Construction Work in Progress (“CWIP”) is generally recognized as property that is in the process of changing from one state to another, such as the conversion of personal property from inventory to asset or fixture by installation, assembly, or construction.  See Valuation of Machinery and Equipment Construction in Progress (CIP), Pollack and Meier, Institute for Professionals in Taxation Property Tax Symposium.  Determining how a state treats partially-completed properties for purposes of ad valorem tax is an important question for any taxpayer, but it is particularly critical for an industrial taxpayer during the site location process.

There is no clear consensus among taxing jurisdictions as to whether or how CWIP is to be valued by a tax assessor on the applicable assessment date.   Many states, including Alabama, Missouri, and North Carolina, value CWIP based on the value or percentage of completion on the assessment date.  Kansas values incomplete construction based on the cost incurred as of the assessment date.  Florida, Maryland, Virginia, and West Virginia assess CWIP when the work has progressed to a degree that it is useful for its eventual purpose.  And in South Carolina, improvements are only assessed upon completion.

With the exception of a few errant assessments in the early 1930’s, Louisiana has never assessed CWIP for ad valorem tax purposes.  Rather, the completed property is added to tax rolls and assessed as of January 1 of the year immediately following completion of construction. La. R.S. 47:1952.   This comports with and complements Louisiana’s industrial tax exemption program, which exempts certain manufacturing property from ad valorem taxation for a specified number of years.  LAC Title 13, Part 1, §53(D).   Unfortunately, property on which ad valorem taxes have been paid is not eligible for participation in the exemption program.  LAC Title 13, Part 1, §515.  Thus, if ad valorem taxes are paid on property as CWIP, the property would no longer eligible for the industrial tax exemption and would remain on the taxable rolls subject to assessment each year.  Obviously, assessing CWIP in this manner would significantly diminish the value of the program to taxpayers and undermine its usefulness as an incentive tool by economic development agencies.

In 2016, a local assessor broke with established practice and initiated an audit that included CWIP on a major industrial taxpayer.  This audit raised statewide and local uniformity concerns (assessment of CWIP of a single taxpayer in a single parish) and jeopardized the taxpayer’s existing industrial tax exemption.  The taxpayer immediately filed an injunction action in district court, and the Louisiana Legislature took note of the situation during its regular 2017 legislative session.  Recognizing the need to formalize the exemption, the Legislature referred a constitutional amendment to codify CWIP’s exemption from assessment. Louisiana is one of 16 states that require a two-thirds supermajority in each chamber of the legislature to refer a constitutional amendment to the ballot, so their vote underscores the strong support among lawmakers to codify the exemption.

Slated to appear on the Oct. 14 statewide ballot, Act 428 would add an additional subsection to Article VII, Section 21 of the Louisiana Constitution, which lists property that is exempt from ad valorem tax assessment. The new language would read as follows:

(N)(1) All property delivered to a construction project site for the purpose of incorporating the property into any tract of land, building, or other construction as a component part, including the type of property that may be deemed to be a component part once placed on an immovable for its service and improvement pursuant to the provisions of the Louisiana Civil Code of 1870, as amended. The exemption provided for in this Paragraph shall be applicable until the construction project for which the property has been delivered is complete. A construction project shall be deemed complete when construction is finished to the extent that the project can be used or occupied for its intended purpose. A construction project shall not be deemed complete during its inspection, testing, or commissioning stages, as defined by reasonable industry standards.

(2) Notwithstanding the provisions of Subparagraph (1) of this Paragraph, this exemption shall not apply to any of the following:

(a) Any portion of a construction project that is complete, available for its intended use, or operational on the date that property is assessed.

(b) For projects constructed in two or more distinct phases, any phase of the construction project that is complete, available for its intended use, or operational on the date the property is assessed.

(c) Any public service property, unless the public service property is otherwise eligible for an exemption provided by any other provision of this constitution.

If approved by voters, CWIP would be exempt from property taxes until construction is “completed.” The proposed amendment defines a completed construction as occurring when the property “can be used or occupied for its intended purpose.” The exemption would thus remain effective until the construction project (or a given distinct phase of the project) is ready to be used or occupied for its intended purpose or for occupancy.