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Income tax laws conflict with real estate tax rules

by David Showers | August 30, 2021 at 4:05 a.m.
Garland County Equalization Board members, from left, Don Pierce, Rodney Bottoms, Sean Edds and Larry Griffin, hear VIPA Hospitality Management's property tax appeal Thursday at the Garland County Government Office Building. - Photo by David Showers of The Sentinel-Record

State and federal tax laws don't treat coronavirus relief payments as taxable income, but the state has instructed appraisers to treat the payments as income when calculating a business' real estate tax liability.

That contradiction played out Thursday before the Garland County Board of Equalization, the panel of appointed officials who decide property tax appeals. Parth Patel, VIPA Hospitality Management's president of development, asked the board to lower property taxes on two parcels where four of the company's hotels are located, arguing that the appraisal firm the county contracts should not have included coronavirus relief payments in its calculation of the hotels' net operating incomes.

"In reality, that's not a true cash-flow income," he told the board, explaining the relief reimbursed the company for keeping employees on the payroll when the hotels were closed last year because of public health directives limiting travel and commerce.

"The bottom line is we still lost money at the end of the year. If we didn't get (relief money), we'd be in an even worse position than we were," Patel said, "The state says you should include it, but that's just a one-time thing. We're not going to get that next year or in 2023."

He said 2020 room revenue from the Quality Inn & Suites Hot Springs, Country Inn & Suites by Radisson and La Quinta Inn & Suites by Wyndham fell by more than a third compared to 2019. The Home2Suites by Hilton's 2020 room revenue was $427,000 lower than the previous year, he said.

Arkansas CAMA Technology, the appraisal firm the county awarded a $710,000 annual contract, told the board that even if the relief payments were excluded from the hotels' net operating income, the operating statement Patel presented didn't warrant a reduction in the properties market value.

The board agreed, affirming ACT's appraisals. Its ruling kept 2021 real estate taxes due on the 4-acre parcel in the 4000 block of Central Avenue at $79,000, money that will primarily benefit the Hot Springs School District. Real estate taxes on the 1.64-acre parcel that houses Home2Suites by Hilton on St. John's Island will remain at $43,583, money that will primarily benefit the Lakeside School District.

The 2021 tax bills will go out in February, with payment due by the following October. The Central Avenue parcel has been appraised at $8,643,950 and the St. John's Island parcel at $4,810,500. Twenty percent of a property's market value is taxed at millage rates the Garland County Quorum Court sets for the various taxing entities in the county.

Patel can appeal the board's decision to the county court, which County Judge Darryl Mahoney presides over.

Barbie Weatherford, ACT's chief commercial appraiser, told Patel his properties are undervalued.

"You are one of the most polite and courteous property owners in all of Garland County," she said. "You are a wonderful person to have within our community. You are always conscientious of supporting nonprofits, everything of that nature. If there was anyone I personally, as an appraiser, could give a discount to, Mr. Patel would be on the list.

"At looking at his raw numbers for the net operating income, I found that the property was slightly undervalued. You have come in and discussed your income. Have I not told you each time that we have your property undervalued based on marketable price for the property based on your operating statements. I cannot make a discount on the property, because I have it undervalued."

Patel's accountants told the board the relief payments were a reimbursement for keeping employees on the payroll when the hotels were closed or not operating at full capacity, noting the Legislature amended the state tax code earlier this year to exclude the payments from taxable income and allow expenses the relief paid for to be deducted from a business' taxable income.

Weatherford cited a directive issued by the state revenue agency's Assessment Coordination Division, which sets rules for how real estate is appraised for tax purposes.

"While Arkansas statutes removed the taxable status of the income from (relief payments), they do not remove from the definition of income for the property," she said. "Under typical appraisal practice, it would be appropriate to consider that grant or loan to grant as income for appraisal practices."

The county will begin its five-year reappraisal cycle next year. The new property values will be reflected on 2022 tax bills that go out in February 2023 and are due in October 2023.

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