The Arbitration Chapter: Tax Relief without Relief?

A couple of legislative sessions ago, the Texas Legislature added a new chapter to the Texas Property Tax Code. Chapter 41A provides certain taxpayers with an alternative method of appealing an appraisal review board order: binding arbitration. The Legislature was apparently so proud of the new chapter that it passed it twice, and the Governor approved both bills. Though undoubtedly designed to provide relief to taxpayers, in practice that relief might be illusory for many.

The Procedure

Chapter 41A provides a methodology for property owners to appeal appraisal review board orders without resorting to the courts. To qualify for binding arbitration, the property at issue must be real property (no personal property allowed) and the appraised or market value (whichever is in dispute) must be $1 million or less as determined by the review board. Also, the property owner cannot dispute any matter other than appraised or market value. In other words, the property owner apparently cannot contest ownership, jurisdiction, situs, allocation, exemption, special appraisal qualification, or any other issue apart from value.

To institute an arbitration appeal, the property owner must file with the appraisal district a completed form of request for binding arbitration together with a $500 deposit payable to the comptroller. The request and deposit must be filed within 45 days of the receipt of the review board's order, the same as the deadline for filing a district court appeal. However, if the property owner also files an appeal in district court, then he waives the right to arbitration under Chapter 41A. In other words, a property owner cannot pursue both avenues of appeal, and litigation precludes Chapter 41A arbitration.

Within 10 days of the receipt of the request and deposit, the appraisal district is required to certify the request, forward it and the deposit to the comptroller, and request that the comptroller appoint a qualified arbitrator. The comptroller is allowed to retain 10 percent ($50) of the property owner's deposit to cover costs of administering the arbitration process.

Upon receipt of the request and deposit, the comptroller is to send a copy of its registry of qualified arbitrators to both the property owner and the appraisal district with a request that they select an arbitrator from the list. Not later than 20 days thereafter, the appraisal district is to notify the comptroller of the parties' selection or notify the comptroller than the parties could not agree on an arbitrator. If the parties cannot agree on an arbitrator, then the comptroller is to appoint an arbitrator. If an arbitrator is unable to serve or refuses an appointment, then the comptroller appoints another arbitrator, and so on until an arbitrator is finally selected.

The appointed arbitrator then sets a date, time, and place for the arbitration hearing and provides notice to the parties. The arbitrator has the authority to continue the hearing upon agreement of the parties or the showing of reasonable cause.

After the hearing is concluded, the arbitrator has 20 days to issue an arbitration award determining the value of the property. The arbitrator is also allowed to include any remedy or relief that a court could order under Chapter 42 of the Tax Code; thus, presumably, the arbitrator could award attorney fees to a prevailing property owner. An arbitration award is binding and not subject to appeal except for instances of corruption, fraud, or lack of impartiality on the part of the arbitrator.

The arbitrator's value determination is used to determine who pays the arbitrator's fee. If the final value is closer to the property owner's value opinion, then the appraisal district is required to pay the fee and the property owner's deposit (less the comptroller's 10 percent administration fee) is refunded. If the value is closer to the appraisal district's value, then the property owner's deposit is used to pay the fee.

The chapter also has a provision requiring the payment of taxes pending the appeal (similar to Section 42.08 of the Tax Code). There is a slight difference in the Chapter 41A and the Chapter 42 payment-pending-appeal language, though it is unclear if there is any real distinction. The arbitration chapter also provides that a property owner may not seek arbitration if taxes on the property are delinquent. The statutory language does not specify whether the delinquency of taxes in past years precludes arbitration or if only the taxes for the year in dispute may not be delinquent.

After the completion of arbitration, the post-appeal administrative provisions of Chapter 42 relating to correction of the tax rolls, issuance of corrected tax bills, and refunds apply.

The Problems

Though the legislators probably considered the option of binding arbitration to be a benefit to property owners, in practice it might not work out that way for many.

Perhaps the major problem with the statute is the interpretation that has been provided by the comptroller's office. Though Chapter 41A indicates that the taxpayer may appeal through arbitration either the appraised or market value, the comptroller's office has interpreted this to mean that the property owner may only pursue a market value determination in arbitration. In other words, no equal and uniform claims allowed. Thus, if the taxpayer believes that his remedy lies in equity or that he might potentially have an equity argument in addition to a market value argument, arbitration is not a remedy.

Because the amount of value at issue is relatively small (given the $1 million value limit) and because there is no possibility of appeal through the courts (in fact, filing of a lawsuit precludes arbitration), it does not seem probable that the comptroller's interpretation can be tested in the courts. Perhaps the only test would be for a qualified person to seek an attorney general opinion on the statute.

Another potential problem could involve the arbitrators available for the process. The statute requires the comptroller keep a registry of qualified arbitrators. Shortly after the passage of Chapter 41A, the comptroller's office informally expressed concern about finding enough qualified arbitrators willing to serve to even make the arbitration procedure workable. However, in time, the registry has grown to include well over a hundred arbitrators.

Chapter 41A is very specific on the qualifications for an arbitrator. The potential arbitrator must: (1) have completed at least 30 hours training in arbitration and alternative dispute resolution procedures from a university, college, or legal or real estate trade association; (2) be licensed as a real estate broker or salesperson or as a real estate appraiser; and (3) agree to conduct the arbitration for a fee of not more than 90 percent of the $500 deposit (i.e., $450).

However, for $450, one cannot necessarily expect an arbitrator to travel to the county of protest, especially if it is a long distance. The selection of a specific arbitrator, however, might potentially solve this problem. Though the statute is specific as to the requirements of an arbitrator, it is silent as to the conduct of the arbitration itself. Therefore, the arbitration might be in person, might be by teleconference, or in some cases might be limited to written documentation alone. The comptroller's rules regarding arbitration specify that, if conducted in person, the arbitration must be in the county where the appraisal district is located. As to the possibility of arbitration by teleconference or written documents, a property owner will have to judge for himself whether he believes that such a limited process can adequately provide him with the remedy he seeks.

Another problem involves competing language between the two versions. Though the two versions of Chapter 41A are virtually identical, there is one significant difference, a difference that was not resolved by any subsequent legislation in subsequent legislative sessions. Section 41A.08(b), which deals with representation of parties, has differing language. How significant this differing language will be remains to be seen. However, depending on which version is used, the overall cost of arbitration could be increased significantly for a property owner.

In the House version, Section 41A.08(b) reads as follows:

The parties to an arbitration proceeding under this chapter may represent themselves or may be represented by:

(1)an employee of the appraisal district;
(2)an attorney who is licensed in this state;
(3)a person who is licensed as a real estate broker or salesperson under Chapter 1101, Occupations Code, or is licensed as a real estate appraiser under Chapter 1103, Occupations Code; or
(4)a property tax consultant registered under Chapter 1152, Occupations Code.

The parties to an arbitration proceeding under this chapter may be represented by an attorney or a property tax consultant, real estate appraiser, or real estate broker acting under power of attorney. An employee of the appraisal district may represent the appraisal district in the arbitration proceeding. A person may not serve as a party representative, present evidence, or make arguments in an arbitration proceeding under this chapter unless the person:

(1)is an employee of the appraisal district;
(2)is a licensed attorney in this state:
(3)is licensed as a real estate broker or salesperson under Chapter 1101, Occupations Code, or is licensed or certified as a real estate appraiser under Chapter 1103, Occupations Code; or
(4)is a property tax consultant registered under Chapter 1152, Occupations Code.

Under the House version, a property owner may represent himself; under the Senate version, this is unclear. However, it is likely that an arbitrator (or a court if necessary and if possible) would conclude that under either statute an individual property owner could represent himself, but a non-individual (such as a corporation or partnership) could not. This is essentially the position taken by courts for party representation in litigation matters, and would likely find favor in the arbitration arena.

Under the House version, a licensed real estate salesperson can represent a party; under the Senate version, the salesperson can serve as a witness but a broker must actually serve as the representative. However, the Senate version is not a model of clarity as, while providing that representation can only be by a broker (in addition to an attorney, appraiser, or consultant), the section also provides that a salesperson can be a party representative. It is unclear what distinction the Legislature considered exists between one who represents a party and a party representative. In court litigation, the term "party representative" is normally used to denote a person (usually an officer) who serves as the face of a business entity at trial and not the legal representative or lawyer.

One should note that the Senate version requires the representative to be "acting under power of attorney." Though the House version does not contain similar language, a property owner would be prudent in providing his representative with a power of attorney to avoid any issue on statutory compliance.

The greatest distinction in the House and Senate versions involves who may present evidence.

The House version is silent and presumably an individual property owner could testify as to value, since such an owner can also normally testify in court as to the value of his own property. Otherwise, it is possible that standard litigation rules would apply, which would normally limit value testimony to a licensed appraiser or a licensed real estate broker or salesperson.

The Senate version specifies the qualifications of a person who may testify during the arbitration. Note that the property owner is not one of the listed persons. It is unclear whether an arbitrator might thus prevent an individual property owner from testifying as to value. If so, then the arbitration statute is actually more restrictive than litigation.

However, the Senate version does state that an attorney or property tax consultant can present evidence. Normally, neither an attorney nor a tax consultant can testify as to market value of property, though there are some exceptions. The language of the statute might mean that a tax consultant would be allowed to present value testimony at arbitration, when he would not at trial.

But this remains unclear, and different arbitrators might provide different interpretations of what is allowed. It would be wise for a property owner to obtain initial rulings from the arbitrator as to the arbitrator's interpretation of that statutory language in order to determine who can testify. Otherwise, a property owner might show up with a tax consultant ready to testify, only to have the arbitrator rule that the consultant's testimony is not allowed. However, for a total $450 fee, it might be difficult to get an arbitrator to expend much pre-hearing time on a matter in order to obtain such a ruling.

Currently, the only thing that appears certain based on the differing language of the two statutory versions is that the appraisal district potentially gets the upper hand. While a property owner might have to employ at least one third party (whether attorney, consultant, appraiser, or broker/salesperson) and perhaps more than one to ensure both representation and evidence, an appraisal district need only use one of its employees. Both versions provide that the appraisal district may be represented by any of its employees. The Senate version also provides that an employee of the appraisal district may testify and present evidence.

Therefore, when total cost and everything else is considered, it might be that the arbitration chapter actually benefits the appraisal district more than it benefits the property owner.

However, there has been a trend in some appraisal districts to try to avoid arbitration if possible. In some districts, when a property owner seeks arbitration, the appraisal district will contact the property owner prior to forwarding the request to the comptroller in an effort to reach a quick resolution. Unfortunately, it is impossible to determine in advance if a particular appraisal district will seek such a resolution or if such a resolution will be that favorable to the property owner.

If you have any questions about the contents of this article, please contact the GPD Property Tax Section at propertytax@gpdtax.com.

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