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Suit challenges fairness of tax appraisals, tidelands leases

MISSISSIPPI GULF COAST — Casinos have poured millions of dollars into the coffers of local and state governments. But have the state and Harrison County gone too far with excessive taxation? Some casinos think so, and they’re going to court to settle the dispute.

If successful, revenues to the state, Harrison County and cities within the county could be reduced by millions. But a final resolution could take a long time because no matter how the lower court ruling goes, the decision is expected to be appealed to the Mississippi Supreme Court.

Associated Press writer Jack Elliott Jr. has said that with casinos on the warpath over taxes, “some believe Mississippi’s nine-year honeymoon with casinos could end.”

Two primary issues are at stake in the lawsuit that is scheduled to be tried Dec. 10 in Harrison County Chancery Court. One is concerning Harrison County property taxes for casino hotels, and the other is regarding taxes and lease fees paid on the state-owned tidelands taken up by casino barges.

Two Biloxi casinos, Imperial Palace (IP) and Treasure Bay, are challenging the Secretary of State’s authority to levy tidelands lease fees, and the fairness of Harrison County’s property tax assessment for their hotels. All of the Biloxi casinos with hotels have protested that their property taxes went up an unreasonable amount after the Harrison County reappraisal this past year. But thus far only IP and Treasure Bay are taking their protests to court.

Gerald Blessey, an attorney representing Imperial Palace and Treasure Bay, says that hotel property taxes more than doubled as a result of the reappraisal.

“There was a tremendous increase in the appraised value and the assessed value,” Blessey said. “In a nutshell, we think they used the wrong method of appraisal and they have singled out some of the casinos for a method that they have not used on other commercial properties.”

Blessey said they feel the county arbitrarily used a replacement cost as the method of appraising the hotels. In the case of IP, the replacement cost was more than double what it actually cost to build the hotel just a few years ago. Ralph Englestad, owner of IP, used his own construction company to build the hotel.

“He could build it again tomorrow and it certainly wouldn’t cost twice as much,” Blessey said. “Construction hasn’t gone up that much. It is just such a glaring difference. If it were just a few percentage points, it would be different. But it is not. It has been jumped up by an incorrect appraisal method. Any other method of appraisal will show a fair market value nowhere near what it was four years ago. It really is a question of treating this business fairly just like any other business.”

In 1999, the IP hotel paid taxes of $898,000. In 2000 the tax statement for the same piece of property was $1.8 million.

Blessey said he believes the same mistake was made with most of the casino hotels. Whether intentional or not, he said it appears that casino hotels were unfairly singled out. Representatives from the other casinos have also said they believe the county should have based its appraisals on income, rather than replacement value.

The tidelands lease issue is more complex. In addition to the tidelands lease costs levied by the Secretary of State, Harrison County also charges an ad valorem tax on the tidelands lease. Blessey said he believes that is a fundamental Harrison County mistake.

“We don’t think they are following the State Tax Commission’s rules,” Blessey said. “They are levying a tax on landlord’s interest rather than the tenant’s value. Tenants cannot go out and sublease these tidelands to someone else. So basically their tenant’s lease has no value in and of itself. The fair market value for the tenant’s interest is negative…you can’t sell that interest. You can sell the barge or hotel, but not the lease.”

The lawsuit also involves the issue of whether the tidelands leases are fair. The position of the two casinos is that an upland owner of waterfront property has a right to build a pier and dock a vessel without paying any rent to the Secretary of State’s office.

Blessey alleges that the tideland’s lease program has unfairly singled out casinos while other waterfront property owners with piers and docks don’t always pay for a tidelands lease. Some businesses, Northrup Grumman Ship Systems, Ingalls division, for example, don’t pay tidelands leases. However, Ingalls is specifically exempted from paying tideland’s leases by legislation, said David Blount, spokesman for the Secretary of State’s office.

Non-exempt business must have a tidelands lease and pay rent.

“If a business is on public property, the people’s property, they have to pay rent, Blount said. “The tidelands are public property. Just like any other property, you want to receive fair compensation for its use.”

But Blessey alleges rent on tidelands is not applied uniformly and fairly. Exemptions for businesses like Ingalls were given because the business promotes jobs and commerce. Blessey maintains that casinos should be placed on equal footing because they also promote jobs and commerce.

“Casinos are being discriminated against,” he said. “They are promoting jobs on the waterfront. Mississippi Power Company has its Jack Watson Plant on tidelands. How much rent are they paying? Now we question whether or not the Secretary of the State has power to discriminate between different businesses. Most businesses on the water don’t pay lease rentals to anyone. No residential properties are required to have one. Many waterfront homeowners have piers with extremely valuable yachts docked there, and they are paying nothing. We’re just saying treat everyone equally like they did before the Secretary of State decided to gouge casinos.”

Blessey said their position is that no one should have to pay tidelands leases for littoral property, state waters located next to upland parcels of land. Even if that position doesn’t prevail, Blessey will argue that littoral rights should be worth less than 100% of the total value because of the littoral rights of the property owner. The casino appraiser will state his opinion that since the tidelands next to an upland parcel can’t be leased to anyone but the property owner, the state should only charge 50% of the value of the tideland’s lease.

Blount said current leases are fair because they are based on the amount of revenue generated by the business. “So a bait shop will have a lease, but won’t pay as much as a casino would,” he said.

The Secretary of State’s office filed a motion to intervene on the side of Harrison County in the lawsuit. Secretary of State Eric Clark says the lawsuit threatens the entire public trust tidelands program.

“If the IP notion of littoral rights prevails, the Coast stands to lose responsible oversight of the casino industry and about $5 million annually in lease payments,” Clark said.

In 1997, Clark’s office sued Imperial Palace for refusing to sign a tidelands lease with the State of Mississippi before opening its casino. IP officials signed a lease on November 18, 1997, and pay $500,000 annually in rent.

“The Imperial Palace was wrong then, and they’re wrong now,” Clark said. “This isn’t just about the way the county determines property taxes. It’s also about whether a casino can dock a barge on state property and pay our citizens nothing in rent.”

Calls to the Harrison County Tax Assessor’s office and the Harrison County Board of Supervisors for comment on the article were not returned prior to deadline. In an article in The Sun Herald newspaper, County Attorney Joe Meadows said he expects the IP
law
suit to be the “stalking horse,” and that others will see how it goes before they decide whether to file lawsuits. Meadows said he feels confident the county can defend its higher casino appraisals in court.

About Becky Gillette

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