Troubled by taxes

SANDUSKY The owners of local sweet shop have found themselves in the midst of a sticky mess over tax
Annie Zelm
May 24, 2010

SANDUSKY

The owners of local sweet shop have found themselves in the midst of a sticky mess over taxes.

After nearly a decade of making chocolates together out of the home, sisters Jan Beck and Judi Horchler were thrilled to seal the deal on their own storefront last August. But they say they were “blindsided” by the discovery their property tax bill had more than doubled.

Worse, because the increase in real property value was retroactive for a full year, they were responsible for making up the difference between what the previous owner already paid and  the newly assessed value, dating back eight months before they even owned the building. “It’s taxation without ownership,” said Horchler, who co-owns Tre Sorelle Cioccolato on Columbus Avenue. “We were told the only recourse was to sue the previous owners — which would end up costing us much more than we’d ever get back.” They’ve since paid their bill in full, but with sacrifices. “We took out a loan and had to cut the hours of our staff,” Horchler said. “Coming up with $1,800 in two weeks is very difficult when you’ve only been in business nine months ... and financially, we’re not out of the woods yet. We have to have a very good holiday season to make up for it.”

During the same time period, they were also hit with more than $3,000 in street assessments.

Though their frustrations are still evident, the sisters’ focus has shifted to awareness. They say the last thing they want is to see another property owner caught off guard.

With several decades of experience in education between them — Horchler taught in local school districts for 35 years, and Beck teaches entrepreneur classes to college students — both were confident they’d done their homework before purchasing the property.

Yet even their RE/MAX realtor told them she was unaware such a scenario could occur.

Experts say it’s more common than many realize.

 “It isn’t fair, but somehow it’s legally occurring, and I’m not aware of anyone who’s fought successfully against it,” Southern Title of Ohio agent Sam Schmenk said. “It becomes an issue of the schools needing money, but unfortunately, it’s killing small businesses.”

Schmenk, who has 21 years experience at the local title agency, said the problem was relatively unheard five years ago but seems to be more common now.

The issue stems from the fact that all real estate taxes in most Ohio counties run one year behind, and real property values are often only estimates until someone buys a building.

When a new owner closes on a transaction, they typically receive a prorated bill for the current year because the tax bill hasn’t been issued yet. It’s common practice — though not required — to use an existing bill and divide by 365, multiplied by the number of days from Jan. 1 until the closing date. But the value before that bill does not necessarily reflect the sales price of the property.

The previous owner should be responsible for paying taxes during the time of ownership, he said, but such an arrangement isn’t always part of the closing process.

Schmenk said a business owner can minimize the impact of an increase by making sure the values of all other inventory, such as equipment, are listed separately — though in Tre Sorelle’s case, no significant inventory appeared to be at stake.

Beck and Horchler, as owners of the property listed as BHP Properties,  purchased the building from Philip A. Pisano for $171,500. At the time, the property’s total assessed value was $86,240, according to records from the Erie County Auditor’s Office. The total taxable value (35 percent of the appraised value) was listed as $30,180.  In March, Attorney Thomas Holmes filed a complaint to the County Board of Revision on behalf of Sandusky City Schools challenging the valuation.

On June 20, the Board of Revision held a five-minute hearing during which Beck briefly argued her position. At that point, she said she did not realize their corrected bill would be retroactive for a full year once the valuation increased.

Shortly after the hearing, Beck and Horchler received their corrected bill, listing the new appraised value at $171,500 and the new taxable value at $60,020.

The $899.64 they were expecting to pay for the second half of the tax year jumped to $2,678.66. The majority of the new tax amount, $2,093.06, is distributed to the school district, according to their corrected bill.

Sandusky City School Superintendent Bill Pahl and now-retired treasurer Troy Bouts initially expressed a willingness to work with the chocolate shop owners before their new bill was due.

On July 2, the school district’s attorney sent a letter to Erie County Auditor Thomas Paul asking to withdraw his complaint against the valuation of real property. But a few days later, on July 8, the attorney reversed his position by asking the auditor to disregard the first letter and reinstate the complaint, increasing the true value to $171,500 — the amount for which BHP Properties purchased the property.

Pahl said the decision was made upon the advice of legal counsel after realizing it was too late to make a change.

“The issue was they paid more for that structure than what it was valued at at the auditor’s office,” he said. “Taxes are negotiable in the sale...and they could have asked the seller to pay that extra amount.  “We’d like to help people, but you can’t come to us after the fact,” he said. “They should have gone for an abatement or worked between the realtors and negotiated on who should pay.”

Pahl said he sympathizes with the owners and added that the district only gains “a few dollars” from the deal.

“The only advantage (for us) is if we have a future levy, that property is valued at its present value,” he said.

John Kohlstrand, a spokesman for the Ohio Department of Taxation, said it’s not uncommon for school districts to challenge property values — though the practice is more prevalent in larger metropolitan districts. Auditors announce new values every three years, and the right of school districts and property owners to challenge those values ensures a system of checks and balances.

The Department of Taxation also plays a role in overseeing auditors’ values for tax purposes.

“Courts have consistently said in Ohio that the sale price is the best indicator of what the price should be for taxes,” Kohkstrand said. “Eventually, that sale will be looked at for its worth — it just happens the school district here looked right away.”

Horchler said she’s in the process of contacting state legislators, hoping a simple tax reform can eliminate any confusion over who is responsible for paying up on an increased property value.

“The issue needs to be addressed so it’s prorated from the time you purchase the building — when it’s truly the market value of the building,” she said. “We want to see the law changed to reflect that or to make people aware.”