Owners of some Cook County lodging establishments may be paying a lot more in property taxes starting in 2014—people like Scott Mehlhaff and Chris Holland-Mehlhaff, owners of Best Western Superior Inn and Suites in Grand Marais, who were notified last year that their taxes would be going from just under $39,000 to over $96,000.
The reason for the big jump was that their classification had gone from “seasonal resort” to “commercial” based on a questionnaire sent out by the Cook County Assessor’s Office that their bookkeeper answered on their behalf. The questionnaire asked whether the hotel offered onsite recreational amenities such as boat or snowmobile rentals, guide services, or sale of bait and tackle. The bookkeeper answered “no” and the Assessor’s Office changed their classification.
The Holland-Mehlhaffs protested the change, saying they do offer other recreational amenities such as bonfires and swimming on the beach, free use of bicycles, snowshoe rentals, sale of Lutsen Mountains lift tickets, vouchers for discounted golfing at Superior National at Lutsen Golf Course, arrangements for sled dog adventures, and referrals to Stone Harbor Wilderness Supply for kayak and cross-country ski rentals.
Assessor Mary Black agreed with the owners and talked to the county board about it. On December 13, the board approved the requested tax abatement and reclassification of the property back to its former seasonal resort status.
The Assessor’s Office sent an inquiry to the Minnesota Department of Revenue (DOR) and was told that seasonal resort recreational amenities must be offered onsite by the operator of the property.
Drew Imes, state program administrator of the DOR’s Information Education Section/Property Tax Division wrote on December 21, “…Providing swimming and beach access, providing campfires, or simply being considered a good location to be used as a base camp for enjoying a region’s unique recreational activities does not qualify a property for class 4c(1)” (the seasonal resort classification under Minnesota Statute 273.13 Subd. 25).
Imes said his office’s opinion was that while snowshoe and bicycle rental would qualify under that classification, the hotel would need to provide evidence that at least 20 percent of its annual gross receipts were from charges for providing recreational activities.
On June 1, John Hagen, director of the Property Tax Division, wrote to Assessor Black, saying that he would encourage the Cook County Board of Appeal and Equalization to restore the commercial classification unless he received “compelling information” that would change his opinion.
“On the surface, based upon my current understanding of the facts,” he wrote, “you having recommended that the county board abate this property troubles me a great deal.”
Hagen cited several reasons: Trying to fit a property into a classification that is not appropriate would have repercussions around the state. The classification was changed against the recommendation of the county’s tax compliance officer and the Department of Revenue.
“In my opinion, hotels are clearly not resorts,” Hagen wrote. “They function very differently from resorts and an attempt to work them into a classification that they are not entitled to creates a very large and unwarranted tax benefit to the property that is incorrectly classified and unfairly shifts the tax burden onto all other properly classified properties.
“It appears to me that the legislature went to a great deal of effort to attempt to differentiate resorts from other types of commercial property. Any action that contributes to blurring this line undermines the legislative intent.
“The classification of the Best Western Hotel as a resort will make the proper performance of every other assessor in the state more difficult as property owners draw a comparison of classification of this property to their own.
“…It is absolutely critical to the proper functioning of a property tax system that all assessors classify property based on the statutory requirements for the various classes of property and not try to fit properties into classifications that are not appropriate.”
Assessor’s reasoning
Assessor Black responded on June 11, saying the owners of the Best Western provided the necessary documentation to support the seasonal resort classification. “I agree that hotels are clearly not resorts,” she wrote. “Last weekend I stayed at a Hilton in downtown Minneapolis where the atmosphere is definitely that of a hotel: valet parking, room service, etc. The Best Western in town has a much different atmosphere; while not that of a ma and pa resort, the line is blurred.”
She said she brought the issue to fellow assessors at a meeting of the Minnesota Association of Assessing Officers, and all but one stated they would have made the same decision.
Black told Hagen that the property had been classified as a seasonal resort since at least 1997, the first year the county started keeping its tax records on computer. “This was the year after the former assessor, Ted Mershon, wrote a letter to then-senator Johnson regarding the East Bay tax court decision and its implications of what could happen with the classification of motels/hotels … because of this case. It is my understanding that after that decision, the language regarding the recreational activities was added to statute to quantify what was a resort and what was a hotel. Regardless of that addition, Mr. Mershon continued to give this classification to every motel in the county.”
Black said she questioned these qualifications when he retired, added more detail to the questionnaires her office sends out, and started requiring documentation that supports the tax classification.
“I am not adamant in my decision to classify this property a resort,” Assessor Black wrote. “I believe I am following statute and doing my job to keep the county out of a tax court case that I believe we would lose.”
She pointed out the statutory language that states that lodging establishments could still qualify if they could not prove that 20 percent of their income came from recreational fees as long as at least 60 percent of their rentals were for guests staying at least two consecutive nights.
Assessor Black said she had been unable to meet with County Attorney Tim Scannell on this issue because of disruptions related to his injury in the December courthouse shooting.
“I did not intend for this to be such a contentious issue between myself and the DOR,” Black wrote. “If there is something I am missing in statute, please enlighten me.”
State’s rebuttal
John Hagen wrote a letter back, saying that despite the letter of the law, the intent of the law was for seasonal resorts to provide recreational activities onsite rather than acting as concierges. In the case of Best Western, he wrote, “Any recreational activities would appear to be extremely minimal, likely for purposes of securing a more preferential classification and a significantly lower tax bill.”
Hagen said rather than worry about whether the business would take the county to court, the classification should be based on “how similar properties in your region are currently assessed based on use and statutory guidelines.
“Remember, the classification of a property is based upon the primary use of the property, not an incidental use.”
Review of all lodging establishments
The week of August 13, Assessor Mary Black and a Department of Revenue representative reviewed the classifications of 83 lodging establishments in Cook County. Some were site visits and the rest were office audits.
Black told the Cook County News- Herald, “Nothing will change for taxes payable 2013, but assessment 2013/taxes payable 2014 is another story. The property owners will be notified via letter that unless they have a significant increase in the recreational activities they offer their guests, their classification will change [to] (or in some cases remain) commercial next year.”
Assessor Black said the Department of Revenue was reviewing Lake County lodging establishments as well.
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