What makes a patch of land agricultural or commercial?
That question lies at the heart of a years-long property tax dispute playing out on a Flathead Lake orchard.
Cherry Pines on Flathead Lake, about 13 miles south of Bigfork, saw its appraised value increase by nearly a million dollars in 2016, when the Montana Department of Revenue decided some of the owners' activities were commercial. It dropped back down last year after a successful appeal, but the Department of Revenue has refused to refund the taxes it collected the last two years.
The wrangling began over three vacation cabins that Cherry Pines’ owners, John and Rebecca Nasgovitz, rented out through vacation-rental website VRBO. John Nasgovitz declined to comment for this story.
The Department of Revenue had classified the two parcels, totaling about 16 acres, as agricultural until 2016, when Brittany Rech, a member and lead consultant at Taxed Right Consulting, says it changed the classification to commercial, citing the vacation rentals.
In an email to Montana Department of Revenue Director Gene Walborn, Rech recalled that when John Nasgovitz contacted the Department of Revenue about the change in fall 2016, he was told that “because he rents out his cabins in the summer months that his property was now considered commercial, and the land and buildings under the cabins were going to be valued and taxed as commercial.”
Department spokesperson Sanjay Talwani explained the decision this way: “One acre of land devoted to residential use, or that has agricultural improvements and is integral to the ag operation, is to be valued as agricultural land.”
“In 2016 the one acre beneath the rental improvements was determined by the DOR to NOT be an integral part of the agricultural operation and subsequently was valued at a market rate and taxed with the commercial tax rate.”
The department’s property record cards indicate that after this change, the two parcels’ appraised value jumped by about a million dollars, and their taxable value rose by $18,000. Property tax records Rech provided show that the orchard’s total taxes rose from about $4,100 in 2015 to more than $14,000 in 2016 and nearly $15,900 in 2017.
In April 2017, the owners requested an informal classification and appraisal review for one of the parcels. “The Cherry Cabin (on this parcel) is currently being used as a short term rental,” John Nasgovitz wrote in the state's AB-26 form, provided to the Missoulian by Rech. “Starting in 2018 it will no longer be rented. Since the Cherry Cabin will only be used by us/personally, it should be taxed as such.”
But in a decision that would later prove consequential, the owners withdrew their appeal. The determination letter, signed by Jim Bach, noted that “via telephone conversation with John (Nasgovitz) the change of use indicated on the appeal is for tax year 2018. The appeal for 2017 was withdrawn.” He advised them to “consider filing an AB-26 for 2018 if the cabin rental is discontinued as of 12/31/2017.”
The Nasgovitzes did just that, re-filing the request at the start of 2018, and once again citing the end of the cabin rental as reason to change it from “commercial” back to “agricultural.” But Rech, their tax consultant — and a former Department of Revenue appraiser — saw a more promising line of argument.
“I contacted my client in 2017 and told him that the State had no right taking his property out of agricultural and moving it to commercial,” she wrote in an email.
Lake County has seen its share of controversy over property taxes in recent years; the commissioners recently filed a lawsuit against the Department of Revenue over an unrelated tribal tax exemption. And the rise of online vacation rental services like VRBO and Airbnb has raised new questions about classifying and taxing property — and hurdles for enforcement.
“Overall, people on the lake are trying to figure out how to generate additional income from their properties, and so that’s why we’ve seen these vacation rental questions come up,” said Lake County Commissioner Gale Decker. His colleague, Commissioner Dave Stipe, said that “we discovered almost 300 advertisements on the internet for vacation rentals within Lake County, so there’s just a lot of them out there that are flying under the radar.”
In her appeal, Rech wrote that the Department’s actions here broke with its practices elsewhere. “As far as my research goes this is the only parcel that I can find being assessed this way regardless of the hundreds of VRBO’s being renting (sic) in Lake County.
“I have made calls to (Department of Revenue offices in) 5 of the surrounding counties and it was unanimous that this is not how they would handle a VRBO on Ag land,” she continued.
The department reclassified the properties for the 2018 tax year. She appealed the commercial statuses of both properties, and won a reclassification for the 2018 tax year that August. From $15,900 in 2017, the orchard’s tax bill dropped down to about $4,600.
Rech then set out to seek a refund of the taxes paid in 2016 and 2017. Montana law requires a county’s board of commissioners to refund property taxes resulting from appraisal error.
In October, Rech requested that the Lake County Commissioners take this step, and Commissioner Gale Decker replied that “the Commissioners will email DOR and ask for reappraisals of the two properties for tax years 2016 and 2017. As soon as we receive those, we can move forward with a refund.” The commissioners promptly requested reappraisals and revised assessments for the two properties.
On Oct. 9, Dan Lapan, then the department’s area manager for Lake and Sanders counties, replied to the commissioners, telling them that “with respect to a tax refund for tax years 2016-2017, there is no standing for a tax refund.”
That, he said, was because the department had never made a mistake.
“It is the opinion of the Department of Revenue that the property wasn’t appraised erroneously; it was an issue with agricultural classification of the land on structures not integral to an agricultural operation,” he wrote.
A crucial distinction separated the two sets of appeals filed for this property in 2018. While Rech had argued that the state had erred by taxing vacation-rental cabins as commercial property, John and Rebecca Nasgovitz explained that they were taking one of their cabins out of rental.
Now, Lapan’s explanation for denying a refund evoked the second argument. “After review of the properties during the AB26 informal review process for tax year 2018, adjustments were made based on physical examination of the structures and current use of the property,” he wrote.
Asked to clarify which of the appeals — Rech’s or the Nasgovitzes’ — had triggered the classification, the department’s Talwani wrote, “The department considers all informal reviews.”
While the department put both parcels back into agricultural status, the owners are still renting two cabins through VRBO. But Talwani wrote that “in 2018, as part of the informal review process, it was represented to the department that the owners were no longer renting the structures.”
“As in previous years, the classification was based on the information available to the department about the properties’ use at that time.”
Rech found the department’s decision lacking, noting that in their appeals, “neither one of us said that all the buildings on the property were not going to be rented. With that said, why then did the DOR remove them all from commercial?”
“Either they made the mistake putting these into Commercial to begin with … or they made a mistake taking them out of commercial during the 2018 appeal process,” she surmised.
But even if she’s correct, the property can’t receive a refund. To have been eligible for that, Talwani explained, they would have needed to pay the taxes under protest.
“Taxes may potentially be paid under protest if there is a timely appeal at the time taxes are due. As the department stated in its email to the Lake County Commissioners, there were no AB-26s or other appeals, and the taxes were paid — not under protest — for the 2016 and 2017 tax years. Therefore, there was no justification for the department to perform a revised assessment for those years.”
Under state law, he continued, “the property owner is not entitled to a refund if they do not pay their taxes under protest.”
In 2017, John and Rebecca Nasgovitz had withdrawn their appeal on advice from the Department of Revenue. Now, that department holds that they needed to have maintained their appeal and filed under protest to be eligible for a refund.
In this turn of events, Rech sees an untoward about-face. “I know he didn’t file his taxes under protest, but how do you do that when you’re told by the appraiser that there’s nothing wrong with that (value)?” she asked after reading the explanation.
Since the refund got denied, Rech said she’s reached out to both department leadership and the governor’s office without hearing back. The experience has left her with harsh words for the Department of Revenue.
“Most taxpayers believe in the system and the education of the people working in the State Offices. How many people do they tell this to and its (sic) incorrect? How many taxpayers are being valued differently than other properties with the same circumstances and don't know it?” she wrote in an email.
Noting the state of Montana’s stated policy to “provide for the reappraisal of taxable property in a manner that is fair to all taxpayers,” she asked, “How is this procedure fair to all taxpayers?”