It goes without saying that taxes are a certainty. Almost as certain is the need for “earth” in all forms of construction activity.
Excavation areas and earth aggregates are uniquely taxed in New Hampshire. Both the state Legislature and the Supreme Court have regularly reviewed, tweaked and substantively changed New Hampshire’s so-called “gravel taxes” for years. Most recently, the 2002 legislative amendments consolidated two of the prior tax strategies and resolved a prior distinction between an active excavation area and its surrounding real property.
Until recently, New Hampshire’s excavation tax scheme had been divided into three separately calculated taxes. The simplest and most straightforward, the excavation tax, applies a $.02 assessment for each cubic yard of “earth” excavated from the excavation site during the tax year. The second, the former excavation activity tax, was used to assess an enhanced or increased tax rate against all active excavation areas within the larger excavation site. And the third, the former hybrid tax applied to areas surrounding the excavation, taxed property outside of the active excavation area using hypothetical comparisons with other industrial or commercial properties to compute a market value.
In late 2001, the Supreme Court rendered the assessment method for the third tax, the surrounding area tax, unconstitutional because of its reliance on hypothetical comparisons. In response to the court’s decision, the 2002 Legislature redesigned the excavation tax system. The most significant change within this redesign was the repeal of the former excavation activity tax and the unconstitutional tax applied to the surrounding areas. Its successor, a single tax on the entire excavation site, applies a more traditional appraisal-based assessment. It also eliminates the excavation activity tax’s enhanced taxation rate.
The excavation tax — which survived the Legislature’s 2002 amendments without change — is a fixed-rate assessment directly proportional to the amount of “earth” excavated during the tax year.
This “one-time” tax is calculated by simple multiplication of the number of cubic yards of “earth” excavated in a given tax year times $.02. “Earth” is defined to include “sand, gravel, rock, soil or construction aggregate produced by quarrying, crushing or any other mining activity” and is intended to be both broad and inclusive. There are several important exemptions to the taxation of excavated “earth” under the excavation tax.
One exemption excepts minimal excavations of up to 1,000 cubic yards of “earth.” This exemption, however, is based on amounts excavated during a given tax year — April 1 to March 31 — and is intended to exclude smaller excavation areas that do not exceed the minimum amounts. Therefore, an operator who exceeds the minimum amount and removes 1,100 cubic yards of “earth” is responsible for payment of the full excavation tax on all 1,100 cubic yards excavated.
Another exemption relates to the excavation of “earth” “incidental” to construction. Activities commonly considered “incidental” include the installation of foundations and septic systems. Excavations “incidental” to construction are exempted from the excavation tax, provided that not more than 1,000 cubic yards of “earth” are removed from the construction site during any given tax year.
In addition, “earth” which is excavated and later returned to the excavation site in the same tax year is exempt from the excavation tax. Reclamation topsoil, for example, which is stripped, stockpiled and later spread back over the excavation area is exempted from the tax. To qualify for the exemption, however, the topsoil must be stripped and reapplied within the same tax year.
Other exemptions from the excavation tax include “earth” removed solely for agricultural or forestry purposes and “earth” excavated from government or municipal land to be used exclusively for municipal purposes.
The revised excavation activity tax was enacted in 2002. While the previous system included a complex distinction between active and inactive areas within an excavation site, the new tax considers the entire excavation site and applies a more traditional appraisal-based tax strategy.
One key component of the new tax, however, is that the value of the “earth” at or under the surface of the excavation site is excluded from the assessment. Therefore, the value of the “earth” in stockpiles cannot be used as a basis to increase the assessment of the property. Similarly, “earth” in the ground is not to be valued in the assessment. Excepting “earth” or its income stream, an assessing official should arrive at an assessed value of the excavation parcel by employing a traditional comparable sales analysis.
This comparable sales analysis likely includes consideration of the property’s location, zoning, lot size, wetlands, developable areas, and topography.
In addition to the exclusion relating to “earth,” other exceptions are also incorporated into the new tax. For example, excavation areas that have been properly reclaimed or have ceased commercial operations are exempt from assessment under the new tax. In addition, areas within an excavation site that consist of unexcavated and exposed rock ledge can be exempted. Lastly, ancillary facilities servicing an excavation site are also exempt. Such ancillary facilities include administrative offices, stockpiles and storage spaces, haulage ways and internal roads, and processing or crushing plants.
Although a detailed analysis of filing requirements is beyond the scope of this article, the importance of filing timely and proper notices of an intent to excavate cannot be understated.
These notices must be filed with assessing officials and are used by municipalities and the state to track reserves and usage, calculate taxes owed and to monitor an operator’s compliance.
Importantly, an exemption from having to pay excavation taxes often does not absolve the operator from the responsibility of having to file a notice of intent. Moreover, while most taxing authorities use standardized forms to collect information, and while most of the forms are straightforward and require minimal disclosures, an operator’s failure to properly file notices of intent may constitute a violation and can result in substantial fines or negatively affect local permitting.
To ensure proper filings and full compliance in your particular circumstances, you should consult with an excavation attorney or tax advisor before the April 1 filing deadline.
As a combination of old strategies and new approaches, today’s revised excavation tax system is likely to receive renewed challenges and additional tweaking. Regardless of what might come, however, an understanding of excavation taxes and their application to your business can greatly assist excavation companies and aggregate contractors in planning for tax liabilities. Tax planning, in turn, can help companies plan, manage and anticipate operating expenses, properly adjust consumer pricing and minimize costly and distracting abatement litigation.
* Ari B. Pollack is admitted in New Hampshire and Massachusetts.