Wisconsin Department of Revenue prevails against Nestle USA, Inc. in property tax case

By Joe Forward, Legal Writer, State Bar of Wisconsin

Feb. 8, 2011 – Nestle USA Incorporated finished construction of a plant in Eau Claire, prompting the Wisconsin Department of Revenue (DOR) to assess the property at $10.9 million for property tax purposes, an amount Nestle challenged up to the Wisconsin Supreme Court.

In Nestle USA Inc. v. Wisconsin Department of Revenue, 2011 WI 4 (Feb. 2, 2011), the supreme court – in an opinion written by Justice Michael Gableman – unanimously held that the DOR’s $10.9 million assessment was correct for 2003 and 2004.

Assessment of the property required a determination of the facility’s “highest and best use” and application of the proper assessment method. The DOR determined that the facility’s highest and best use was as a powdered infant formula facility.

Normally, assessor’s look to comparable sales to assess property value, but the DOR could not find comparable sales of powdered infant formula production facilities in the United States.

Thus, the DOR used a cost assessment method, which considers the cost of constructing an exact replica, less depreciation and tax-exempt components, to determine property value.

Under this method, the assessor “deducts depreciation for functional obsolescence from the replication cost,” the court explained.

A functionally obsolete deduction results if the property contains a specialized feature that a prudent purchaser would not pay extra for under current market conditions. The Nestle facility contained certain features – like reverse osmosis water treatment equipment – that were specifically designed to meet FDA regulations for producing powdered infant formula.

The DOR’s assessor determined that Nestle’s plant contained specialized features, but they could be marketed and sold for use in other powdered infant formula production facilities. Thus, the DOR denied a functional obsolescence deduction for these specialized features.

Nestle hired its own assessor, who determined that the plant’s highest and best use was not as a powdered infant formula production facility, but as a food processing plant. He then used the comparable sales method, comparing sales of other comparable food processing plants, to appraise the plant at $3.59 million.

His alternate appraisal under the cost method found that an exact replica would cost $17.2 million to build then deducted $13.9 million for functionally obsolete features that did not have value in the food processing plant market.

Highest and best use presumption

According to the tax appeals commission and the circuit and appeals courts, the DOR assessment is afforded a presumption of correctness, and Nestle did not overcome the presumption that the facility’s highest and best use was as a powdered infant formula facility.

Reviewing the decision of the tax appeals commission, the supreme court concluded that the commission had the requisite substantial evidence to support its findings.

The court rejected Nestle’s argument that the facility’s highest and best use was as a food processing plant because there is no market for powdered infant formula facilities.

“The Commission concluded that neither party found an instance in the United States where a powdered infant formula production facility was sold for continued use as a powdered infant formula production facility,” Justice Gableman wrote. “This finding, however, is not analogous to a finding that there is no market for powdered infant formula production facilities.”

The court explained that Wis. Stat. section 70.31, Wisconsin’s Property Assessment Manual, and case law “do not demand that evidence of actual sales of properties be put forward to satisfy the ‘marketable’ requirement of a highest and best use determination.”

The court noted that the FDA regulations on production of powdered infant formula are recent, the industry is young, and Nestle is the first plant of its kind in the state.

The DOR put forth evidence that competitors in the powdered infant formula sector exist, and the industry is expanding. Nestle’s evidence that no other sales of powdered infant formula production facilities were found in Wisconsin was insufficient to rebut the presumption of correctness attributed to the DOR’s assessment, the court held.

The court also concluded that deductions for functional obsolescence were not warranted because “[p]rudent purchasers of powdered infant formula production facilities would value the Gateway Plant’s specialized features because these features are required by the FDA regulations and are therefore necessary to the operation of such a plant.”

Attorneys

Robert Gordon of Michael Best & Friedrich LLP represented Nestle USA Inc. Assistant Attorney General F. Thomas Creeron III represented the DOR. Amicus briefs were filed by the City of Eau Claire and the Wisconsin Manufacturers and Commerce Inc.