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Taxing situation.

Taxing Situation

Stephen Glover was momentarily perplexed when he prepared the 1989 property tax assessment for Omega Tube and Conduit's Little Rock operation. Why were the numbers for 1988 and 1989 so different? Glover, who had taken over as company controller a few weeks earlier, couldn't account for the $52,000 gap until he took a closer look at how his predecessor had done things.

"In my prior working experience, I've never assessed raw materials, and that's what the problem was," Glover remarks. "The fellow before me assessed them. I was always told raw materials were exempt under state law."

The problem is much bigger than Glover's attempt to reconcile his books. Omega Tube has filed suit against Pulaski County to resolve the issue once and for all. The dispute is scheduled for a pretrial hearing on Aug. 23, followed by a trial on Sept. 6 in chancery court, and its findings have implications for businesses across the state.

No one is willing to venture a guess as to how much money statewide is involved in all of this, but it could easily run into millions of dollars.

On one hand, manufacturers that haven't been assessing their raw materials stand to pay thousands of dollars in additional property tax each year. On the other hand, counties that have been collecting the tax could lose tens of thousands of dollars of revenue.

"We want a clear definition of the law," Glover says. "We're not mad. We're just taking care of business. A figure like $52,000 may not sound like a lot for a company the size of Omega, but that adds up to $1 million over 20 years."

Omega Tube and others point to Act 269 of 1969, the so-called freeport law, in defense of the exemption on raw materials, and more than 40 other states have similar provisions. But the Assessment Coordination Division of the Public Service Commission has affirmed Pulaski County's right to tax raw materials stating that any such exemption would require a constitutional amendment, not a legislative enactment.

Who's right in all of this? That's a taxing question that will likely be posed to the Arkansas Supreme Court before all the legal wrangling is over and done. There's more at stake than Omega Tube's attempt to recover $94,583 in taxes paid on raw materials during 1986-88.

The AT&T plant in Little Rock is among those manufacturers that haven't paid taxes on raw materials in the past. The revamped reporting efforts boosted AT&T's 1990 assessment from $3.37 million to $7.93 million with the inclusion of raw materials.

That translates into more than $246,000 of "new" property taxes for the company. The money won't flow into the county coffers until next year, but AT&T has already filed its 1990 assessment under protest.

The inconsistencies are abundant as to how individual companies and county assessment offices around the state treat raw materials for tax purposes.

Two things add to the confusion: 1) The Arkansas Industrial Development Commission and various chambers of commerce have relied on the freeport law and told manufacturers for years that raw materials are tax exempt, and 2) the Assessment Coordination Division of the Public Service Commission backed up Pulaski County last year and said that counties may legally tax raw materials.

The situation is an awkward one with two arms of state government on different sides of the issue, and the dispute has put industrial recruiters in an uncomfortable position. Irate manufacturers who remember the assurances that raw materials were exempt have already started giving the AIDC and local chambers of commerce an earful.

"It sort of all hit the fan during the last few months," sighs Dave Harrington, AIDC director. "[The Assessment Coordination Division] rendered an interpretation that is at odds with how we have always interpreted the law.

"We don't know what kind of guidance to give companies. We've been telling them one thing, and all of sudden the rules are different. They're quite upset, and they want us to fix it.

"I'm not an attorney, but I believe we have been operating under the original spirit and intent of the law."

Is It Just Semantics?

If the semantics of the freeport law are called into question, that will be one argument raised by State Rep. Art Givens who is representing Omega Tube in its lawsuit.

However, folks on the other side of the fence believe the issue of original intent is a moot point. They say the Arkansas constitution clearly spells out property tax exemptions, and raw materials used in manufacturing goods is not among the items listed. The director of the PSC's Assessment Coordination Division for one believes it will take a constitutional amendment to change that.

"I think its simple, and I think our position makes total and logical sense," states Larry Crane, a lawyer and former assistant attorney general. "Obviously, Omega Tube and Mr. Givens think otherwise."

From a big picture perspective, this hubbub is an outgrowth of Amendment 59. This constitutional amendment is designed to revamp assessments across the state to reflect the actual value of real property carried on the county books. The dispute over raw materials was bound to happen sooner or later.

Factor In, Factor Out

According to the Pulaski County Assessor's Office, raw materials have always been subject to property tax, but officials have relied on each company to include raw materials as part of its inventory disclosure. Some manufacturers factored it in, and others didn't.

In an effort to clarify things and establish uniformity, the PSC's Assessment Coordination Division distributed a new assessment form statewide this year. Among other things, it divides inventory into three categories: finished goods, work in progress and raw materials.

Until this year, a standardized reporting method didn't exist to accurately measure the property tax dollars generated by raw materials. Those figures won't come in until 1991, and even then a statewide total may be an estimate at best. Some assessors are taking a wait and see attitude before enforcing any property tax on raw materials.

"I'm going to keep doing it like I've been doing it for 14 years until the courts say otherwise," reports Larry Fratesi, Jefferson County Assessor.

Century Tube Co. in Pine Bluff, a direct competitor of Omega Tube, has never paid taxes on its raw materials. That is another factor in Omega's quest for justice.

"The big discrepency is that not everyone is paying the tax," observes Stephen Glover of Omega Tube. "It's a loose end thing that needs clearing up, so that everyone is playing by the same rules."

PHOTO : LEGAL ASSESSMENT: Stephen Glover is seeking a clear definition of the state law regarding assessment of raw materials. He is controller at Omega Tube and Conduit, which has filed suit against Pulaski County to settle the issue once and for all.
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Title Annotation:Omega Tube and Conduit files suit against Pulaski County, Arkansas, on tax assessment of raw materials
Author:Waldon, George
Publication:Arkansas Business
Date:Aug 13, 1990
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