the fact that the value based upon highest and best use is lower.
[[Orig. Op. Page 13]]
In summary, then, our ultimate answer to your first question is in the negative. The fact that an assessor's current use value may be higher than his highest and best use value provides a strong reason for further inquiry. However, it does not provide, by itself, a basis for concluding as a matter of law that the current use value is too high and must be brought down to the lower value. Instead, viewed broadly, there are three possible explanations for a discrepancy of this sort.
(1) Both values may in fact be legally correct; i.e., both may be such as would withstand challenge in an administrative or judicial proceeding‑-either because of the different techniques or approaches used in valuing (a) farm and agricultural land, on the one hand and (b) land which has not been so classified for tax purposes, on the other, or simply because of the above described "range of permissible judgment."
(2) The highest and best value might be too low; or
(3) The current use value might be too high, through a misapplication of the criteria contained in RCW 84.34.065.
In the firsttwo cases, no relief is to be granted to the taxpayer.7/ In the third, on the other hand, relief would properly be granted‑-but it would be properly granted independently of the fact that the highest and best use is lower.
Next you have asked:
May a landowner who has requested current use classification for his farm and agricultural land, pursuant to RCW 84.34.030, then have such classification removed (a) after the assessor has approved such request but (b) prior to the date for the first payment of the property taxes which would be based upon such classification?
The answer to this question requires an examination of the relationship between RCW 84.34.070, 84.34.080 and 84.34.108, quoted at pp. 6-8 above. RCW 84.34.070 establishes the general rule as follows:
[[Orig. Op. Page 14]]
"When land has once been classified under this chapter, it shall remain under such classification and shall not be applied to other use for at least ten years from the date of classification . . ."
After the first eight years of this ten-year period has elapsed, ". . . notice of request of withdrawal . . . may be given by the owner to the county assessor . . ." After two years have elapsed from receipt of this notice, the assessor is required to make the actual withdrawal from classification. Thus the withdrawal is to be made after a total of at least ten years has elapsed.
Moreover, even when this ten-year rule has been complied with the additional tax provided for in RCW 84.34.108 will be imposed, with the amount of the tax being:
"(a) The difference between the property tax paid as . . . 'farm and agricultural land', . . . and the amount of property tax otherwise due and payable for the seven years last past had the land not been so classified; plus
(b) Interest . . ." RCW 84.34.108(3)(a) and (b).8/
RCW 84.34.080 then recognizes that there may be cases in which the ten-year rule will not be complied with. The owner may change the use of his property within that period, thus losing the classification. In such a case, a penalty is imposed in addition to the additional tax, in the amount of 20% thereof.
In the situation envisioned in your question, however, there is no change of use involved. Thus, RCW 84.34.080 is clearly inapplicable. The question, then, is whether RCW 84.34.070 locks a landowner into the ten-year period even though he makes no change in use.
We believe that the provisions of RCW 84.34.108(1) require a negative answer to this question. Once again this subsection reads, in pertinent part, as follows:
[[Orig. Op. Page 15]]
"(1) When land has once been classified under this 1973 amendatory act, . . . such land shall be valued pursuant to RCW . . . 84.34.065 until removal of all or a portion of such designation by the assessor upon occurrence of any of the following:
"(a) Receipt of notice from the owner to remove all or a portion of such designation;9/
". . ."
As we read this language, it states that removal shall take place upon receipt of a request by the owner. Whether a change in use has occurred is irrelevant; an actual change in use is not a necessary precondition for the removal.
Such a result, we believe, is also the more reasonable one. Under RCW 84.34.080, a landowner may clearly avoid the ten-year rule by changing the use of the land under classification‑-though, of course, at the cost of incurring the 20% penalty. It would seem reasonable that he could also avoid the ten-year rule without the necessity of actually changing the use.
Accordingly, we answer your second question in the affirmative. We would further observe that the removal of classification could occur even after the date for the first payment of the property taxes which would be based upon the classification. The date of the removal from classification, as we shall see, only affects the tax consequences of the removal, and not the landowner's right to have the removal made.10/
By your third and final question you have inquired as follows:
[[Orig. Op. Page 16]]
If the answer to the second question is in the affirmative, what are the tax consequences of such a removal in a case in which the "current use" determination of value is properly higher than that which would have been assigned had the land not received current use classification?
The answer to this question is found, we believe, in the provisions of RCW 84.34.108(3) which reads, in pertinent part, as follows:
"Unless the removal is reversed on appeal, the assessor shall revalue the affected land with reference to full market value on the date of removal from classification. Both the assessed valuation before and after the removal of classification shall be listed and taxes shall be allocated according to that part of the year to which each assessed valuation applies. . . ."
We should first note that pursuant to RCW 84.34.035, quoted above, an application for classification of farm and agricultural land is deemed automatically approved if it has not been denied by May 1 of the year following submission of the application.
Accordingly, if the request for removal of classification is made before that date, we believe that such a request should effectively make void the application submitted in the previous year, with the result that the provisions of RCW 84.34.108(3) quoted above would not come into operation at all.11/ If the removal is made, however, after May 1, then the above provisions come into operation. We may illustrate their operation with an example.
[[Orig. Op. Page 17]]
Assume that the removal takes place on September 1; i.e., after two-thirds of the calendar year has expired. Assume further that the value of land determined on the basis of current use classification is $X and the value determined without regard to such classification is $X minus Y. The taxes due and payable on that land will be computed as follows: two-thirds of the applicable levy rate will be applied to the value $X and the other third will be applicable to the value $X minus Y. The total of these two amounts will be the taxes due and payable the following year.12/
We trust that the foregoing will be of some assistance to you.
Very truly yours,
TIMOTHY R. MALONE
Assistant Attorney General
*** FOOTNOTES ***
1/One additional feature of RCW 84.34.035 should also be noted. The assessor is to determine and record two assessed values for the land, one to be based on its current use classification, and the other to be determined without regard to such classifications.
2/Subsection (4) of this statute then establishes procedures for collecting the additional tax and subsection (5) lists those types of transfers which may be made without imposition of the additional tax.
3/The statutory criteria for determining "true and fair value" are found in RCW 84.40.030, and are consistent with the definition of "market value" given by the supreme court in Morgan.
4/For example, the assessor must determine a "net cash rental" figure; and this figure, in turn, is to be based either upon what we might term "comparable leases" of similar property or, in the absence of such leases, upon "cash value of typical or usual crops grown on land of similar quality and similarly situated."
5/Cf., WAC 458-12-305, which sets forth the three approaches to value;i.e., the market data approach, the cost approach, and the income approach.
6/The fact that the value purportedly based on highest and best use or comparable sales is the lower of the two values may, in many cases, simply reflect the fact that the assessor has neglected to keep the highest and best use values up to date.
7/Whether there is, in fact, a procedural mechanism for challenging the highest and best use value of classified farm and agricultural land and under what circumstances that mechanism might be invoked, are questions on which we here express no opinion.
8/This additional tax is commonly referred to as the "seven year roll-back."
9/We believe that the term "designation," as here used, is synonymous with "classification."
10/We realize that under this result, a landowner may now avoid the impact of the 20% penalty provided for in RCW 84.34.080 by first requesting and obtaining removal classification under RCW 84.34.108(1) and then changing use. RCW 84.34.108 was added to the original, 1970, law as part of a comprehensive set of amendments adopted in 1973, by chapter 212, Laws of 1973, 1st Ex. Sess. It is important to note, however, that this apparent liberalization of the laws (insofar as the original effect of RCW 84.34.070 is concerned) does not allow a property owner to avoid the additional tax upon removal of his land from classification; rather it only permits him to avoid the further penalty for a change in use by delaying any such change until after he has obtained a removal of the land from an open space classification. If you would like our assistance in again changing this by further amendatory legislation, we would be happy to suggest an appropriate bill drafting approach.
11/RCW 84.34.040 requires the assessor to have completed all property valuations by May 31 of each year. We do not believe, however, that this general statute would allow the assessor to treat as void an application for classification when the request for removal is made after May 1 but before May 31. We believe that RCW 84.34.035 makes the May 1 date controlling for purposes of determining the status of the land as classified or unclassified. Once that status is determined, the actual values must be determined by May 31.
12/And under these circumstances, of course, there will be no "additional tax" since we are assuming no change in the use of the property.