A Joint Audit Report on the Department of Finance’s Inclusion of Cell Antenna Revenue in the Assessment of Real Property Taxes

Audit Report In Brief

The Department of Finance (DOF) is responsible for collecting revenues efficiently and encouraging compliance with New York City’s tax and other revenue laws.  One of the ways DOF does this is by valuing real property in the City.  DOF is charged with valuing almost one million properties.  The market or property value assessed by DOF is a factor in the calculation of property taxes.  The real property tax is the City’s largest single revenue source.

Owners of income-producing real property are required to file an annual Real Property Income and Expense (RPIE) statement with DOF.  According to Title 11, Chapter 2, §11-208.1 of the New York City Administrative Code, “Where real property is income-producing property, the owner shall be required to submit annually to the department not later than the first day of September a statement of all income derived from and all expenses attributable to the operation of such property.”

The objectives of this audit were to determine if all owners report cell site income on the RPIE statement, if additional property tax would be due from unreported cell site income, and if penalties are assessed for not reporting cell antenna income.

Audit Findings and Conclusions

DOF records indicate that owners of 1,219 properties reported receiving $62,951,827 in cell site income on their RPIE for 2008, and owners of 1,498 properties reported receiving $81,566,993 in cell site income on their RPIE statements for 2009.  In addition, DOF assessors, through physical observations, identified an additional 90 properties where cell site income should have been reported on the 2009 RPIE form.  DOF ascribed $3,028,079 in cell site income to these 90 properties and estimated the potential tax impact to be $1,166,650.¹ However, we noted weaknesses in DOF’s practices that, if corrected, would identify more property owners who should report cell site income, which would then be included in the property tax bill calculations. Furthermore, DOF did not assess any penalties against the 90 property owners who failed to report cell site income on the RPIE.  Property owners who fail to report cell site income should be penalized.  The potential tax impact would be to increase real estate tax collections and City revenue.

DOF did not use all the readily available resources to identify additional property owners who were required to report cell site income on their 2008 or 2009 RPIE statements. Using lists of properties with cell antenna equipment maintained by the Department of Buildings (DOB) and DOF, our audit found an additional 569 properties for 2008 and 1,539 properties for 2009 with cell antenna equipment for which owners failed to report cell site income.  Had DOF used the above records, DOF could have ascribed additional cell site income totaling $66,720,000 and, applying DOF’s methodology, the potential tax impact of this additional income may have been $24.3 million.

DOF assessors ascribe cell site income, based on their physical observations, to those properties that failed to report cell site income.   Although DOF assessors ascribed $3,028,079 in cell site income for 90 properties that did not report cell site income on RPIE2009, DOF did not assess a penalty against the owners of the 90 properties for failure to report the cell site income. Based on the penalty schedule used during 2009 for non-filers, DOF could have assessed– at a minimum– a $200 penalty against each of the property owners. This penalty, although small to the individual property owner, would signal that there are consequences when the RPIE statement is not completed accurately. Applying the $200 penalty to the additional 2,108 properties we identified could ensure future compliance with RPIE filing requirements and would bring in $421,600 to the City.   For the 2010 RPIE, the penalty assessed for non-filing was increased to .075 percent of the assessed value of the property.

Audit Recommendations

To address these issues, DOF should:

• Conduct matches of its records of property owners who reported cell site income and the New York City Department of Buildings Cell Antenna Record, found on the DOB website, to identify property owners who have cell antennas/equipment and did not report cell site income on the RPIE.

• Conduct matches of its records of property owners who reported cell site income and the Real Estate of Utility Corporation list that DOF compiles to identify property owners who have cell antennas/equipment and did not report cell site income on the RPIE.

• Ascribe cell site income when it identifies and verifies additional properties that are cell sites and were not reported by property owners.

• Consult with its Legal Department to determine if penalties can be assessed against property owners who fail to include cell site income on the RPIE. The penalty should be calculated based on the income the assessor ascribes.

Agency Response

In its response, DOF stated, “Your report focused on cell site valuation in calendar years 2010 and 2009. In calendar year 2011, the Department of Finance (DOF) prioritized the accurate valuation of cell sites as part of creating the Fiscal Year 2013 Assessment Roll. Therefore much of the Audit Report is outdated….The Quality Assurance Group analyzed a list of Real Estate Utility Companies (REUC) telecommunications equipment and matched it against RPIE filing data and Tax Commission Income and Expense filings (TCIE).”

We disagree with DOF’s statement that our audit report is outdated.  Our report identified additional parcels not identified by DOF’s methodology by using other data matching not employed by DOF.  Further, we believe that DOF’s 2011 initiative is long overdue.  DOF claims that it first started using the utility company data for its initiative around the time we initiated our audit—even though utility companies have been providing DOF with cell site location information since 2006.

The delayed implementation of this initiative has resulted in millions in lost revenue to the City.   Had DOF begun its initiative in 2006, the City would now be able to collect much of the additional taxes due because the five-year phase-in period (20 percent a year) would have elapsed.

DOF further stated, “The 2011 cell site initiative resulted in an estimated $28,000,000 added in income. DOF estimates that this would produce at most an additional $2 million in FY 13 or $10,500,000 in tax revenue, phased in over 5 years.  Most cell sites are classified as Tax Class 4 or 2 properties. State law provides that market value increases in these Tax Classes be phased in over 5 years at 20% a year. The actual tax depends on future events including updated tax rates, court challenges and Tax Commission reductions and remissions.”

DOF also disagreed with our estimate of potential tax revenue of $24.3 million.  DOF estimates that its initiative would at most produce an additional $2 million in FY13 or $10.5 million in tax revenue phased in over five years.

DOF’s position is inaccurate.  In an email we received subsequent to DOF’s response, DOF stated its $10.5 million estimate is based on 843 properties. Our estimate of $24.3 million is based on 1,711 properties. Considering that we identified an additional 868 properties, more than double the number of properties identified by DOF, our estimate of $24.3 million is in line with DOF’s own estimate.

Nevertheless, regardless of the exact figure, the important point is that while DOF has begun to pursue cell tower income, it must additionally consider the importance of using DOB records to further identify properties with unreported cell income.

Finally, despite the above disagreements, DOF agreed or partially agreed with the four audit recommendations.