BEFORE THE STATE BOARD OF EQUALIZATION
FOR THE STATE OF WYOMING
IN THE MATTER OF THE APPEAL OF )
VERIZON WIRELESS (fka AIRTOUCH )
COMMUNICATIONS) FROM A NOTICE OF ) Docket No. 2001-122
VALUATION AD VALOREM TAX PURPOSES )
BY THE DEPARTMENT OF REVENUE )
IN THE MATTER OF THE APPEAL OF )
WYOMING RSA #1 - PARK LIMITED )
PARTNERSHIP FROM A NOTICE OF ) Docket No. 2001-123
VALUATION AD VALOREM TAX PURPOSES )
BY THE DEPARTMENT OF REVENUE )
IN THE MATTER OF THE APPEAL OF )
WYOMING RSA #2 - SHERIDAN LIMITED )
PARTNERSHIP FROM A NOTICE OF ) Docket No. 2001-124
VALUATION AD VALOREM TAX PURPOSES )
BY THE DEPARTMENT OF REVENUE )
IN THE MATTER OF THE APPEAL OF )
WYOMING RSA #3 - CELLULAR INC. )
NETWORK CORP. FROM A NOTICE OF ) Docket No. 2001-125
VALUATION AD VALOREM TAX PURPOSES )
BY THE DEPARTMENT OF REVENUE )
_________________________________________________________________________________________
FINDINGS OF FACT,
CONCLUSIONS OF LAW,
DECISION, AND ORDER
___________________________________________________________________________________________
APPEARANCES
Richard G. Smith of Hawley, Troxell, Ennis, & Hawley, LLP, for Petitioners, Airtouch Communications, Inc., Wyoming RSA #3, Wyoming RSA #2, and Wyoming RSA #1.
Cathleen D. Parker, Assistant Attorney General, for Respondent, Wyoming Department of Revenue.
DIGEST
These appeals arise from the decision of the Wyoming Department of Revenue (Department) treating Petitioners as telephone companies located in the State of Wyoming, and assessing their property as state-assessed property. Petitioners filed Notices of Appeal of the 2001 valuation determinations of the Department on June 10, 2001, for Wyoming #1-Park Limited Partnership (RSA #1), Wyoming #2-Sheridan Limited Partnership (RSA #2), Wyoming RSA #3 (RSA #3), Cellular Inc. and Verizon Wireless, their cellular telephone companies. These matters were consolidated on October 1, 2001. Pursuant to notice duly given to all parties in interest, this matter came before the State Board of Equalization (Board) for hearing on the July 16, 2002, at 9:00 a.m. in the State Board of Equalization Hearing Room, Herschler Building, 122 West 25th Street, Cheyenne, Wyoming and was heard by Chairman Edmund J. Schmidt, Vice-Chairman Roberta A. Coates and Member Sylvia Lee Hackl. Ms. Hackl was no longer a member of the Board at the time this Decision was rendered.
JURISDICTION
Upon application of any person adversely affected, the Board is mandated to review final decisions of the Department on state-assessed property and hold hearings after due notice pursuant to the Wyoming Administrative Procedure Act and prescribed rules and regulations pursuant to Wyo. Stat. §39-11-102.1(c)(viii).
The Board is required to “[d]ecide all questions that may arise with reference to the construction of any statute affecting the assessment, levy and collection of taxes, in accordance with the rules, regulations, orders and instructions proscribed by the Board.” Wyo. Stat. §39-11-102.1(c)(iv). The rules of practice and procedure for appeals before the Board involving tax matters contemplate appeals from final administrative decisions of the Department. Rules, Wyoming State Board of Equalization, Chapter 2, §3. The rules require appeals to be filed with the Board within thirty (30) days of any administrative decision. Rules, Wyoming State Board of Equalization, Chapter 2, §5. Petitioners timely filed their appeals. The Board is required to decide all issues relating to this appeal and give a written decision, citing findings of fact and conclusions of law following a hearing before the Board. Rules, Wyoming State Board of Equalization, Chapter 2, §34.
DISCUSSION
The Notices of Appeal alleged:
1. Intangible property was being overvalued and taxed incorrectly;
2. The economic enhancement adjustment in the cost approach to value the property was improper;
3. There should have been an adjustment for economic and functional obsolescence; and
4. The unitary method to value property should not have been used.
Later, in the Petitioners’ Summary of Updated Contentions, Petitioners alleged;
5. Their companies are not telephone companies and should be assessed by the county assessors instead of the Department.
The Board finds that all of the companies were telephone companies because the service they provide is indistinguishable from the service of land-line telephone companies, only the technology is different. We find the unitary method of valuation is appropriate because all companies are going-concern businesses with integral parts for which a willing buyer would pay more. We find the economic enhancement adjustment to be correct, and the adjustment for functional obsolescence to be adequate. We also reject the Petitioner’s formula to exclude values for the customer base and the Federal Communications Commission (FCC) licenses.
OUTLINE OF FINDINGS OF FACT AND CONCLUSIONS OF LAW
This is a complex case, with multiple issues, a lengthy record and detailed analyses of facts and law. This outline is presented to assist in identifying the individual issues and in locating the facts, law and conclusions relevant to each. The subsections are presented in parallel fashion: for example, the second section in the Findings of Fact, dealing with the valuation of the companies as telephone companies under state law, is also the second section in the Conclusions of Law. The numbers in parentheses following each subsection heading refer to the numbered paragraphs within the opinion which reference that issue.
FINDINGS OF FACT
I. General Information and Unitary Valuation. (1-16)
II. Petitioners are “telephone companies” subject to state assessment and valuation under Wyoming Statute Section 39-13-102(m)(vi). (17-24)
III. The economic enhancement adjustment used by the Department was appropriate. (25-43)
IV. The Department allowed a sufficient adjustment for obsolescence. (44-62)
V. The intangible property identified by Petitioners does not have to be deducted from the value of the unit. (63-93)
A. The assets Petitioners identified, customer base and FCC licenses, are not intangibles to be deducted from value.
B. The formula offered by Petitioners to deduct “intangibles” is flawed.
C. Petitioners failed to report the necessary information to qualify for a deduction for intangibles.
VI Leased property is taxable under Wyoming law. (94-96)
CONCLUSIONS OF LAW
I. General Information: Jurisdiction, Burden of Proof and Unitary Valuation. (99-107)
II. Petitioners are “telephone companies” subject to state assessment and valuation under Wyoming Statute Section 39-13-102(m)(vi). (108-115)
III. The economic enhancement adjustment factor used by the Department was appropriate. (116-126)
IV. The Department allowed a sufficient adjustment for obsolescence. (127-132)
V. The intangible property identified by Petitioners does not have to be deducted from the value of the unit. (133-151)
A. The assets Petitioners identified, customer base and FCC licenses, are not intangibles to be deducted from value.
B. The formula offered by Petitioners to deduct “intangibles” is flawed.
C. Petitioners failed to report the necessary information to qualify for a deduction.
VI. Leased property is taxable under Wyoming law. (152-154)
FINDINGS OF FACT
I. General Information and Unitary Valuation.
1. This matter relates to the valuation and assessment of Petitioners’ properties in Wyoming by the Ad Valorem Division of the Department for tax year 2001. [Transcript p. 1].
2. Petitioners provide cellular telephone service in the State of Wyoming. Each operates under an FCC license granting it the right of coverage in certain parts of the state. The license for each Petitioner covers multiple taxing districts and multiple counties. [Transcript, p. 178].
3. In approximately 1986, CommNet Cellular, Inc. (CommNet), convinced local telephone exchanges to form partnerships to provide wireless services. CommNet provided the ability to build, manage, and market the systems for the partnerships. [Board Exhibit #1, p. 02408]. Those partnerships are the Petitioners, RSA#3, RSA #2 and RSA #1. CommNet does not provide cellular services but is a management company. [Board Exhibit #1, p. 02407].
4. Airtouch acquired the CommNet entities on January 6, 2000. Thereafter, on April 3, 2000, Airtouch became part of Verizon Wireless, a partnership between Verizon Communication (formed from the combination of Bell Atlantic and GTE) and the Vodafone Company. [Board Exhibit #1, pp. 02408-02409].
5. Originally there were two types of licenses issued by the FCC for cellular service in each service area. The “A” licenses were allocated on a lottery process pursuant to which there were rules imposing requirements on the owner to “build out” the service area within a certain period of time. [Board Exhibit #1, p. 02350]. The “B” licenses were reserved for local exchange telephone companies who already provided service in an area. [Board Exhibit #1, pp. 02349, 02408]. Both licenses cover a fixed geographical area. Petitioners acquired several “B” licenses through partnership agreements with local exchanges and one “A” license through the lottery. The FCC issued licenses for the rural service territories or “Rural Service Area” known as “RSAs.” There are five RSAs in Wyoming. RSA #1 and RSA #2 operate in northern Wyoming, RSA #3 in southwestern Wyoming, and RSA #4 and RSA #5 in central and southeastern Wyoming. [Board Exhibit #1, pp. 02349-02350, 02361].
6. The Department is required to determine the fair market value of fifty-five to sixty telephone companies in two months. [Transcript, p. 210; Board Exhibit #1, p. 02505].
7. Wyoming is a self-reporting state which means the Department collects the information from the taxpayer and calculates value based on this reported information. [Transcript, p. 314].
8. The Department valued the various properties of the Petitioners using a unitary approach to valuation. [Transcript, p. 211; Stipulated Updated Summary of Uncontroverted Facts, ¶ 6]. The unitary approach looks at the value of all the assets of a going-concern business, and values that entity. [Transcript, p. 211 ].
9. The unitary method values the company as a whole in contrast with the summation method, which values individual assets then sums the total. [Transcript, p. 211 ]. Going concern value is appropriately captured in the unitary approach. [Transcript, p. 345]. Unitary valuation is defined as “the process of determining the value of a company as a whole without reference to the individual parts. The unitary approach is used in the valuation of properties which derive their value from interdependent assets working together. The market value is not a summation of fractional appraisals, but the value of a company as an operating unit.” A fractional appraisal is when each piece of equipment is valued and those values are added together. Rules, State of Wyoming Department of Revenue, Ch. 7, §4(k).
10. To insure uniformity the Department valued all telephone companies in the state using the unitary method. [Transcript, p. 213].
11. The Department uses three unitary methods to value a company. The first method is the “historical cost of the property less depreciation,” HCLD, which is a cost approach. The second method is “yield capitalization,” which is an anticipated income valuation approach. The third method, used by an appraiser in the Department who reviews the initial valuation, is the “direct capitalization value,” which is also an income approach. The Department may also consider the stock and debt model and sales comparison but those approaches were not available for Petitioners’ companies. [Transcript, p. 211, Stipulated Updated Summary of Uncontroverted Facts, ¶ 7 ].
12. The Department rejected the value determined using the direct capitalization model because it was much higher than the other methods. [Transcript, p. 258]. If the Historical Cost Less Depreciation, HCLD, had resulted in a higher value than the direct capitalization method, the HCLD model would have been rejected. [Transcript, p. 296].
13. The capitalization rate used by the Department in the income valuation method is a rate developed by the Department after consulting various documents concerning industry financial information. The Department held a public hearing concerning the rate. The Department subsequently used the capitalization rate uniformly for all cellular companies. [Exhibit 503].
14. The Department performed an appraisal for each of the Petitioners’ companies. Exhibit 512 is the appraisal of Airtouch Cellular. Exhibit 513 is the appraisal of RSA # 1. Exhibit 514 is the appraisal of RSA #2 and Exhibit 515 is the appraisal of RSA #3.
15. When the Department calculated the net value of the plant in service for Airtouch it appears that $604,173 for accounts receivable was included in the value and that is an error. [Transcript, pp. 203-205].
16. Petitioners did not provide their plan for expansion, information about obsolescence or any information about significant changes in financial structure and position of the company or the acquisition by Airtouch until May 2001, long after the Department had completed its preliminary calculation of value. [Transcript, pp. 229-232].
II. Petitioners are “telephone companies” subject to state assessment and valuation under Wyoming Statute Section 39-13-102(m)(vi).
17. Petitioners argue that because they are not regulated by a governmental entity and do not own any land-line facilities, they are not a “telephone company” within the tax statutes. [Board Exhibit #1, p. 02425]. Petitioners do not own any facilities for the operation of land-line services. In other words, they do not own “telephone wires.” In fact, they are not even permitted to own such property under the terms of their FCC licenses. [Board Exhibit #1, pp. 02425 - 02426]. Wireless communication companies are not rate or tariff regulated by a governmental entity. [Board Exhibit #1, pp. 02409, 02427, 02539].
18. All cellular companies must hold a wireless license with the FCC and must file a certificate that they can provide and are providing wireless service to the licensed area. The cellular companies are regulated to some extent by the FCC, as are telephone companies. [Board Exhibit #1, p. 02409].
19. The FCC license is for multiple counties and each Petitioner provides service across multiple county lines. [Transcript, p.178]. Petitioners are long-distance telecommunications carriers whose sole service depends upon the network of microwave transmitters and fiberoptic cable that connect across county and even state lines to transmit conversations for its customers. Each Petitioner owns licenses and property in multiple counties. [Board Exhibit #1, p. 02488].
20. The FCC cellular licenses are competitive because more than one license may be awarded for a certain territory. [Board Exhibit #1, pp. 02412, 02427].
21. Cellular calls originate from a customer’s handset, which then sends a signal to a cell site. A cell site is usually a tower on which are mounted one or more antennas, which are connected with cable to electronics located in an adjoining cell site building. After the signal is transmitted from the mobile handset to the cell site, it is then transmitted from a cell site to a switching station. Depending upon the location of the switching station, and the ultimate destination of the call, the call may be routed from the switching station to a local telephone office, which then rings the telephone number of the person to be called. The routing of the call between switching stations, and from the switching station to the ultimate destination, typically occurs over land telephone lines, and that portion of the call would be billed to the cellular company just as any other call from one local exchange company customer to another. [Stipulated Updated Summary of Uncontroverted Facts, ¶ 17].
22. Land telephones and cellular telephones use fiberoptic cable to transmit signals. Both land telephones and cellular telephones use cordless handsets, commonly called “phones.” The primary purpose of both land telephones and cellular telephones is to make and receive two way, interactive, real time, verbal communications at a distance. [Board Exhibit #1, pp. 02480- 02481]. Both provide voice mail services, caller ID services and call waiting services. [Board Exhibit #1, p. 02482]. The telephone numbers of both land telephone companies and cellular companies are similar with identical area codes assigned to telephones for that area, and are specific to a handset. [Board Exhibit #1, pp. 02351, 02372-02373, 02482]. Most calls made on cellular phones are mobile-to-land calls thus using wire line technology. [Board Exhibit #1, p. 02366].
23. Communication companies that are locally-assessed and not state-assessed provide one-way and not immediate, not real time, communication functions, i.e. pagers, internet service providers, television. [Transcript, p. 216].
24. Petitioners implied that the Department’s determination of a different capitalization rate for the wireless industry substantiates their claim that they are not telephone companies. However, the Department arrived at different capitalization rates for rural telephone companies (non-rated), long distance carriers, and local exchanges. [Transcript, p. 324]. Similarly, the Department differentiates pipelines based on what the pipeline is transporting. [Transcript, p. 327].
III. The economic adjustment used by the Department was appropriate.
25. The Department calculated a value for Petitioners’ companies using the Historical Cost Less Depreciation, HCLD, method and used an economic enhancement adjustment. [Exhibits 512, 513,514, 515, 516].
26. Petitioners argue because of the economic enhancement adjustment in the cost approach used by the Department, the cost approach is inappropriate because it is dependent on the income approach. [Exhibit 106 and Board Exhibit #1 p. 02441]. They demonstrated the effect is circular, if the same income is used in both the income methods and the cost method. [Exhibit 106].
27. Petitioners also argue the net book value of the equipment of the company should serve as an upper limit on valuation because of the rapid change in technology, resulting in functional obsolescence. [Board Exhibit #1, p. 02444]. The sum of the net book value of each piece of equipment does not reflect fair market value. [Transcript, p. 366].
28. Petitioners argue the higher income is a result of the intangible assets. [Transcript, pp. 227-228]. Other than this bold assertion, there is no showing that the value of the intangibles is equivalent to the economic enhancement. In fact, if one accepts the value of the intangibles as asserted by Petitioners then the assertion is incorrect and Petitioners disproved their own theory. Further, the economic enhancement factor could very well equal the synergy created by the combination of the assets.
29. The Department analyzed each wireless telephone company in Wyoming and made adjustments if the “Return on Average Operating Property and Equipment” was different from the Wyoming Capitalization Rate. If there was a difference, the Department adjusted the net book value of the company either up or down depending on the difference. The economic enhancement adjustment is different for each company as a result of the individual company’s rate of return. [Transcript, p. 298].
30. The Department’s formula first calculated the average telephone plant subject to economic obsolescence which was determined by taking the previous years’ total plant book value and adding it to the current year’s total plant book value, and dividing that figure by two (2).
By dividing the selected Working Net Operating Income by the Average Total Telephone Plant subject to economic obsolescence, the appraiser arrived at a Return on Average Operating Property and Equipment. The Department’s appraiser divided the calculated Return on Average Operating Property and Equipment by the Wyoming Capitalization Rate of Return for the current year and subtracted 1.00 to arrive at a negative or positive adjustment, arriving at the Adjusted Percentage.
a)The appraiser then multiplied the Adjusted Percentage by the Total Telephone Plant Subject to Economic Obsolescence to determine economic enhancement or obsolescence.
b)If the Adjustment Percentage is positive when 1.00 is deducted, appreciation or enhancement is added to the Average Total Telephone Plant Subject to Economic Obsolescence by the assessor.
c)If the Adjustment Percentage is negative when 1.00 is deducted, obsolescence is deducted from the Average Total Telephone Plant Subject to Economic Obsolescence by the assessor.
31. Using the above-described formula, the Department calculated the economic obsolescence/enhancement adjustment so that the Petitioners received the following adjustment:
2001 |
Cap Rate (%) |
Company Return Rate (%) |
Adjustment (%) |
RSA #1 |
15.75 | 23.0104 | 46.0978 |
| RSA #2 | 15.75 | 46.9320 | 197.9810 |
| RSA #3 | 15.75 | 47.4568 | 201.3130 |
| Airtouch | 15.75 | 54.9881 | 249.1308 |
[Stipulated Updated Summary of Uncontroverted Facts, ¶ 13-16 ].
32. The Department applied this formula to all cellular phone companies. Each Petitioner received a rate of return on its assets higher than the anticipated rate for that industry thus resulting in an Adjustment Percentage that was positive. The Department refers to this as “economic enhancement.” It is the Department’s judgment that such adjustment is necessary to measure the true value of the property, otherwise, the property would only be valued at net book value. The Department noted that Petitioners’ income is increasing while the book value of the assets is declining through depreciation, and therefore there is a greater return on the assets, resulting in a positive adjustment to properly measure the true value of the assets. The Department also argues that if Petitioners had earned a lower rate of return than the industry-wide capitalization rate, Petitioners would have received a deduction for economic obsolescence using the same formula. [Transcript, p. 294].
33. The value derived by the Department using its formula for RSA#3 is three times higher than the net book value of the company. [Exhibit 515, p. 452, Transcript, p. 287].
34. If the value derived using the HCLD method had resulted in a value many times greater than the other values using other methods it would not be given much weight in the final valuation decision or might be rejected altogether. [Transcript, p. 296].
35. The Department of Revenue Rules, Chapter 7, Section 5(a)(ii)(C) allow the Department to value property using a historical cost model that adjusts for “appreciation.” “Appreciation” is defined in the Department of Revenue Rules, Chapter 7, Section 3(f):
Appreciation means an increase in value due to an increase in cost to reproduce, value over the cost or value at some specified earlier point in time brought about by greater demand, improved economic conditions, increasing price levels, reversal of depreciation and environmental trends or other factors as defined in the market.
[Transcript, pp. 290-291, 316].
36. Marshall & Swift, a nationally recognized company that compiles cost information for valuing property recognizes economic enhancement:
External obsolescence is a change in the value of a property, usually negative but can be an enhancement, caused by forces outside the property itself, and is not included directly in the tables that follow.
[Exhibit 517, p. 000485, Transcript, p. 351].
37. Petitioners agree that an economic obsolescence adjustment may be appropriate but they dispute the use of the economic enhancement adjustment. [Board Exhibit #1, p. 02502].
38. If no economic enhancement adjustment is made, and the historical cost approach method is used, the value can never be more than the net book value of the company. [Board Exhibit #1, p. 02503].
39. The sum of the book value of the equipment is not fair market value except in rare circumstances. [Transcript, p. 366]. When a combination of assets work together a synergy is created, and thus the value of the whole is greater than the sum of the value of the parts.
40. The Department does not use the same net operating income to calculate the economic adjustment as the income used in the income method. This is a result of the recommendation of a special study as commissioned by the Board. This study is discussed in PacifiCorp v. Department of Revenue, 2001 WY 84, ¶ 12, 31 P.3d 64, 12 (Wyo.2001). [Transcript, p. 253]. This study did not discourage the economic enhancement adjustment.
41. Petitioners’ own exhibit allows for economic enhancement: “If the required return rate had been less than the five year average dollar return, then negative economic obsolescence would exist (appreciation), . . .”
[Exhibit 113, p. 58].
42. The income projections used by the Department were reasonable according to our findings and the discussion in Findings of Fact 48. The lower income figure results in a reduced economic enhancement. [Transcript, p. 253].
43. The higher capitalization rate utilized by the Department as referenced in Finding of Fact 60 results in a lower adjustment for economic enhancement.
IV. The Department allowed a sufficient adjustment for obsolescence
44. The Department disputed any adjustment for obsolescence. Functional and physical obsolescence should be accounted in the depreciation on the equipment. The only obsolescence not accounted for is economic obsolescence. The income indicator of value exceeds the net book value. Thus, there is no indication that there is economic obsolescence. [Transcript, p. 343].
45. In one year, the number of Petitioners’ customers has increased as follows:
| Company | 1999 | 2000 | % Increase |
| RSA #1 | 6,100 | 7,800 | 27.87% |
| RSA #2 | 6,700 | 8,900 | 32.84% |
| RSA #3 | 13,000 | 23,000 | 76.92% |
| Airtouch | 31,000 | 46,100 | 46.35% |
[Transcript, pp. 181- 182].
46. The Department explains that functional obsolescence is not important in this situation:
On the other hand, since it is producing revenue well in excess of the required cost to capital, or capitalization rate, it does suggest that even if there is some functional obsolescence, that is more than offset by the economic or external enhancement.
[Transcript, p. 373].
47. The Department emphasized the consulting engineers for a company should be recommending the depreciation schedule to account for physical and functional obsolescence. [Transcript, p. 343].
48. The Department used the lowest five year average to project future income. [Exhibit 512, p. 000392, Exhibit 513, p. 000420; Exhibit 514, p. 000436; Exhibit 515, p. 000454; Exhibit 516, p. 000469]. Using a five-year average to calculate income is appraiser judgment. The Department used a long-term average because this was a new company. [Transcript, p. 252]. The actual income of RSA #3 was in excess of seven million dollars ($7,000,000) but the income used to calculate value in the Department’s models was three million dollars ($3,000,000). Similarly the actual income for RSA#1 was almost two million dollars ($2,000,000) and the Department used eight hundred thousand dollars ($800,000). Airtouch had an income of seven million eight hundred thousand dollars ($7,800,000) and the Department used four million eight hundred thousand dollars ($4,800,000). RSA #2 had an income of one million nine hundred thousand dollars ($1,900,000) and the Department selected an income of eight hundred thousand dollars ($800,000). The income projections used by the Department were reasonable.
49. We find that by using multiple years to compute the companies’ income the Department reasonably adjusted the value.
50. The lower income amount results in an acknowledgment and appropriate deduction for functional obsolescence. [Transcript, p. 253].
51. The analog equipment of Petitioners’ is state-of-the-art for Wyoming although analog equipment in large metropolitan areas is being replaced by digital equipment. [Transcript, p. 293].
52. The analog equipment is necessary to the provision of wireless service. In fact, the FCC requires that analog equipment be maintained in Wyoming. More importantly, the digital equipment conversion was not required for the tax year at issue in this case. The only company of all the Petitioners that offered digital service during the tax year was Verizon Wireless. [Transcript, p. 188].
53. Petitioners, through Michael Mupo, executive director of property tax for Verizon Wireless, believed that the value should be adjusted downward by thirty percent (30%) for functional obsolescence. [Transcript, p. 34, Exhibit 108]. This is calculated based on the original cost of the equipment and what Petitioners estimate they spend to replace their currently existing equipment. Petitioners want the obsolescence adjustment even though the value reported to shareholders is not depreciated to that amount. [Transcript, p. 59].
54. Petitioners believe there is obsolescence because cellular phone companies are retrofitting their analog equipment to encompass digital technology. Digital technology is an advantage to cellular phone companies because digital cell sites can handle more capacity, more features may be offered to the customer and a digital call is more private. [Board Exhibit #1, p. 02353]. Furthermore, digital technology allows an emergency call to be located, and when enhanced 911 emergency call regulations are enacted, digital service will be increasingly important. [Board Exhibit #1, p. 02356]. At the same time, analog equipment is increasingly hard to replace, and it is anticipated it will no longer be sold in the future. [Board Exhibit #1, p. 02357]. Equipment suppliers for cellular equipment are switching their inventory to digital equipment and analog equipment is increasingly harder to find. [Transcript, pp. 42-43].
Digital service does not cover as large an area as analog service; thus, there are gaps in the digital service area in Wyoming. Approximately 27 more cell sites are being added to accommodate digital technology with a goal of being all digital in Wyoming in the future as FCC regulations allow. [Board Exhibit #1, pp. 02355, 02364].
55. Due to FCC regulation, cellular companies must keep analog technology in place and cannot totally convert to digital technology. [Transcript, p. 37]. Dual-mode cellular technology will be maintained by Petitioners including the modem handsets. All handsets work on analog equipment as there are no “digital only” handsets. Analog is the default mode if digital service is not available and is deemed the “fail-safe” mode. [Board Exhibit #1, 02372].
56. The Department pointed out that there was no calculation to demonstrate the 30% obsolescence adjustment and the cellular telephone business has had steady growth. [Transcript, pp. 182, 342].
57. Petitioners failed to present documentation of obsolescence to the Department when they had the opportunity to do so. In prior years Petitioners provided invoices for analog equipment that was reduced from the original price, but the Petitioners did not provide such information to the Department during this assessment cycle. We do not know if the Department would have adjusted the value for obsolescence if such information had been provided but we believe such an adjustment decision is within the appraiser’s judgment. [Transcript, p. 256]. Petitioners now argue that due to the need to retrofit their equipment for digital service they should have received a larger adjustment for functional obsolescence. [Board Exhibit #1, p. 02491]. Petitioners failed to provide any information to the Department in their annual reports that they were changing to digital technology. [Transcript, p. 237]. When filing information with the Department, Petitioners disclosed no information about obsolescence because of digital technology, lower anticipated income because of loss of roaming income, or the acquisition by AirTouch. [Board Exhibit #1, Vol. II, pp. 02493- 02495]. Petitioners prepared an analysis about the decreasing cost of analog equipment, Exhibit 108, but this exhibit was not prepared until November, 2001, approximately six months after Petitioners were supposed to supply information to the Department. [Transcript, p. 49].
58. Petitioners’ witness, Mr. Mupo, could not describe how the obsolescence he identified related to the income approach to value. [Transcript, p. 59].
59. Petitioners attempted to criticize the appraisal of the Department through the testimony of Ms. Stacey Sprinkle, who is the Director of Federal and State Tax Policy for Verizon Wireless. While Ms. Sprinkle certainly has vast experience in tax matters and accounting, Petitioners never established her credentials as an expert witness in appraisal sufficient to overcome the presumption of correctness of the Department’s appraisal. [Board Exhibit #1, p. 02520, Exhibit 100].
60. The Department of Revenue Rules, Chapter 7, Section 7(b) require that a public meeting be held for presentation of the capitalization rate to be used for the current year and to allow oral and written comments. The Department determined the proper Wyoming Capitalization Rate of Return for the wireless telephone industry for the 2001 tax year to be 16.27%. [Exhibit 503, Exhibit 519]. Petitioners calculated a capitalization rate 15.46%. The higher capitalization rate of the Department results in a lower value. [Transcript, p. 257].
61. There was little competition for cellular services in 2001 in Wyoming. There are resellers of phone service but each phone has to operate under some form of FCC license. In 2001, only Qwest had started to compete in limited Wyoming markets. [Board Exhibit #1, p. 02488].
62. We find location is a factor when determining obsolescence, as in this case, the company is in a location of little competition. The digital technology is of little significance in Wyoming because of all the cellular service offered less than ten percent is digital. [Transcript, pp. 38, 375]. Obsolescence does not apply to Wyoming because the competition is analog. [Transcript, p. 261]. Therefore, the Department did not need to further adjust the value for obsolescence. [Board Exhibit #1, p. 02372].
V. The intangible property identified by the Petitioners does not have to be deducted from the value of the unit.
63. When Petitioners requested an informal conference with the Department they requested deductions for the trade name, workforce, the FCC license, and the customer base. [Transcript, p. 226 ].
64. Now, Petitioners claim the FCC licenses and customer base of the companies are intangible assets, and thus their value should be deducted from the assessed value of the companies. Petitioners contend that other states use generally accepted appraisal standards and allow the requested deductions. [Transcript, p. 384-385].
A. The assets Petitioners identified, customer base and FCC licenses, are not intangibles to be deducted from value
65. The Wyoming Supreme Court has held that an intangible asset must be both identifiable and separable. RT Communications, Inc. v. State Board of Equalization, 11 P.3d 915, 928 (Wyo. 2000). Intangibles that are not components of a going concern have to be deducted. [Transcripts, p. 367].
66. Petitioners’ own exhibit explains: “Intangible personal property, assets commonly found in the business enterprise are identifiable, separable, and capable of systematic valuation.” [Exhibit 113, pp. 55-56].
The customer base and FCC license are not at all capable of systematic valuation as admitted in the Petitioners’ Annual Report. [Exhibit 507, p. 000210; Exhibit 508, p. 000257; and Exhibit 509, p. 5A].
67. The FCC license and the customer base are not separable, identifiable, or easily valued and are therefore not qualified intangibles. [Transcript, p. 350].
68. The customer base is not an intangible because it is neither identifiable nor separable. To identify the value of the customer base, the Petitioners estimated the acquisition cost by looking at advertising expenses and contract discounts. This indicates the customer base is not easily identifiable. Similarly, if there were no customers there would be no business, therefore the customer base is not separable.
69. Similarly, the FCC licenses are not intangibles because they are neither identifiable nor separable. They are not identifiable because there is no market for this type of FCC license. An FCC cellular license can be purchased from the FCC, but there is no evidence in the record that there is a secondary market for such FCC licenses. Furthermore, the licenses are saleable only after approval by the FCC. The FCC may revoke a license if the company fails to build out service according to the plan. [Board Exhibit #1, pp. 02412, 02451, 02510, Transcript p. 177].
The licenses are not separable because to provide wireless communication, Petitioners were required to have an FCC license; in fact, the CommNet partnerships were formed to obtain the licenses. [Board Exhibit #1, p. 02407]. There was evidence that cellular service could be offered if the company were to lease an FCC license but the act of leasing would not make the license non-taxable. Leased property is taxable. [Transcript, p. 361]. If the license were severed from each company, the remaining assets of the company would have only salvage value, since Petitioners could no longer provide cellular phone service. Salvage value is not fair market value. The enhancement effect of the FCC cellular license is critical to establishing fair market value for the company. [Transcript p. 110]. Mr. Michael Mupo, the executive director of property tax for Petitioners, agreed that the equipment would not be worth much without the FCC license. [Transcript, p. 110].
70. No other taxpayer deducts its FCC license or customer base from its value. [Transcript, pp. 318, 321]. Likewise, no other taxpayer receives a deduction for its work force or trade name. [Transcript, p. 321].
71. The Internal Revenue Service, Internal Revenue Code §197, and purchase price accounting standards mandate that an intangible be identified on the books of a company and amortized for fifteen years. [Board Exhibit #1 p. 02459, Transcript, pp. 360, 376]. Although Petitioners were aware of these standards, they neither listed the FCC licenses and the customer base on their books, nor was there any evidence they amortized these claimed intangibles. [Transcript, pp. 200, 376, Board Exhibit #1, p. 02459]. Even after the acquisition of the companies by Verizon, Petitioners did not assign a value on their books for the FCC license or customer base. From this it is logical to assume Petitioners themselves did not consider the FCC licenses and the customer base to be intangibles.
72. Petitioners did not list the value of the FCC cellular licenses on their accounting books because Petitioners were the original recipients and thus did not have to purchase licenses. [Transcript, p. 179; Board Exhibit #1, p. 02453]. However, Petitioners continued to fail to list the value of these assets even after Verizon paid for all of the property. Petitioners want an exemption for equipment for which there was no booked cost, and for assets which are an integral part of the business. [Transcript, p. 225].
73. Petitioners argue that because the Department allows a deduction from taxable value for working capital that the FCC licenses and customer base should be treated similarly. The Department argues, and the Board agrees, that working capital is separable from the business. However, the customer base and FCC licenses are not and therefore the working capital should be treated differently. [Transcript, p. 322].
74. Mr. James Painter, an appraiser in the Department, explained that in removing the intangibles listed in Wyoming Statute Section 39-11-101(a)(vii) the value of the tangible assets is not affected. However, when other intangibles are removed, such as the programming in a calculator, the FCC license permitting operation of cellular company, or a customer base, are removed, the value of the remaining tangible assets is substantially altered as they no longer serve their intended function. [Transcript, pp. 346-348].
B. The formula offered by Petitioners to deduct “intangibles” is flawed.
75. If we conclude the customer base and the FCC license are intangibles, the Petitioners’ have offered a formula to calculate value using the income method to value. Petitioners, through the testimony of Ms. Sprinkle, offered the following formula to value the companies:
1)5 year average Net Operating Income(income projection model)
X Capitalization Rate
Income Indicator of Value
Less
2) Net Book Value of Tangible Booked Assets (cost model)
Less 30% Obsolescence
Adjusted Book Value of Tangible Assets
3) Remainder is the Value of Goodwill and Intangibles
Less
4) The Value of the FCC license determined by multiplying the population served times 1996 PCS rate of $31.23
5) The Value of the Customer base determined by Multiplying the number of subscribers x $160
Goodwill
Determine the percent of the goodwill for the tangible assets and the percent of goodwill for intangible assets and multiply those percentages times the value of the tangible and intangible assets to determine their value.
Then only tax the value of the tangible assets plus the percent of goodwill.
[Exhibit 103].
76. The Petitioners’ formula subtracts the value of the intangibles using a cost of acquisition formula. [Transcript pp. 136, 393]. This is a fatal flaw because it cannot be assumed the contribution to the income is equal to the cost of an asset. [Exhibit 113 p. 58].
77. Petitioners’ formula would result in a negative value for RSA #1. [Exhibit 103, Transcript p. 139]. This demonstrates the flaw of the formula because Petitioners would not operate a business that has a negative value for any length of time.
78. Petitioners’ formula assumes that the income approach to value includes the value of the intangibles.
79. At the highest value, Petitioners’ formula would result in the depreciated book value of the assets in addition to a small goodwill adjustment. [Transcript p. 139].
80. The Department argues that capitalized income may not capture the full value of intangibles. [Transcript, p. 345]. The Board finds there is no showing that capitalized income did in fact capture a value for intangibles.
81. Because customer base expenses are deducted from income, when income is capitalized customer base value is not captured. [Transcript, pp. 348-349]. Customer acquisition costs are an expense. They decrease net income and therefore reduce the income stream that is capitalized. Customer acquisition costs were accounted for in both methods the Department used to value these companies. Therefore, there is no need to deduct customer acquisition costs again. [Transcript, p. 356].
82. Beginning in 1994, the FCC issued a new kind of license, a PCS license, for digital cell phone service. These licenses are not for analog equipment but only for digital equipment. Petitioners’ licenses are for analog and digital service. [Board Exhibit #1, p. 02358]. In January 2001, PCS licenses sold in an auction for $25 to $100 per population served in the area. [Board Exhibit, #1 p. 02522]. In 1995 and 1996 the original PCS license auctions averaged from $12 to $35 per population. [Board Exhibit #1, p. 02523].
83. Petitioners attempted to value the FCC license by multiplying the population of the area served by the weighted average sale price taken from the 1996 auctions, taking into account transactions that involved fewer than a million customers. [Transcript, p. 156]. We disagree with the use of the 1996 auction prices because those licenses were only for digital operations, which were in limited use in Wyoming during the tax year in question. Furthermore, there was no testimony that there had been a purchase of an FCC license separately from a “going concern” company.
84. Petitioners valued the customer base by using acquisition costs, advertising costs and contract reduction costs, which was estimated to be $160.00 per customer. [Transcript, p. 152 ]. The customer acquisition cost information is not publicly available. [Transcript, p. 153]. There was no information provided to support the customer acquisition costs.
85. The Department argues that Petitioners’ formula is a new theory in the area of appraisal. [Transcript, p. 311]. The Department similarly argues Petitioners’ deduction for enhancement is not a generally accepted appraisal practice. [Transcript, p. 317].
86. Petitioners presented two 1996 papers that argue economic impairment (economic obsolescence) should be allocated between tangible and intangible property. [Exhibit 520, Exhibit 113, Transcript, p. 388]. From these articles, Petitioners argue it is generally accepted appraisal standards that their allocation formula should be used. [Transcript, pp. 387-388]. The Department admits that if there is to be a deduction for intangibles there should be an allocation of additional enhancement between tangible and intangible assets. [Transcript, p. 368].
87. The Department contends the intangibles in fact were not assessed. The Department used a unitary approach which valued each company as a “going concern.” This approach captures the enhancement of the tangibles operating as a working unit in combination with the intangibles. [Transcript, p. 345].
C. Petitioners failed to report the necessary information to qualify for a deduction for intangibles.
88. Even if we accept Petitioner’s proposition that customer base and FCC licenses are intangible and the formula presented by Petitioners is reasonable, the Petitioners should not be able to prevail in their deduction because of their failure to report the necessary information to the Department. The Annual Report form filed by Petitioners on April 17, 2001, disclosed the company owned intangible assets, but did not provide any information to value the intangible assets because:
The Department’s rules of instructions do not require any detailed valuation of the exempt property, nor would that be practical or necessary at this time. However, the identification and taxable value of that property is obvious from the absence of any significant book value attributed to that property in the financial information accompanying this Annual Report.
[Exhibit 507, p. 000210; Exhibit 508, p. 000257; and Exhibit 509, p. 5A].
Petitioners failed to avail themselves of the opportunity to provide information on matters about which they now complain.
89. Petitioners claim they reported all information required by the Department. However, when the Petitioners filed their Annual Report to the Department, they declined to identify a value of any claimed intangible property. [Exhibit 507, p. 000210; Exhibit 508, p. 000257; and Exhibit 509, p. 5A]. Petitioners did claim a value for “amortized intangibles” but failed to provide the Department information about how the value was reached. [Exhibit 507, p. 000214,; Exhibit 508, p. 000261; Exhibit 509, p. 000309]. Petitioners did not report costs in the Annual Report for customer base, the FCC license or goodwill. [Transcript, p. 241].
90. Petitioner’s formula would result in a deduction of a portion of the goodwill the Petitioners associate with the intangible property. However, Petitioners failed to identify any value for goodwill in their annual report. What Petitioners are requesting greatly exceeds what was reported. Petitioners had the opportunity to report a value for goodwill in the Annual Report but failed to do so. [Exhibit 507, p. 000211; Exhibit 508, p. 000258; and Exhibit 509, p. 000306]. Petitioners can not now argue for a reduction in value when they originally failed to report the information.
91. The General Instructions for a company to file its Annual Report allow a company to file additional information that may be helpful. [Exhibit 507, p. 000205, and Exhibit 509, p. 000300, Instruction Number 7 ].
92. Petitioners did not provide any information to value the claimed intangibles until after the value of the subject property was determined by the Department. [Transcript pp. 175, 180, 229-232]. Petitioners did not attempt to report any value for any identifiable intangible property until May 2001. [Board Exhibit #1 Vol. II, pp. 02460, 02543]. Petitioners provided an appraisal performed by the accounting firm of Ernest and Young to the Department in May 2001. This appraisal was for the 1999 and 2000 tax years and contained information about valuing the FCC licenses and the customer base. This was the first time Petitioners provided FCC auction information to the Department. [Transcript, p. 306]. The failure of Petitioners to provide appropriate information is important. As noted in Petitioners’ own exhibit:
If an appraiser does not have access to appropriate data concerning the identification and/or value of intangible assets and rights, then it will not be possible to remove the value of those intangible assets and rights as required by this rule . . .
[Exhibit 112, pp. 152-153].
93. The Department agrees an asset may have value if it was not purchased and is not listed on the companies’ books. [Transcript, pp. 282, 283]. However, taxpayers have a responsibility to provide fair market value information for intangible property. [Transcript, p. 304]. Petitioners failed to provide information to value the customer acquisition costs and even admitted the number of subscribers to value the customer base was not provided and was not public information. [Transcript, p. 181].
VI. Leased property is taxable
94. Petitioners lease property for their cell sites. [Transcript, pp. 168, 238, 240]. According to the lease, Petitioners are to reimburse the landowner for any taxes.
95. When the Department calculated the value of Airtouch, it included the non-capitalized lease property in the value calculated pursuant to the HCLD model. [Exhibit 512, p. 000382].
96. The Department assesses leased property because of the language in Wyoming Statute Section 39-13-102(m)(viii). If leased property is taxed to the lessee then the owner of the property is not taxed. [Transcript, p. 244].
97. The Department argued it complied with generally accepted appraisal standards, the Wyoming Constitution, the Wyoming statutes, and the Department of Revenue rules and reached fair market value when appraising the Petitioners’ companies. [Transcript, p. 264].
98. Any Discussion above or Conclusion of Law below which includes a finding of fact may also be considered a Finding of Fact and, therefore, is incorporated herein by this reference.
CONCLUSIONS OF LAW
I. General Information: Jurisdiction, Burden of Proof and Unitary Valuation
99. Petitioners’ Notices of Appeal were timely filed and the Board has jurisdiction to determine this matter. The final assessments were sent on June 11, 2001, and all the notices of appeal were filed July 10, 2001.
100. Petitioners have the burden of going forward and the ultimate burden of persuasion. Rules, Wyoming State Board of Equalization, Chapter 2, §20. The Department’s appraisal is presumed valid if determined in accordance with applicable statutes, rules, regulations and other directives developed under public scrutiny. RT Communications, Inc., 11 P.3d at 922; Amoco Production Co. v. Wyoming State Bd. of Equalization, 899 P.2d 855 (Wyo. 1995); Gray v. Wyoming State Bd. of Equalization, 896 P.2d 1347, 1350 (Wyo. 1995), citing Teton Valley Ranch v. State Bd. of Equalization, 735 P.2d 107 (Wyo. 1987).
101. The applicable constitutional provisions provide, in relevant part:
Wyoming Constitution Article 15 Section 11: Uniformity of assessment required.
(a) All property, except as in this constitution otherwise provided, shall be uniformly valued at its full value as defined by the legislature, in three classes as follows:
* * *
(ii) Property used for industrial purposes as defined by the legislature; and
* * *(f) All taxation shall be equal and uniform within each class of property. The legislature shall prescribe such regulations as shall secure a just valuation for taxation of all property, real and personal.
102. The Department’s valuation established for state assessed property is presumed valid, accurate, and correct, a presumption which survives until overturned by credible evidence. Without evidence to the contrary, it is presumed that the official charged with establishing value, be he a county assessor or a Department appraiser, exercises honest judgment in accordance with the applicable statutes, rules, regulations, and other directives, which presumption survives until overturned by credible evidence. Chicago Burlington & Quincy Railroad Co. v. Burch, 400 P.2d 494, 498-499 (Wyo. 1965).
103. Petitioners have the initial burden to present credible evidence to overcome the presumption. A mere difference of opinion as to value is not sufficient. Teton Valley Ranch v. State Bd. of Equalization, 735 P.2d 107 (Wyo. 1987); Hillary v. Big Horn Coal Company, 549 P. 293 (Wyo. 1976); Weaver v. State Bd. of Equalization, 511 P.2d 97 (Wyo. 1973); CF&I Steel Corporation v. State Bd. of Equalization, 492 P.2d 529 (Wyo. 1972); Chicago Burlington & Quincy Railroad v. Burch, 400 P.2d 494 (Wyo. 1965); J. Ray McDermott & Co. v. Hudson, 370 P.2d 363 (Wyo. 1962) and Certain-Teed Products Corporation v. Comily, 87 P.2d 21 (Wyo. 1939).
104. All taxable property is to be annually valued at its fair market value. Wyo. Stat. § 39-2-102. “Fair market value” is defined in Wyoming Statute Section 39-11-101(a)(vi) as follows:
The amount in cash, or terms reasonable equivalent to cash, a well-informed buyer is justified in paying for a property and a well-informed seller is justified in accepting, assuming neither party to the transaction is acting under undue compulsion, and assuming the property has been offered in the open market for a reasonable time.
105. The unitary method is considered the most rational means of central assessment to determine the value of an enterprise whose functions rely on cross-boundary connections. RT Communications, Inc., 11 P.3d at 924; Adams Express Company v. Ohio State Auditor, 165 U.S. 194, 17 S. Ct. 305, 41 L. Ed. 683 (1897) and Burlington Northern v. Bair, 584 F. Supp. 1229 (S.D. Iowa 1984). As the Utah Supreme Court observed in Beaver County, et. al. v. Wilted, Inc., 995 P.2d 602 (Utah, 2000):
From a purely practical perspective, central assessment is the most rational way to determine the value of an enterprise whose function relies upon cross-boundary connections. In fact, the sum of assessments of local property made by a collection of counties each employing different valuation systems and competing for tax dollars could conceivably overestimate the value of unitary enterprise’s state-wide property.
In this case, each Petitioner owns property in multiple counties and taxing districts. See Finding of Fact 2. Furthermore, the services provided by Petitioners frequently cross county and even state boundaries because calls can cover many miles. Unitary valuation is appropriate.
106. The Department of Revenue rules define unitary valuation as:
[T]he process of determining the value of a company as a whole without reference to the individual parts. The unitary approach is used in the valuation of properties which derive their value from interdependent assets working together. The market value is not a summation of fractional appraisals, but the value of a company as an operating unit.
Rules, State of Wyoming Department of Revenue Chapter 7, §4(k).
107. The goal of the appraisal process is to determine fair market value. Petitioners’ property is most appropriately valued as a whole using the unitary approach. The full value is not reflected merely by a summation of the parts of each unit, because there is value to the entire combined unit (the “operating unit” or “going concern”) that a simple summation does not capture.
II. Petitioners are “telephone companies” subject to state assessment and valuation under Wyoming Statute Section 39-13-102(m)(vi).
108. Telephone companies are assessed by the Department in accordance with Wyoming Statute Section 39-13-102(m)(vi) which states:
(m) The department shall annually value and assess the following property at its fair market value for taxation:
* * *
(vi) Property of telephone and telegraph companies which have more than two thousand dollars ($2,000) in assessed value;
109. The term “telephone company” is not defined in Title 39 of the Wyoming Statutes. In order to determine if Petitioners are telephone companies subject to state assessment, we must decide whether the statutory reference to “telephone companies” is clear and unambiguous. If it is, there is no need to resort to rules of statutory construction. “Construction of legislative enactments is only appropriate where the enactment has first been found, as a matter of law, to be ambiguous.” Snake River Brewing Company, Inc., v. Town of Jackson, 2002 WY 11, ¶29, 39 P.3d 397, 29.
A statute is unambiguous if its wording is such that reasonable persons are able to agree as to its meaning with consistency and predictability. General Chemical Corp. v. Wyoming State Bd. of Equalization, 819 P.2d 418, 420 (1991). If a statute is determined to be unambiguous, the words used are to be given their plain and ordinary meaning. Wyoming Game and Fish Comm’n v. Thornock, 851 P.2d 1300 (Wyo. 1993); U.S. West Communications, Inc. v. Wyoming Public Service Commission, 989 P.2d 616 (Wyo. 1999). The dictionary defines “tele” as, ”distant, at a distance; over a distance,” and “phon” or “phono” as “sound, voice; speech.” Webster’s New Collegiate Dictionary (1977). “Telephone” is defined as “an instrument for reproducing sounds at a distance.”
The words of the statute are unambiguous: the Department shall assess telephone companies. Thus, the words “telephone companies” must be given their plain and ordinary meaning. To most reasonable people, Petitioners’ business is indistinguishable from that of a telephone company. In fact, in today’s society, many people use telephone services and cellular services interchangeably. Sometimes, cellular services are utilized in areas where traditional telephone service is not even available. Thus, since the statute is clear and unambiguous, there is no need to resort to statutory construction. Johnson v. Safeway Stores, Inc., 568 P.2d 908, 911(Wyo. 1977).
110. The Board has previously determined that a pager service is not a “telephone company.” Rule Radiophone Service, Inc.,1999 WL 124396 (Wyo. St. Bd. Eq. 97-215). We can understand the confusion created by that decision, because some of the factors used to determine that the pager service was not a “telephone company” are applicable to Petitioners. One common factor is that the pager system was no longer regulated as a public utility and Petitioners are not regulated public utilities. Another factor is that the pager service used radio transmission frequencies under a license of the FCC. Petitioners also operate pursuant to FCC licenses.
However, there is an important distinction between the Petitioners and the pager company. Petitioners provide real time, two-way communication between significant numbers of unrelated persons or businesses, whereas the pager service provided one-way communication. “Telephone companies” and Petitioners provide their service primarily as two-way communication.
Another important distinction is that state law defines an “Essential Telecommunications Service” as “Services necessary to connect 911 emergency services to the local network.” Wyo. Stat. §37-15-103(a)(iv)(D). Petitioners provide 911 emergency services and are installing digital equipment in part to interface with enhanced 911 emergency services. See Finding of Fact 45.
111. This Board agrees with those courts which have concluded that cellular phone companies are “telephone companies” for taxation purposes. In holding that cellular telephone companies should be centrally assessed, the court in Cellular Telephone Co. v. Commonwealth of Kentucky, 897 S.W. 2d 601, 603 (Ky. App. 1995) said:
The only thing that significantly sets cellular telephone companies apart from traditional telephone companies may be the technology involved. The means to the end may have changed, but the end remains the same, that is, cellular phone companies are designed and operated to provide telephone service.
We find the services here are the same as those important to the Arkansas Appellate court in Southwestern Bell Mobile Systems v. Arkansas Public Service Commissioner, 40 S. W. 3d 838 ( Ark. App. 2001), when the court found the cellular telephone service is taxable as a telephone company because it is real time, two-way communication, it is voice communication and the handsets look the same.
Although Wyoming Statute Section 39-13-102(m)(vi) was enacted long before cellular technology was invented, we agree that the means to the end may have changed but the end remains the same. Cellular service is telephone service. Only the technology has changed. Cellular telephone companies are similar to public companies because they use public airwaves and they are regulated for the public benefit by the FCC. We also find convincing the argument that most cellular communication utilizes land-based wire lines. See Findings of Fact 18 and 22.
It is true that Wyoming law does not demand cellular service to be rate-regulated. However, that does not mean that the legislature cannot, or has not, decided to assess cellular companies at the state level. The legislature may assess differently than it determines to regulate, with the result that a cellular phone company, while not rate-regulated, is nevertheless centrally assessed. This is the same logic applied in Southwestern Bell Mobile Systems, Inc., 40 S.W. 3d at 841, and U.S. Transmission Systems v. Board of Assessment, 715 P.2d 1249 (Colo. 1986).
We also find persuasive the reasoning that if a company is in the business of transmitting two-way communication between a significant number of unrelated persons or businesses, it is a telephone company. U.S. Transmission Systems, 715 P.2d at 1254.
Finally, the telephonic service provided by Petitioners is an essential service, not merely a convenience like a paging service. Due to the isolation and sparsely populated nature of the areas served by Petitioners in the State of Wyoming, cellular telephone service is essential for emergency purposes. In some areas, it is the only telephone service available.
112. It is clear Petitioners fall within the meaning of “telephone companies.” Petitioners sell handsets that have telephone numbers, and that are used for local and long-distance two-way communication. The service provided by Petitioners crosses taxing districts, county and state lines. See Findings of Fact 2, 19, and 21.
113. We acknowledge other states have decided cellular phone companies should not be centrally assessed as “telephone companies.” In the cases of In re Topeka SMSA Ltd., 917 P.2d 827 (Kansas, 1996), affirmed by In re Kinnet, 984 P.2d 725, 727 (Kansas, 1999) and MCI Telecommunications Corp. v. Limbach, 625 N.E. 2d 597 (Ohio 1994), the courts compared cellular phone companies to pager services or resellers of services, and concluded that since those services were not centrally assessed, the cellular services should not be either. In Radio Relay Corp. v. Public Utilities Comm’n, 45 Ohio St. 2d 121, 34 N.E.2d 826 (1976) the court found cellular phones were a convenience for a limited number of people. That is not the situation in Wyoming because cellular service is the only service for some in Wyoming. Two other cases cited by Petitioners are not on point because those courts found that radio and paging services were not to be regulated. Radio Telephone Comm. v. Southeastern Telephone Co., 170 So. 2d 577 (Fla., 1964) and Southern Message Service v. Louisiana Public Service, 554 So. 2d 47 (La. 1989).
The evidence before us, however, does not support a comparison between cellular service pager service, internet service or television service. In Wyoming, Petitioners’ competitors are wire-line telephone companies, not pager services or resellers. When a customer decides to make a telephone call, he must chose between a wire-based handset or a cellular handset. It would violate constitutional principles of equal taxation to tax wire-line telephone companies centrally, but tax cellular services companies locally.
114. One of the fundamental reasons our legislature requires large industries such as railroads, pipelines, airlines and telephone companies to be state-assessed is because these industries provide services that cross taxing districts, county and even state lines. It simply is more practical for the Department, with its staff of professionally-trained appraisers, to appraise these industries utilizing a unitary approach to value. If these businesses were appraised at the local level, piece-meal valuation would result, with twenty-three county assessors arriving at different opinions as to the value of the property. The very nature of the services provided by these businesses supports central assessment using the unitary approach.
115. During the 2001 legislative session, the legislature amended the language of Wyoming Statute Section 39-13-102(m)(vi). In its original form (applicable during the assessments at issue in these cases), the statute provided for state assessment of “[p]roperty of telephone and telegraph companies.” (emphasis added). Effective January 1, 2002, the statute requires state assessment of “[p]roperty of telecommunications companies.” Session Laws 2001, Ch. 206, §1. The legislature for the first time also defined “telecommunications companies,” as “any person engaged in the furnishing of telecommunications service.” Session Laws 2001, Ch. 206, §1, now codified as Wyo. Stat. 39-13-101(a)(vi). The legislature then defined “telecommunications service” as:
[T]he offering of transmission for hire of telecommunications between or among points specified by the user, of information of the user’s choosing without change in the content of the information as sent and received by means of telecommunications facilities, including switching facilities, using wire, cable, microwave, radio wave, light wave or a combination of those or similar media. The term shall include all types of telecommunications transmission, such as telephone service, telegraph service, cellular, wireless or satellite. The term shall not include assets used for television or radio programming broadcast over airwaves for public consumption, cable or satellite television offered for public consumption or telephone answering service and one-way paging or beeper service.
Session Laws 2001, Ch. 206, §1, now codified as Wyo. Stat. 39-13-101()(vii).
The Board acknowledges the rule of statutory construction that “when the legislature amends a statute, it must be presumed that some change in the existing law was intended.” State ex rel. Albany County Weed and Pest District v. Board of County Commissioners of Albany County, 592 P.2d 1154, 1157 (Wyo. 1979). However, as noted above, See Conclusion of Law 109, the rules of statutory construction are not used to read an unambiguous statute. The current form of Wyoming Statute Section 39-13-102(m)(vi) is unambiguous, just as was its predecessor. The legislature merely updated the language to reflect the reality of technological changes in the industry. Petitioners are telecommunications companies, within the meaning and scope of the statute. Thus, they were, and are, subject to state assessment.
III. The economic adjustment factor used by the Department was appropriate.
116. In valuing Petitioners, the Department used the “historical cost approach,” which is the sum of the cost of the parts, adjusted by the historical performance income. [Board Exhibit #1 Vol. IV, pp. 563-564]. It is logical that if an adjustment for economic obsolescence is appropriate to adjust a value downward, it is equally logical to adjust value upward through economic enhancement. However, Petitioners argue an upward adjustment is inappropriate because such enhancement is due solely to the value of the intangibles, See Finding of Fact 28. An adjustment to the sum of the net book value is appropriate to find the fair market value because the value of the whole is greater than the sum of the parts.
117. Petitioners failed to demonstrate the entire economic enhancement was composed of the intangibles.
118. Petitioners argue the economic enhancement adjustments were not appropriate because they included income information, and therefore were not an independent value. We do not find the values derived from different approaches have to use completely different information. Indicators of value from different approaches may be related. It is well recognized that the indicators of value are “integrated, interrelated, and inseparable.” In these cases, because the appraiser used different incomes in attempting to measure historical income versus future performance income, the enhancement adjustment was proper. [ Appraisal Institute, The Appraisal of Real Estate, (10th Ed. 1992) p. 409]. See also the study by David Shank of Ad Valorem Services, Inc., commissioned by the Board and discussed in PacifiCorp v. Department of Revenue, 2001 WY 84, ¶ 12, 31 P. 3d 64, 12 (Wyo. 2001). See Finding of Fact 40.
119. Furthermore, such adjustment is supported by the Department of Revenues rules which, having been properly promulgated pursuant to statutory authority, have the force and effect of law. Department of Revenue v. Buggy Bath Unlimited, Inc., 2001 WY 27, 18 P.3d 1182 (Wyo. 2001). The Department of Revenue rules require that cost models consider all forms of depreciation and appreciation. Appreciation is defined as:
[A]n increase in cost to reproduce, value over the cost, or value at some specified earlier point caused by greater demand, improved economic conditions, increasing price levels, reversal of depreciating environmental trends or other factors as defined in the market.
Rules, State of Wyoming Department of Revenue, Chapter 7, §4 (f).
120. The Department reasonably found that the increase in the number of subscribers clearly indicated that there was and is greater demand for the Petitioners’ services. [Transcript, pp. 181-182].
121. A commonly accepted appraisal treatise cited by the Department states:
The valuation process as a whole is composed of integrated, interrelated and inseparable techniques and procedures designed to produce a convincing and reliable estimate of value, usually market value. ... Capitalization techniques are commonly used to analyze and adjust sales data in the sales comparison approach; in the cost approach, obsolescence is often measured by capitalizing an estimated rent loss.
[Transcript, pp. 306, 338; Appraisal Institute, The Appraisal of Real Estate, 10th Ed., Chicago: Appraisal Institute, 1992 p. 409].
122. The use of the economic enhancement adjustment is a mere difference of opinion because it is the flip side of economic obsolescence which the Petitioner readily accepts. It is not sufficient to meet the challenging party’s burden. Teton Valley Ranch v. State Board of Equalization, 735 P.2d 364 (Wyo. 1962) and Chicago Burlington & Quincy Railroad Co. V. Bruche, 400 P.2d 494, 499 (Wyo. 1965). The historical cost method is just one of three methods considered by the Department. The value as determined by the historical cost method could have been rejected if the appraiser did not consider it reasonable, that is appraisal judgment. We find the use of the economic enhancement adjustment was appropriate. Petitioners’ argument is merely a disagreement regarding value. Hillard v. Big Horn Coal Company, 549 P.2d 293 (Wyo. 1976).
123. The Department used an income in the economic enhancement adjustment that was representative of historical performance while the income used in the income approach uses an income that is representative of future economic performance. [Transcript, p. 253].
124. The Department’s formula is not circular because the Department uses different incomes to measure a historical versus a future performance.
125. Petitioner’s own expert acknowledges economic enhancement. [Exhibit 113, p. 58].
126. The income and capitalization rate used to determine economic enhancement were the most favorable calculated for the Petitioners, again demonstrating appraisal judgment. See Findings of Fact 51 and 60.
IV. The Department allowed a sufficient adjustment for obsolescence.
127. The “flip side” of economic enhancement is obsolescence. Just as Petitioners argue that the Department’s valuations included too great an increase for economic enhancement, they contend that the Department did not take into account a sufficient decrease for functional and technological obsolescence. The obsolescence identified by Petitioners was the eventual change from analog equipment to digital equipment, and the resulting additional cell sites and a decrease in roaming income.
128. Petitioners argue for a larger obsolescence adjustment than they entered on their books and reported to the Department because of the change from analog to digital equipment. However, the evidence does not support a larger adjustment because analog was the primary technology offered at the time, analog compatibility was required by the FCC, and there was little competition for wireless services.
129. Because of the location of these companies, obsolescence is not the same as in large metropolitan areas. Analog equipment provides a larger radius and is an advantage over digital in the large spaces of Wyoming. Wyoming, therefore, remains mainly analog.
130. Petitioners’ income has actually increased over the life of the companies. Petitioners’ income was greater than the sum of the net book value of the assets, indicating there is no need to adjust for obsolescence.
131. The Department determined the depreciation accounted for by Petitioners, and used to decrease net book value, adequately accounted for all technological and functional obsolescence. [Board Exhibit #1, p. 564]. Petitioners did not present sufficient evidence to rebut the presumption in favor of the Department’s valuation. The functional and technological obsolescence has been accounted for in a reasonable manner.
V. The intangible property identified by Petitioners does not have to be deducted from the value of the unit.
132. Petitioners are asking to deduct unidentified intangible property from the total value of the unit. Their position is that the fair market value may never exceed the net book value of the property. This contention is a cutting-edge issue being presented to many courts throughout the country. Assessment Journal, May/June 1996, Vol. 3, Number 3, p. 33. Nevertheless, it is irrational. If the value of property is limited to net book value, in essence the company sets its own value by choosing both what to list as an asset and the rate of depreciation. If intangibles need not be identified, but their alleged value nevertheless may be deducted, then the value is completely subjective. If this view were accepted, then a residential homeowner could argue that electrical service, telephone service, sewer and water service, road value, site value and other intangibles have to be deducted from the assessed value, which in turn could reduce the value to less than the cost of the materials needed to build a home. While this might seem to have beneficial tax consequences, there would be no reason to invest in property if the fair market value is less than the cost of the sum of the parts.
A. The assets Petitioners identified, customer base and FCC licenses, are not intangibles to be deducted from value.
133. Wyoming law provides an exemption for “intangible property.” Wyo. Stat. §39-11-101(a)(vii). Wyoming Statute Section 39-11-105(a)(xxix) provides that intangibles include:
(A) Money and cash on hand including currency, gold, silver and other coin, bank drafts, certified checks and cashier’s checks;
(B) Money on deposit;
C) Accounts receivable and other credits;
(D) Bonds, promissory notes, debentures and other evidences of debt;
(E) Shares of stock or other written evidence of ownership;
(F) Judgments for the payment of money;
(G) Annuities and annuity contracts.
This statute does not, however, define what intangible property is. The Board and the Wyoming Supreme Court have determined the list to not be exclusive. RT Communications, Inc., 11 P.3d 915; Union Telephone Company, et. al., 1999 WL 370035 (Wyo. St. Bd. Eq. 95-69); Tri-County Telephone Association, et. al., 1999 WL 1268428 (Wyo. St. Bd. Eq. 95-70).
134. The difference between the intangibles listed in Wyoming Statute Section 39-11-101(a)(vii) and the claimed intangibles is the affect of the removal of the assets for the going-concern. The intangibles listed in the statute do not affect the value of the tangible assets but when other intangibles, such as the programming in a calculator, the FCC license permitting operation of a cellular company, or a customer base, are removed, the value of the remaining tangible assets are substantially altered as they no longer serve their intended function. [Transcript, pp. 346-348]. RT Communications, Inc., 11 P.3d at 922.
135. In RT Communications, Inc. the Wyoming Supreme Court provided guidance as to what is intangible property, and how to exempt it from taxation within a unit:
The one common characteristic of each of the items listed within §39-1-101(a)(vii) was that they had no inherent value in and of themselves but instead represented value. In the ordinary sense of usage, this is what “intangible property” means: “As used chiefly in the law of taxation, this term means such property as has no intrinsic and marketable value, but is merely the representative or evidence of value, such as certificates of stocks, bonds, promissory notes, copyrights, and franchises. ” Blacks Law Dictionary 809 (6th ed. 1990). This definition is clearly what was intended by the legislature as evidenced by the fact that §39-1-101(a)(vii) specifically listed some of the examples cited therein such as stocks, bonds, and promissory notes.
11 P.3d at 922-923
The court further noted that “intangibles” include goodwill, a certificate of convenience and franchise rights. The court explained that the value of property is not just the sum of the parts of the property, but is the value of the unit as a “going concern,” just as a house is not just the cost of lumber and nails, but includes intangible values such as site, accessibility and ownership rights. RT Communications, Inc., 11 P.3d at 924.
The rationale for allowing taxation of the enhanced value imparted by intangible property is grounded in the concept of valuing a company as a ‘going-concern’ or unit, which is to ensure that the entire value of a company’s property is considered.
RT Communications, Inc., 11 P.3d at 924.
136. Going-concern value includes an intangible enhancement of value that assimilates the effect of all operating property interacting together. The unit valuation method requires the appraiser to determine a “going concern” value which may include contributions due to intangible property, but only to the extent such intangible property is necessary to the operation of the property being assessed. RT Communications, Inc.,11 P.3d at 924.
The Wyoming Supreme court recognized that the use of intangible property to assess the value of tangible property is justified on two grounds: 1) intangible property can affect the value of tangible property; and 2) the difficulty of separating intangible property from tangible property. RT Communications, Inc., 11 P.3d at 923-924.
137. This concept is supported by other authorities. The Iowa Supreme Court recognized: “Intangible property is considered in determining the market value of the company as a whole because it bears on the company’s value as a going concern.” Mich. Wis. Pipeline Co. V. Iowa St. Bd of Rev., 368 N.W.2d 187, 192 (Iowa 1985)
Robert W. Lambert in his article Cellular Telephone Companies: Property Tax Litigation In California, Journal Property Tax Management pages 15 and 16 (1991), similarly observed: “If you do not have the intangible legal right to live in you house and evict others from the premises, what possible value can the house have to you?”
The same analysis can be made with both the customer base and the FCC license. If one does not have the ability to operate a business due to lack of a license or a customer base, the business’ physical property cannot possibly have a meaningful value.
138. In order to be exempt from taxation, an intangible must be both separable and identifiable. RT Communications, Inc.,11 P.3d at 928. Petitioners’ witness contended that for an asset to be intangible it must be only one of three things: identifiable, separable or contractual. [Board Exhibit #1, Vol. III, p. 378]. We disagree, the Supreme Court has stated that for an asset to be an intangible it must be identifiable and separable. RT Communications, Inc., 11 P.3d at 928.
Neither the FCC licenses nor the customer base are separable. Neither are identifiable. Petitioners had to rely on inside information to try to identify the value of those assets. They used customer numbers, the “churn” (turnover rate of customers), and the yearly advertising cost to value customer base. We do not accept the cost of advertising as the value of the customer base. Furthermore, the cost of advertising is deducted from income. If it is again deducted from value it would be a double deduction.
Petitioners attempted to value the FCC licenses by using FCC auction prices. This approach is invalid because the auction was for a different type of license. In fact, Petitioners admitted the auction licenses were to expand existing capacity or area and not for the ability to be in business at the beginning. The value of auction prices for licenses to expand a business or resale should not be used to value a license that gave the Petitioners’ the ability to transact business to begin with. [Transcript, pp. 159-160, 312-313]. Further, there was no showing that the price was what a buyer of the business itself would pay the holder of the current license.
139. The Department clearly demonstrated the difference between the intangibles listed in Wyoming Statute Section 39-11-101(a)(vii) and the Petitioners’ claimed intangibles. Mr. Painter, of the Department, explained that in removing the intangibles listed in Section 39-11-101(a)(vii) the value of the tangible assets are not affected, but when other intangibles are removed, such as the programming in a calculator, the FCC license permitting operation of cellular company, or a customer base, the value of the remaining tangible assets is substantially altered as they no longer serve their intended function. [Transcript, pp. 346-348].
140. Even if we were to conclude the customer base and FCC license are intangibles, it does not necessarily lead to the conclusion that they must be deducted from the taxable value of the unit. As the court observed in RT Communications, Inc.11 P.3d at 924:
None of the tangible property such as telephone poles, lines, and switching equipment had any value unless it could be used, and it could not be used without a certificate of convenience and necessity and these other intangible items that the Telephone Companies argued were accounted for in the acquisition adjustments. If the Telephone Companies could not, or would not, allocate separate values to these intangible assets, they cannot reasonably argue that the Department of Revenue could have or should have done so.
Petitioners argue the equipment could be used without the FCC license because the license of another party could be leased. However, even if the FCC license were leased, all assets would be taxable as a going concern. The equipment has to be associated with an FCC license to provide the cellular service. Therefore, the license is necessary for the service. Further, the service could not be provided unless there were customers for the business. The FCC license and customer base are integral to the business and therefore are not exempt from taxation. RT Communications, Inc., 11 P.3d at 925.
141. No other taxpayer deducts their FCC license or customer base from the value or the unit. All taxpayers are uniformly assessed. See Finding of Fact 70.
142. Petitioners themselves did not recognize the assets as intangibles because the assets were not booked and amortized in accordance with IRS regulations. The excuse that there was no acquisition price paid is not applicable because the companies as a unit were acquired after the acquisition of the FCC license and customer base and, therefore, the Petitioners as they existed during this appeal could have taken advantage of the IRS regulation. Internal Revenue Code §197.
143. Petitioners’ own Exhibit 113, at pages 55 and 56, demands that intangible assets be identifiable, separable and capable of systematic valuation. Petitioners had to extrapolate a lot of information, some not publicly available, to value these assets and, therefore, these assets do not meet the test of intangible.
B. The formula offered by Petitioners to deduct “intangibles” is flawed.
144. Petitioners’ approach to deduct the intangibles from value presumes the values are actually captured in the Department’s valuations. In fact, neither asset was captured in the cost method because neither was included with a book value.
145. The customer base was not included in the income approach because expenses associated with the asset were deducted from the income stream.
146. By removing the intangible value first, Petitioners fail to recognize that the assets of each company operating as a working unit create synergy or enhancement. Petitioners’ method recognized enhancement for RSA#2, RSA#3 and Airtouch, but does not recognize enhancement for RSA#1. Because all of the companies are the same type of enterprise utilizing similar property, tangible and intangible, it is illogical to assume that there is enhancement for one company and not the others.
147. The Petitioners’ have incorrectly relied on the assumption the customer base and the FCC license make up all of the residual with any balance attributable to goodwill. They have not proven this to be the case.
148. It is incorrect to deduct the cost value of intangible assets from the value determined by income method because intangible assets do not contribute to the income in amount equal to their cost. If the assets contribute at all, it is in an amount proportionate to their cost. [Exhibit 113 p. 58].
149. Because the FCC license and customer base cannot be removed from Petitioners’ business operating as a “going concern” without substantially affecting the value of the Petitioners’ physical assets, the assets identified by the Petitioners are not separable and therefore are not intangible property to be excluded from value. See Finding of Fact 68 and 69.
150. The values of the intangibles propounded by Petitioners are predicated on misleading information and must be rejected. See Findings of Fact 81, 82, and 83.
C. Petitioners failed to report the necessary information to qualify for a deduction.
151. A fatal flaw with Petitioners’ requested exemptions is Petitioners’ failure to either give the Department the information necessary to value the claimed intangibles, or to even claim the exemption. See Findings of Fact 7, 57, 88-93. As the court noted in RT Communications, Inc., 11 P.3d at 924, the Department could not have exempted something Petitioners failed to identify or claim. It was Petitioners’ responsibility to properly complete the annual report form, and to request and prove the claimed exemptions. RT Communications, Inc.,11 P.3d at 922; Amoco Production Company v. Wyoming State Board of Equalization, 899 P.2d 855 (Wyo. 1995), Gray v. Wyoming State Board of Equalization, 896 P.2d 1347, 1350 (Wyo. 1995); citing Teton Valley Ranch v. State Board of Equalization, 735 P.2d 107 (Wyo. 1987).
VI. Leased property is taxable.
152. Wyoming Statute Section 39-13-102(m)(viii) demands:
(m) The department shall annually value and assess the following property at its fair market value for taxation:
(viii) Leased property consisting of warehouses, storage facilities and office structures and any other property that is in support of or which is used or held for use for the activities listed in this subsection. If leased property is assessed to the lessee it shall not be assessed to the property owner.
154. Verizon provided information that it leased property to place its towers and under Wyoming Statute Section 39-13-102(m)(viii) such property is taxable.
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ORDER
IT IS THEREFORE HEREBY ORDERED:
A. The matter is remanded to the Department of Revenue for consideration of the value of Airtouch excluding $604,173.00 in accounts receivable from the net value of the plant.
B. In all other respects the Department of Revenue’s valuation is affirmed because unitary valuation is appropriate, Petitioners are telephone companies under Wyoming Statute Section 39-13-102(m)(vi), the economic enhancement adjustment by the Department was appropriate, there is no need to further adjust for obsolescence, there is no need to adjust for intangibles and the leased property is taxable.
PURSUANT TO Wyo. Stat. §16-3-114 and Rule 12, Wyoming Rules of Appellate Procedure, any person aggrieved or adversely affected in fact by this decision may seek judicial review in the appropriate district court by filing a petition of review within thirty (30) days of the date of this decision.
DATED this 10th day of January, 2003.
STATE BOARD OF EQUALIZATION
Edmund J. Schmidt, Chairman
Roberta A. Coates, Vice-Chairman
ATTEST:
Wendy Soto, Executive Secretary