How to Contest Your Property Taxes Deep in the Heart of Texas

Most things are bigger in Texas, but your property tax bill doesn’t have to be.

No doubt, tax authorities in Texas are at times overzealous in their valuations on which property taxes are computed. The head of property taxes for a Fortune 500 client once quipped: “If the taxing authority is correct that my house is a castle, why don’t my kids treat me like a king?” Whether it’s your residence, your company’s headquarters building, an industrial facility, or any other real or tangible personal property, appraisals that are either inflated or on which reasonable minds may differ are commonplace.

There typically is not a single, clear-cut value that should be assigned to any particular piece of property. Expert appraisers frequently disagree about a property’s proper valuation. So do taxpayers and the tax authorities who rely on the experts. This is similar to sparring views on valuation that taxpayers encounter in the fields of estate taxes and transfer pricing. In the ad valorem tax domain, reasonable minds may also differ as to the application of exemptions and other issues that impact the amount of property taxes that are rightfully due.

Fortunately, there is a robust process in Texas to contest your property taxes. For many companies, annual challenges to their property tax assessments has become part of their regular course of doing business in Texas.

The Stakes

Property taxes are a significant revenue source for taxing authorities and a significant cost for taxpayers. Local public entities rely primarily on their property tax base to fund their operation. This may incentivize tax authorities to “push the envelope” on their valuations. For taxpayers, ad valorem tax liabilities can represent a material cost to their business, particularly because it applies regardless of the financial situation of the taxpayer.

If the taxpayer is running financial losses, they may not have income-based tax liabilities but still must pay property taxes, exacerbating their losses. If the taxpayer is upside down on their property—their debt exceeds the property’s value—they still must pay property taxes. Taxpayers also must remain cost-competitive with their competitors and thus have motivation to ensure they are not overpaying their property taxes.

These stakes often compel taxpayers and tax authorities to engage when there are disagreements about the value of property, application of exemptions, and other issues that impact the amount of ad valorem taxes owed by the taxpayer.

Property Tax Administration

Texas property tax laws are, with narrow exceptions, enacted on the state level by the Texas legislature. But they are not administered by the Texas Comptroller, the statewide agency that administers most taxes in Texas. Instead, property taxes are administered on the local-level by “appraisal districts” throughout Texas.

Each appraisal district administers the appraisal and tax roll processes for “taxing units” within their geographic jurisdiction. The primary taxing units tend to be school districts, as well as city and county governments. There are also a litany of lesser known taxing units that include municipal utility districts, flood districts, hospital districts, ports, irrigation districts, and others.

Any issues involving whether property should be taxed, and at what value, are within the purview of the appraisal districts. In addition, the appraisal districts are responsible for determining whether exemptions apply. Basically, the appraisal districts identify the property that should be on the tax rolls, and at what value. Actual collection of taxes, however, are handled by the taxing units themselves.

Below we’ll focus on disputes with the appraisal districts, but readers should note that any tax delinquency suits or other collection actions are brought by the taxing units.

The Appraisal Process

The processes for appraisal districts to identify and appraise property differ between real property and business tangible personal property. The appraisal districts proactively identify real property in their jurisdictions and issue valuation notices to the property owners of record, typically without input from the property owners. For business personal property, the owner (and sometimes the lessee or other party in possession) ordinarily has a legal obligation to “render” (to self-identify in a report) their property within the appraisal district.

This rendition process can be a trap for the unwary. Many taxpayers, often years after they have already been in operation in Texas and paying ad valorem taxes on their real property, discover this gap in their compliance. (Although beyond the scope of this article, there are mechanisms to remedy past failures and limitations on the number of years the appraisal districts may go back to add omitted property to the tax rolls.)

Ultimately, regardless of whether property is self-identified by the taxpayer or identified by the appraisal district, the appraisal district assigns a value to the subject property, which the taxpayer has a statutory right to challenge.

Administrative Challenges

Once a taxpayer receives notification from the appraisal district of the subject property’s appraised value, or of the denial of an exemption, the property owner may challenge the appraisal district’s action by filing a “protest” within the time frames established by the Texas legislature—in most cases, May 15. To hear these administrative protests, each appraisal district establishes an appraisal review board, or ARB, to hear taxpayer challenges at the administrative level and before the dispute escalates into a judicial action in a court of law. As a matter of practice, taxpayers are also given an opportunity to settle their matter in an “informal hearing”—a fancy term the appraisal districts use for a settlement conference—before proceeding to the protest hearing before the ARB.

The most commonly protested issues involve the appraised value of property. Property owners have a right to challenge any appraisal that exceeds the property’s fair market value or is not equal and uniform with valuations of similarly situated properties. These rights are stated in both the Texas Constitution and Texas Tax Code.

The latter right—to equal and uniform valuations—is unfamiliar to many attorneys and tax practitioners so may merit further comment. The basic concept is competition neutrality: Taxpayers should not be required to pay taxes incommensurate with the taxes their competitors are paying on comparable property. As a result, taxpayers should pay based on the lesser of market value or values comparable to those on which the taxpayer’s competitors and similarly situated taxpayers pay.

Thus, even if a taxpayer’s property is valued at fair market value, the appraised value for property tax computation purposes still is subject to challenge if competitors are receiving a better deal. When a taxpayer protests the appraised value of their property, it is essential that they properly identify and preserve all grounds, including that the property’s valuation is not equal and uniform if applicable.

A distant second place to disputes over valuation in terms of frequency are challenges to appraisal district denials of exemptions. There are more than 50 statutory exemptions from property taxation in Texas, and taxpayers have a right to protest the denial of any such exemptions for which the taxpayer applied. Less common but also available for challenge by protest are whether a taxpayer owns the subject property, whether the appraisal district lacks jurisdiction over the property or has violated a U.S. constitutional provision—such as the Commerce Clause—in its assessment, and other actions that adversely affect the taxpayer.

Some ARBs have a reputation as shills for the appraisal district of which they are a part. Importantly, regardless of this perception, taxpayers must exhaust their administrative remedies, including participation in the ARB process, to preserve their ability to appeal their case to an independent forum, the district courts.

Judicial Challenges

If a taxpayer does not receive adequate recourse from an ARB, the taxpayer has a right to judicial review. Such action is commenced in Texas district court in a de novo proceeding and generally must be filed within 60 days of the ARB order being challenged. There are important pre-payment requirements that may apply and, if they do, then noncompliance may result in forfeiture of any judicial remedies. In district court, taxpayers have a right to a jury trial. The procedures for district court reviews of ARB actions is similar in most other respects to general civil litigation in the district courts. The losing party may appeal through the two levels of appellate courts in Texas, the highest being the Texas Supreme Court.

Significantly, Texas has a specific statute that applies in property tax disputes that supplants the “American rule” that each litigant pays their own fees. Prevailing taxpayers in property tax litigation generally may recover reasonable attorneys’ fees if the court finds in their favor. This rule cuts only in the taxpayer’s favor; it does provide the appraisal district defendant with a similar opportunity to obtain fees. In practice, this prospect of attorneys’ fees may incentivize appraisal districts to negotiate resolutions rather than risk an adverse outcome and be on the hook for the property owner’s attorneys’ fees.

Conclusion

The procedural rules to challenge appraisal district actions in administrative protests and in appeals in the district courts are designed to ensure that taxpayers pay their fair share of property taxes, but not more. If professionally navigated, taxpayers have an opportunity in Texas to keep appraisal district valuations in check and their property tax burdens at levels appropriate to their asset base in the jurisdiction.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Pete Lowy is a shareholder with Chamberlain Hrdlicka White Williams & Aughtry in Houston. His practice’s main area of concentration is assisting clients with Federal, State and Local tax controversies.