Thares v. Brown County Board of Equalization

2000 SD 114, 616 N.W.2d 380, 2000 S.D. LEXIS 121

• Court: South Dakota Supreme Court
• Decided: August 23, 2000
• Docket: None
• Status: Published

Opinions

GILBERTSON, Justice.

[¶ 1.] James L. Thares and Traci L. Thares (Thares) appeal the Brown County Board of Equalization’s (County) assessment of their property, which was based on SDCL 10-6-33.14. Thares challenge the constitutionality of this statute. We affirm.

FACTS AND PROCEDURE

[¶ 2.] The facts in this case are stipulated. Thares purchased approximately 80 acres of land in Brown County on July 30, 1998 for $125,456, or $1600 per acre. They constructed a house, shop, and a horse barn on a portion of the land. They used the remainder of the land to grow crops and pasture livestock. Just prior to the purchase, the land was assessed and classified for tax purposes as agricultural property in the amount of $450 per acre, or $35,290. After the sale, County reclassified the Thares’ property as non-agricultural, and the 1999 assessment raised the valuation of the land for tax purposes to $116,690. County relied upon SDCL 10-6-33.14 in raising the assessment, which requires all agricultural property that sells for more than 150 percent of its agricultural income value to be classified as a non-agricultural acreage.

[¶ 3.] After a parcel of agricultural property meets the sale¹ requirements of SDCL 10-6-33.14, the land is then valued “at the price for which such land sold multiplied times the level of assessment for non-agricultural property within the county.” SDCL 10-6-83.18. Barring a successful administrative appeal by the taxpayer, once the land is classified as non-agricultural land, it remains so classified for a minimum of five years pursuant to SDCL 10-6-33.17. After the five-year period, the director of equalization may reclassify the non-agricultural acreage as agricultural land if the land remains in agricultural use and the landowner submits an annual application to County.

[¶ 4.] The circuit court upheld the constitutionality of SDCL 10-6-33.14. Thares now challenge the constitutionality of SDCL 10-6-33.14 et seq. in this Court.

STANDARD OF REVIEW

[¶ 5.] Since the parties have stipulated to the facts in this case, there are no factual issues to be resolved. Thus, this case presents a question of law, and this Court reviews the circuit court’s decision de novo, giving no deference to its legal conclusions. Yankton Ethanol, Inc. v. Vironment, Inc., 1999 SD 42, ¶ 6, 592 N.W.2d 596, 598 (citing Thompson v. Summers, 1997 SD 103, ¶ 5, 567 N.W.2d 387, 390) (other citation omitted).

ANALYSIS AND DECISION

[¶ 6.] The South Dakota Constitution gives the legislature authority to create as many classes of non-agricultural property as it desires, so long as taxes are uniform on property within the same class. Great Northern Railway v. Whitfield, 65 S.D. 173, 272 N.W. 787, 791 (1937). S.D. Const. Art. VIII, § 15 provides:

The Legislature shall make such provision by general taxation and by authorizing the school corporations to levy such additional taxes as with the income from the permanent school fund shall secure a thorough and efficient system of common schools throughout the state. The Legislature is empowered to classify properties within school districts for purposes of school taxation, and may constitute agricultural property a separate class. Taxes shall be uniform on all property in the same class.

Thus, under the state constitution, agricultural land constitutes its own, separate and distinct class. See also SDCL 10-6-31, which states all property for the purposes of taxation is classified into separate classes of agricultural property and non-agricultural property.

[¶ 7.] In Gould v. Pennington County Bd. of Equalization, 1997 SD 129, 570 N.W.2d 846, we held SDCL 10-6-58 to be unconstitutional, as it created two classes of agricultural property, by classifying in its own separate agricultural class, agricultural property which sold for a price greater than 150 percent of its agricultural income producing value. SDCL 10-6-58 provided:

Any agricultural land, as defined in § 10-6-31.3, which sells for more than one hundred fifty percent of its agricultural income value is hereby classified for purposes of ad valorem taxation. The agricultural income value shall be determined pursuant to § 10-6-62.

We again reaffirmed our previous holding that while classes of non-agricultural property can be created by the legislature without limit, agricultural land is limited by the constitution to but a single class. Gould, 1997 SD 129, ¶ 8, 570 N.W.2d at 848 (citing Great Northern Railway, 65 S.D. 173, 272 N.W. 787, 792). We then determined that:

The adopted criteria [of SDCL 10-6-58] bears no relationship to any agricultural factors (type of land, productivity, etc.) but is based almost entirely on its sales price. Valuing the agricultural land, as in the present case, based upon its sales price is to set it apart from agricultural property and treat it as “non-agricultural,” or other property, (emphasis in original).

Id. ¶ 17, 570 N.W.2d at 849-50. Thus the constitutional infirmity was not a separate classification for this type of property, but making the classification an agricultural one.

[¶ 8.] In 1998 the legislature enacted a new statutory classification² in response to our decision in Gould. It included SDCL 10-6-33.14, “[c]lassification of non-agricultural acreage,” which provides:

Any agricultural land, as defined in § 10-6-31.3, which sells for more than one hundred fifty percent of its agricultural income value is hereby classified for purposes of ad valorem taxation as a non-agricultural acreage. The agricultural income value shall be determined pursuant to § 10-6-33.15. (emphasis added).

Thares now challenge the constitutionality of the statute, contending that even with the added phrase “as a non-agricultural acreage,” based upon our analysis in Gould, SDCL 10-6-33.14 is unconstitutional. Thares contend that SDCL 10-6-33.14 still creates an impermissible subclassification of agricultural property which is taxed at a higher rate. County argues that SDCL 10-6-33.14 is constitutional, because instead of placing Thares’ land into a subclass of agricultural property, their property is reclassified from agricultural to non-agricultural acreage. We agree "with County.

[¶ 9.] Initially, we must note that “there is a strong presumption that the laws enacted by the legislature are constitutional and that presumption is rebutted only when it clearly, palpably and plainly appears that the statute violates a provision of the constitution.” Gould, 1997 SD 129, ¶ 6, 570 N.W.2d at 847. “[T]he party challenging the constitutionality of a statute bears the burden of proving beyond a reasonable doubt that the statute violates a state or federal constitutional provision.” Id. (citing Cary v. City of Rapid City, South Dakota, 1997 SD 18, ¶ 10, 559 N.W.2d 891, 893 (citing Sedlacek v. South Dakota Teener Baseball Program, 437 N.W.2d 866, 868 (S.D.1989))).

[¶ 10.] Additionally, the legislature has broad power to classify property for taxation purposes:

Where there is power to impose a license or privilege tax, the Legislature may classify and may subclassify the objects of the tax upon some reasonable basis.... The determination of the question of classification is primarily for the Legislature and courts will not interfere unless the classification is clearly arbitrary and unreasonable. “The power of the state to classify for purposes of taxation is of wide range and flexibility.” Louisville Gas & Electric Co. v. Coleman, 277 U.S. 32, 37, 48 S.Ct. 423, 425, 72 L.Ed. 770, 774.

State v. Black Hills Transportation Co., 71 S.D. 28, 20 N.W.2d 683, 685 (1945). “ ‘It is well agreed that the legislature may select some occupations for taxation and not others, and may classify for the purpose provided the classification is reasonable and not arbitrary and bears some relation to the subject in hand.’ ” Berdahl v. Gillis, 81 S.D. 436, 136 N.W.2d 633, 638 (1965) (quoting State v. Welsh, 61 S.D. 593, 641, 251 N.W. 189, 210 (1933)); see also Brink Electric Construction Co. v. State, 472 N.W.2d 493, 501 (S.D.1991) (quoting Phillips Chemical Co. v. Dumas School District, 361 U.S. 376, 385, 80 S.Ct. 474, 480, 4 L.Ed.2d 384, 390 (1960) (stating “the State’s power to. classify is, indeed, extremely broad, and its discretion is limited only by constitutional rights and by the doctrine that a classification may not be palpably arbitrary.”)); Enron Corp. v. Spring Indep. School Dist., 922 S.W.2d 931, 936 (Tex.1996) (stating the state legislature may constitutionally draw any distinction in classifying property for ad valorem tax purposes, as long as the classifications are not unreasonable, arbitrary, or capricious). Notably, Thares do not argue County’s decision to classify their property as non-agricultural land was arbitrary and capricious, but instead focus solely on their constitutional claim.

[¶ 11.] We concluded in Gould that the phrase “... may constitute agricultural property as a separate class,” indicates that agricultural property, if classified separately, was to form a class unto itself. 1997 SD 129, ¶ 13, 570 N.W.2d at 849. “The use of the language ‘a separate class ’ in the singular, ... [establishes] that agriculture was to be designated as one class of property and all other properties were the other classes of property.” Id. (emphasis in original). However, as noted there is no prohibition on the number of non-agricultural classes of property allowed under our state constitution. Great Northern, supra. That determination has been constitutionally left to the legislature. For example, SDCL 10-6-31.2³ creates a separate class or sub-class for leased school lands, while commercial, industrial and nonresidential property is referenced in SDCL 10-6-35.19.⁴

[¶ 12.] SDCL 10-6-33.14 does create a separate class of land, however, it creates a nonagricultural class of land, i.e., land that “sold for more than 150 percent of its agricultural income-producing value.” By enacting this statute, the legislature determined that all agricultural land which sells for more than 150 percent of its agricultural income-producing value, would thus not fall within the definition of “agricultural land” in SDCL 10-6-31⁵ and SDCL 10 — 6—31.3.⁶ The circuit court was correct when it concluded “the legislature created an additional non-agricultural classification, not a second agricultural class.” Thus, since SDCL 10-6-33.14 reclassifies property from agricultural to non-agricultural property, the Thares’ land becomes by statutory definition, a “non-agricultural acreage.”

[¶ 13.] Prior to its purchase, the land in question was valued at $450 per acre. However, Thares purchased the property for $1600 per acre, nearly four times its previous agricultural valuation. While Thares claim the land continues to be principally used as agricultural land, since the purchase they have built a house and other structures on the property. It is simply not reasonable or logical to allow Thares to now own this property, bought at $1600 per acre, to only be assessed for taxation purposes at $450 per acre, or $35,290, the original assessment before application of SDCL 10-6-33.14, and limit any increased assessment to post purchase improvements. “[A] sale for a purchase price which is three or more times the agricultural assessment placed on the land creates a red flag for the assessor to reevaluate the classification of such land as agricultural....” Straughn v. K & K Land Management, Inc., 326 So.2d 421, 424-25 (Fla.1976).

[¶ 14.] In Straughn, the appellee’s land was reclassified from agricultural to non-agricultural, resulting in a substantial increase in his tax liability. The appellee challenged the constitutionality of the Florida statute⁷ which gave the tax assessor the authority to classify the land as nonagricultural, arguing that his land was being used for bona fide agricultural purposes at the time of assessment, and thus qualified for a lower agricultural tax rate. Id. at 423.

[¶ 15.] In upholding the constitutionality of the statute in question, the Straughn court explained the rationale behind the presumption that agricultural land which sells for three or more times its assessment, is not being used for bona fide agricultural purposes:

The reduced taxation for farmland is based on a legislative determination that agriculture cannot reasonably be expected to withstand the tax burden of the highest and best use to which such land might be put.... The rational presumption imposed by the Legislature is that land purchased for three or more times its assessed agricultural value is not intended to be put to ‘good faith commercial agricultural use’ per [the Florida statutes]. Property not put to such use is not entitled to the legislatively-created exception to taxation at full value represented by the agricultural use tax status. But a property owner may yet overcome the presumption that land purchased at three times its agricultural value falls into the non-agricultural category.

Id. at 424. Also important to the Straughn court’s finding that the statute was constitutional was the fact that the presumption created by Florida statute was rebuttable by the taxpayer, who is able to “come forward with evidence of ‘special circumstances’ within the framework of [the Florida statutes] to establish that the land continues to be used for ‘bona fide agricultural purposes’.” Id. at 425.

[¶ 16.] Similarly, in South Dakota the legislature provides the taxpayer with an appeals route to challenge a decision of the director of equalization to classify real estate as non-agricultural rather than agricultural based on SDCL 10-6-33.14. See SDCL 10-11-16, 10-11-16.1, 10-11-22 and 10-11-26(3). With the passage of SDCL 10-6-33.14, the legislature created an alternative method for taxpayers to return their land to agricultural taxation status by following the provisions set forth in SDCL 10-6-33.17. SDCL 10-6-33.17 provides:

Any land which is classified pursuant to §§ 10-6-33.14 to 10-6-33.19 shall remain so classified for a minimum of five years. Five years after the land is so classified, the land may be reclassified as agricultural land if the land remains in agricultural use during the five year period and if the owner of the land submits an annual application to the director of equalization. The application shall include verified documentation that ■ the land has been in agricultural use during [the] past year. If the land meets the criteria set forth in § 10-6-31.3, has been in agricultural use for five years, and the application requirement in this section is complied with, the director of equalization may reclassify the nonagricultural acreage as agricultural land.

[¶ 17.] It is only reasonable to conclude that when agricultural land sells for a substantially higher price than the income it is capable of generating, it has achieved a nonagricultural value in excess of its prior agricultural value and the property’s classification should be reconsidered.⁸ “[A]s long as a classification is reasonable and not arbitrary and bears some relation to the subject at hand, ...” this Court will uphold the legislature’s classifications. In re Sales Tax Liability of Valley Queen Cheese, 387 N.W.2d 39, 41 (S.D.1986). As long as a “plausible policy reason for the classification” exists, classifications should be held constitutional. Nordlinger v. Hahn, 505 U.S. 1, 11, 112 S.Ct. 2326, 2332, 120 L.Ed.2d 1, 13 (1992). This standard is held to be “especially deferential in the context of classifications made by complex tax laws. [I]n structuring internal taxation schemes ‘the States have large leeway in making classifications and drawing lines which in their judgment produce reasonable systems of taxation.’ ” Id.

[¶ 18.] Our state constitution gives the legislature power to divide all property into separate classes, one agricultural and unlimited non-agricultural property. Gould, 1997 SD 129, ¶ 13, 570 N.W.2d at 849. Today we re-affirm our conclusion in Gould that, “[v]aluing the agricultural land, as in the present case, based upon its sales price is to set it apart from agricultural property and treat it as ‘non-agricultural,’ or other property.” Id. ¶ 17, 570 N.W.2d at 849-50. The legislature has done nothing more than follow our conclusion and remedied its prior classification error which we struck down in Gould. It recognized there are instances where the current economic climate dictates land that has been used for agriculture has acquired a higher value for non-agricultural purposes as established by a fair market sale. See e.g., Telkamp v. S.D. Bd. of Equal., 515 N.W.2d 689, 692 (S.D.1994).⁹ The legislature, now in a constitutional manner, declares for taxation purposes what the free market system has already established, that the land’s value as established by a recent sale, dictates it is no longer an “agricultural acreage.”¹⁰

[¶ 19.] Here, by enacting SDCL 10-6-33.14, the legislature created another class of nonagrieultural property, one in which sale price as related to income is for the most part determinative of whether land will be classified as nonagrieultural. If this Court were to hold SDCL 10-6-33.14 et seq. unconstitutional, the legislature would be severely limited in any power to create different classes of nonagrieultural property outside of municipal boundaries, and county tax assessors would not be able to accurately assess the true value of property which sells for much more than its agricultural income producing value.¹¹ This Court has also stated: “[a]ny legislative act is accorded a presumption in favor of constitutionality and that presumption is not overcome until the unconstitutionality of the act is clearly and unmistakably shown and there is no reasonable doubt that it violates fundamental constitutional principles.” West Two Rivers Ranch v. Pennington Co., 1996 SD 70, ¶ 15, 549 N.W.2d 683, 687 (quoting Accounts Management, Inc. v. Williams, 484 N.W.2d 297, 299 (S.D.1992)).¹² Thares have not established beyond a reasonable doubt that SDCL 10-6-33.14 is clearly and unmistakably unconstitutional. Therefore, this Court upholds the constitutionality of SDCL 10-6-33.14 et seq. The County’s decision assessing the value of Thares’ property at $116,690 is affirmed.

[¶ 20.] MILLER, Chief Justice, and KONENKAMP, Justice, concur specially. [¶ 21.] SABERS, Justice, dissents. [¶ 22.] AMUNDSON, Justice, concurs in the result of the dissent.

1 . The triggering mechanism of SDCL 10-6-33.14 is a sale of the realty. Thus, owners of agricultural realty who purchased it prior to July 1, 1998 when the statute went into effect, are not affected by it. Their land will continue to be taxed as agricultural as long as it is not sold for a price in excess of 150 percent of its agricultural income value. Likewise, owners of agricultural realty who purchased it after July 1, 1998 will not be affected as long as the purchase price was for less than 150 percent of the agricultural income value.

2 . The legislature also repealed the statutory scheme of SDCL 10-6-58 through 10-6-62, after this Court declared it unconstitutional in Gould.

3 . SDCL 10-6-31.2 provides: "Leased school and endowment lands as provided in chapter 5-11 are hereby separately classified for the purpose of taxation.”

4 . SDCL 10-6-35.19 provides: "All commercial, industrial and nonresidential agricultural real property which increases more than ten thousand dollars in true and full value as a result of reconstruction or renovation of structures is specially classified for purposes of taxation.”

5 . SDCL 10-6-31 provides in part:

Agricultural property includes all property used exclusively for agricultural purposes which is not handled for resale by wholesale or retail dealers. It includes all land used exclusively for agricultural purposes, both tilled and untilled, the improvements on such land, other than buildings and structures, and the livestock and machinery located and used on such agricultural land.

Non-agricultural property includes normally occupied dwellings on agricultural land and automobile garages or portions of buildings used for that purpose by the occupants of such normally occupied dwellings, and all other property not classified as agricultural property.

6 . SDCL 10-6-31.3 provides:

For tax purposes, land is agricultural land if it meets two of the following three criteria:

(1)At least thirty-three and one-third percent of the total family gross income of the owner is derived from the pursuit of agriculture as defined in subdivision (2) of this section or it is a state-owned public shooting area or a state-owned game production area as identified in § 41-4-8 and it is owned and managed by the Department of Game, Fish and Parks;

(2) Its principal use is devoted to the raising and harvesting of crops or timber or fruit trees, the rearing, feeding and management of farm livestock, poultry, fish or nursery stock, the production of bees and apiary products, or horticulture, all for intended profit pursuant to subdivision (1) of this section. Agricultural real estate also includes woodland, wasteland and pasture land, but only if the land is held and operated in conjunction with agricultural real estate as defined and it is under the same ownership;

(3) It consists of not less than twenty acres of unplatted land or is a part of a contiguous ownership of not less than eighty acres of unplatted land. The same acreage specifications apply to platted land, excluding land platted as a subdivision, which is in an unincorporated area. However, the board of county commissioners may increase the minimum acre requirement up to one hundred sixty acres.

However, for tax purposes, land is not agricultural land if the land is classified pursuant to § 10-6-33.14 as a nonagricultural acreage. (emphasis added).

The dissent while declaring the three criteria to be a legislative decision to "make a meaningful distinction between agricultural and non-agricultural land,” fails to acknowledge the last sentence of the current statute which was a post-Gould amendment to incorporate the classification set forth in SDCL 10-6-33.14. We do not have the authority to pick and choose those portions of a statute that are in accord with our views and set aside the rest. We have consistently adhered to the proposition that a statute is to be construed as a whole and in harmony with other statutes. Taylor Properties v. Union County, 1998 SD 90, ¶¶ 14-15, 583 N.W.2d 638, 641. The dissent fails to adequately support its thesis that the criteria in SDCL 10-6-31.3 apparently could not be amended in 1998 and that "the county and legislature are limited to applying the criteria set forth in SDCL 10-6-31 and 10-6-31.3” prior thereto.

7 . The Florida statute in question in Straughn provided:

Sale of land for a purchase price which is 3 or more times the agricultural assessment placed on the land shall create a presumption that such land is not used primarily for bona fide agricultural purposes. Upon a showing of special circumstances by the landowner demonstrating that the land is to be continued in bona fide agriculture, this presumption may be rebutted.

Fla.Stat.Ann. § 193.461(4)(c).

8 . While agriculture and the family farm have recognized social and moral benefits {see SDCL 47-9A-1) for it to survive as a way of life, it must fundamentally also be considered a business. No explanation is offered how $450 per acre agricultural land can sustain a $1600 purchase price if the land remains agricultural. While we realize all agricultural operations are not profitable, and whether they are profitable or not is not a determinative factor to an agricultural classification, profit motive has been recognized as a factor which can be considered when determining whether the land is entitled to an agricultural classification. Love PGI Partners, LP v. Schultz, 706 So.2d 887, 892 (Fla.Dist.Ct.App.1998). Specifically, Thares do not show how they can meet their investment cost and realize a reasonable profit from their land when they paid $1600 per acre for it. Neither do Thares argue they paid too much for the property or that it has decreased in value since its purchase.

9 . Nielsen v. Erickson, 272 N.W.2d 82 (S.D. 1978) made the observation that as of the time it was decided in 1978, "there is nothing in the law that requires or permits an assessor to consider whether the land is economically self-sufficient[.]” Id. at 86. As previously noted SDCL 10-6-33.14 was not passed until twenty years later in 1998.

10 . It was recognition of economic reality that led to the present constitutional

classification system in the first place. In Great Northern we stated:

Since 1929 the severity of the adverse conditions affecting agriculture in this state, of which we are now fully aware, makes complete our realization that this court failed to see in 1929 that which was apparently then plainly visible to the Legislature and the people. Commencing some time prior to 1923 and continuing until this very time, the agricultural industry in this state has been in a serious condition and fighting desperately for its existence. The prices for agricultural products have been far below normal.... This court knows that as a part of the general adverse conditions affecting agriculture in this state, prior to the enactment of the 1931 law, the taxes levied for school purposes meant practical confiscation of agricultural lands in many school districts....

272 N.W. at 792.

11 . This Court agrees with the circuit court’s reasoning:

Because comparable sales of agricultural property can be considered in determining the value of agricultural property, if property which sold for more than one hundred fifty percent of its agricultural income value is left in the classification of agricultural properly, then the value of all agricultural property increases accordingly. By reclassifying this property as nonagrieultural, this accelerator effect on other agricultural property is minimized.

12 .Thares contend that the only solution for the legislature to create a separate classification of land such as the land in question is to amend the state constitution. The legislature proposed an amendment in 1998 to Article VIII, § 15, however, it failed at the November, 1998 general election. The legislature again proposed the same amendment in 1999, which would change the third sentence of Article VIII, § 15, to read as follows: "The Legislature is empowered to classify properties within school districts into separate classes for purposes of school taxation.” This 1999 proposed constitutional amendment will be on the ballot for the November 2000 general election. However, even without a constitutional amendment, SDCL 10-6-33.14 et seq. remains constitutional as it corrects the deficiency found in the 1993 statutes declared unconstitutional in Gould by creating a separate distinct class of non-agricultural property, instead of creating a subclass of agricultural property.