Iowa Court Reduces Property Tax Assessment for Feed Mill

On November 4, 2020, the Iowa Court of Appeals issued an opinion determining whether an assessor properly appraised a feed manufacturing facility’s machinery for property tax purposes. The court analyzed whether a feed mill and steel grain storage bins met the definition of machinery under Iowa Code chapters 427A and 427B. Machinery must be used directly in manufacturing and a necessary part of the manufacturing process, used solely for effectuating that purpose, to qualify as tax exempt machinery.

Background

The plaintiff built a feed manufacturing facility. Building one, a feed mill, is used to store non-corn ingredients in ingredient bins until being processed into either meal feed or pellet feed. The product is then stored in load-out bins until semi-trucks are available for delivery. Buildings five and six are steel grain storage bins where corn is stored until it is processed using an aeration floor, fans, and power sweeps in the bins.

The County hired a certified appraiser to assess the taxable value of the property. Using the cost-to-value approach,[1] the assessor valued the property at $4,272,900. Believing the assessment to be incorrect, the plaintiff petitioned the county Board of Review claiming that some of the manufacturing machinery was exempt and that the correct taxable value was $870,700. The plaintiffs claimed that building one, the feed mill, and buildings five and six, the grain storage bins, were exempt as machinery under Iowa Code § 427A.1(1)(e) and § 427B.17(3).

The Board affirmed the assessment and the plaintiff appealed to the Iowa Property Assessment Appeal Board (PAAB). After a hearing, PAAB found that the ingredient and load-out bins in building one were not machinery used in a manufacturing establishment and therefore not tax exempt. Additionally, PAAB found that the plaintiff did not show the correct value of the exempt items that could be machinery. As to buildings five and six, it found that the aeration floor, fans and dryers, and power sweeps were exempt and reduced the taxable value accordingly. However, PAAB found that the steel grain bins housing the machinery was not tax exempt. The plaintiff petitioned for judicial review and the Board of Review filed a cross-appeal claiming the original assessment of $4,272,900 was correct.

The plaintiff moved to dismiss and strike the cross-appeal. The district court denied these two motions, but granted the plaintiff’s motion to remand to allow PAAB to determine the value of the feed mill and grain storage bins components. During a second PAAB hearing, the plaintiff claimed that the ingredient and load-out bins of the feed mill, as well as the walls and roofs of the two grain storage bins, should be exempt from taxation.

The plaintiff presented expert testimony from a commercial real estate appraiser regarding the valuation of the feed mill and grain bins. PAAB found that neither the ingredient and load-out bins in the feed mill nor the walls and roofs of the exterior grain bins were machinery because the primary purpose of these structures was to hold ingredients until needed in the manufacturing process. It also found that the expert’s valuation did not account for site work and did not necessarily result in an accurate valuation. The plaintiff filed an amended petition to the district court, which also affirmed the PAAB decision. The plaintiff appealed and the Board of Review cross-appealed.

Cross-Appeal Jurisdiction

On appeal, the plaintiff claimed that the district court did not have subject-matter jurisdiction to hear the Board of Review’s cross-appeal. An appeal from PAAB to a district court must be filed within twenty days “after the letter of disposition of the appeal by the [PAAB] is postmarked to the appellant.” Iowa Code § 441.38. The deadline to begin an appeal in district court was March 20, 2016. The plaintiff filed its appeal on March 17, but the Board of Review did not file its cross-appeal until March 23.

Looking to City of Hiawatha v. City Development Board, the plaintiff claimed the district court did not have jurisdiction to hear the cross-appeal because the Board of Review filed notice after the March 20 deadline and the Iowa Administrative Procedure Act governing judicial review of agency actions does not provide a mechanism for filing a cross-appeal. See 609 N.W.2d 532, 537 (Iowa 2000).

In Hiawatha, the city of Robins filed a petition for voluntary annexation with the city board. A second city, Hiawatha, filed a petition for involuntary annexation that also included land specified in the Robins’ annexation petition. Then, Hiawatha filed a petition for a voluntary annexation consisting of the two parcels. Before approving the Robins annexation application, the board amended the city’s petition by removing the two parcels of land in Hiawatha’s voluntary annexation petition and annexed that land to Hiawatha. Robins received the rest of the contested land. Hiawatha appealed and the city of Robins intervened.

The district court affirmed and Robins cross-appealed the board’s removal of the two parcels of land from its application, an issue not included in Hiawatha’s pleadings. The Iowa Supreme Court affirmed that because Robins did not petition for judicial review within the statutory thirty day time period, the district court did not have jurisdiction to determine this issue. The Court of Appeals found that Hiawatha does not require every party to file its own petition. Instead, an affected party may choose to intervene by filing “an appearance within forty-five days from the time the petition is filed.” Iowa Code § 17A.19(2). Therefore, the Board of Review timely intervened and could expand the scope of judicial review as an intervenor.        

Machinery Used in a Manufacturing Establishment

Machinery used in manufacturing is exempt from property taxation. The word “machinery” is not defined in this context, but the Iowa Supreme Court has found that a manufacturer’s cupola, vertical annealing furnace, smokestacks, water systems, air separators, dust collectors, and truck turn around were tax exempt machinery. See Griffin Pipe Prods. Co., Inc. v. Bd. of Rev. of Cnty. of Pottawattamie, 789 N.W.2d 769, 770, 773, 775 (Iowa 2010). In addition to the wide array of machinery that has been found to be exempt, the court found that the lack of qualifying language in the statute indicated that the scope of the law should be interpreted broadly.

To be exempt from taxation, the machinery’s primary use must be manufacturing and it must be essential to the manufacturing process. The feed manufacturing facility transports corn and other ingredients to the ingredient bins in buildings one, five, and six to be held until the ingredients are needed to be processed into a finished product. The finished product is then held in the load-out bins until it is loaded on to semi-trucks for delivery.

The court found that the ingredient bins and exterior grain bins were directly involved in the manufacturing process as temporary storage facilities. Because their primary purpose is to facilitate the manufacturing process, the ingredient bins and exterior grains bins qualified as machinery and are therefore exempt from taxation. However, because the load-out bins were not directly involved in the manufacturing process and only served as a storage area for the finished product, these did not fall within the definition of machinery.

Valuation

Lastly, the plaintiff argued that the district court erred in affirming PAAB’s conclusion that the plaintiff failed to meet its evidentiary burden as to the valuation of its claimed exemptions. The court agreed, finding that PAAB acted unreasonably, arbitrarily, or capriciously when it declined to value the claimed exemptions. Using the plaintiff’s expert, the Board of Review’s own expert, and other evidence from the trial, the court modified the total value of the plaintiff’s exemptions.

Cross-Appeal

The Board of Review cross-appealed claiming that the assessor’s original valuation was correct because the assessor used the Iowa Department of Revenue’s manual. The court rejected this argument, finding that while an assessor was required to use the manual, it was not legally binding on the judicial branch on the question of whether property is exempt from taxation.