Another Issue When the Definition of “Agriculture” Matters – Property Tax

Overview

Agricultural law is often “law by the exception.”  Numerous situations exist where being a “farmer” or being engaged in “agriculture” results in different, and more favorable, treatment under the law.  One of those areas of favorability has to do with the tax treatment of property that is used for agricultural purposes. 

One might think that it is easy to determine if a tract of land is used for an agricultural purpose.  Often it is.  The property is either cropped or grazed.  But, other situations are not as easy.  Today, we take a look at those blurry situations.

Mechanics of Real Property Taxation

In many states, real property is listed and valued every two years.  In each year in which real property is not regularly assessed, the assessor lists and assesses any real property not included in the previous assessment and any improvements made since the previous assessment.  Normal and necessary repairs up to a threshold amount per building per year do not increase the taxable value.  The tax rate, typically expressed in dollars per $1,000 of actual value, is applied against actual value or a percentage of actual value.  Actual value is usually the “fair and reasonable market value” of the property.  “Market value” is defined as the result of a “fair and reasonable exchange in the year in which the property is listed and valued between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and each being familiar with all the facts relating to the particular property.” 

In general, the actual value of agricultural property is to be determined on the basis of productivity and net earning capacity on the basis of use for agricultural purposes.  This typically results in lower valuation for real property tax purposes for agricultural property than nonagricultural property.  Thus, to obtain favorable tax treatment, the parcel in question must be used as farm or ranch land for agricultural purposes in accordance with the particular state statute.  While agricultural dwellings are typically valued as rural residential property and are assessed at the same percentage of actual value as other residential property, the lower “use” valuation of agricultural real estate when compared with nonagricultural real estate has spawned numerous cases construing the boundary of the definition of “agricultural land” and “agricultural activities.”

Illustrative Cases

The following is a listing of some of the more illustrative cases that provide a flavor of the issues that can arise and how the courts deal with them:

• In Drost v. Mahaska County Board of Review, et al., 840 N.W.2d 726 (Iowa Ct. App. 2013), the court held that the assessment of $410,480 was correct instead of the plaintiffs’ claimed $75,000. Even though the plaintiffs had sold a wetland easement on 283 acres to the federal government, the ag land still had “net earning capacity,” encompassing potential productivity.

• Under Colorado law (Colo. Rev. Stat. § 39-1-102(3.5)), agricultural products must originate from the land’s productivity. There have been numerous cases involving the application of the statute.  For example, in Welby Gardens Co. v. Colorado Bd. of Assessment Appeals, 56 P.3d 1121 (Colo. Ct. App. 2002), even though greenhouses produced horticultural products, and the statute defined agriculture as including horticulture, the products did not originate from the land’s productivity and the property was not eligible to be taxed as farm property. 

• In Bond County Board of Review v. Property Tax Appeal Board, 796 N.E.2d 628 (Ill. Ct. App. 2003), subdivided lots used for raising and storing of hay and storing of logs were properly valued as agricultural land. The statute did not require subdivided lots to be assessed as residential property. 

• In Schmeig v. County of Chisago, 740 N.W.2d 770 (Minn. 2007), Minnesota law, “agricultural land” defined as “all land used during the preceding year for agricultural purposes,” and the statute contemplated that a particular tract may be subject to more than one classification. The classification of the entire tract as commercial was not appropriate where bees were raised on part of the tract.

• In Hanneken v. Missouri State Tax Commission, No. 96-73000 (Dec. 19, 1996), a portion of lake front property was accepted into a governmental conservation program for timber improvement. The tract qualified for agricultural classification even though it was not part of an ongoing farming operation and there would be a long-time period before trees would be harvestable.

• In Mollica v. Divison of Property Valuation and Review, 2008 Vt. 60 (2008), a “Christmas Cottage” on a Christmas tree farm used as sales office and warming hut for customers during Christmas season and rented guest house during off-season remained eligible for enrollment in a tax abatement program as farm property. The property was used as “rental property” only during the “non-farm” season and still remained actively used in a farming operation during Christmas tree harvesting season.

• In In re Goddard, 39 Kan. App.2d 325 (2008), a sawmill operation was not “farming” for purpose of state ad valorem property tax exemption, but a yarding tractor used to harvest trees was exempt farm equipment.

• In another Colorado case, Douglas County Board of Equalization v. Clarke, 921 P.2d 717 (Colo. 1996), the taxpayer was required to prove that actual grazing of the parcel at issue occurred during the tax year unless there was a conservation practice being utilized that prevented grazing.

• Also in Colorado, C.P. Bedrock, LLC v. Denver County Board of Equalization, 259 P.3d 514 (Colo. Ct. App. Apr. 14, 2011), writ of cert. dismissed, 2011 Colo. LEXIS 569 (Colo. Sup. Ct. Jun. 20, 2011), the property at issue did not qualify as “agricultural” property for tax purposes. There was no grazing of livestock or crop growing activities present, and the property was not sufficiently connected by use with other land so as to be classified as agricultural land.  The property was also not used for conservation purposes.

• In Elmstad v. Lane County Assessor, No. TC-MD 101235D, 2011 Ore. Tax LEXIS 226 (Or. Tax Ct. Jun. 6, 2011), the taxpayer was not entitled to ad valorem real property tax assessment as farm because the property was not used primarily for making profit. The taxpayer’s testimony was that he intended to start vineyard and grow hay and blueberries and filberts on 9.27 acres.  The statute focused on the current use of the land, and the land had been laying fallow for more than one year.  The sales of a few pounds of honey was insufficient to show a profit motive. 

• In Terry v. Sperry, et al., 130 Ohio St. 3d 125, 956 N.E.2d 276 (2011), involved a situation where, under the applicable state statute, township zoning commissions, boards of township trustees or boards of zoning appeals were barred from prohibiting agricultural uses on land or the use of buildings or structures incident to “agricultural uses.” Under the statute, a township could not regulate the zoning of buildings used primarily for venting and selling wine, and no requirement existed that venting and selling of wine be a secondary or subordinate use of the property or that viticulture be the primary use of the property.  Thus, the township could not prohibit use of property for venting and selling wine if any part of property used for viticulture.

• In McLendon v. Nikolits, No. 4D15-4003, 2017 Fla. App. LEXIS 765 (Fla. Ct. App. Jan. 25, 2017),the defendant, county property appraiser, denied the plaintiff’s request for an ag tax classification on all of the plaintiff’s property. The plaintiff owned a five-acre tract and used the land to raise wild birds for sale as pets – aviculture. The plaintiff spent about $50,000 to buy cages, sheds, fences, feeders and structures for storage. From 2006-2012, the defendant classified the property as agriculture because of its dual use for aviculture and cattle. In 2012, the defendant denied an ag tax classification for the requested 4.5 acres, instead issuing it for 2.25 acres. The plaintiff appealed to the Value Adjustment Board (VAB) which held that the entire 4.5 acres should have ag classification. In 2013, the defendant denied ag classification to the portion of the property used for aviculture, which decision was reversed by the VAB. The defendant appealed the VAB’s decision and also denied ag classification for tax year 2014. Both parties motioned for summary judgment. The trial court ruled for the defendant on the basis that only poultry qualified as ag under the applicable statute and entered summary judgment for the defendant. On further review, the appellate court reversed. The appellate court held that if, on remand, the plaintiff could establish that aviculture is useful to humans, then agricultural classification should apply. The court reached that conclusion because the applicable statute defined “farm product” as “any…animal…useful to humans.” 

Conclusion

The cases illustrate that in situations that don’t involve traditional crop or livestock usage of real estate can lead to interesting property tax questions.  Niche farming activities are an example.  A new one recently involves marijuana growing activities in those states where it is legal under state law.  In any event, it is a good idea to be familiar with the particularities of state law.  Each state defines “agriculture” and “agricultural activity” differently and the court constructions of those statutes also vary.  Determining what state law is and bringing an activity within the definition of “agriculture” can save tax dollars.