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Last Updated: 4/14/2017

Ad Valorem Tax on Unmined Natural Iron Ore

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​Minnesota Statutes 272.03, Minnesota Statutes 273.02, Minnesota Statutes 273.12, Minnesota Statutes 273.13, Minnesota Statutes 273.165, Minnesota Statutes 273.1104.

Since 1909, Minnesota’s natural iron ore reserves have been estimated and assessed by the state for Ad Valorem Tax purposes.  The actual Ad Valorem Tax levy is set by the county, the school district and the local township or municipality.  The county auditor collects the tax levy.

A Minnesota Supreme Court decision in 1936 established the present worth of future profits method for valuing the iron ore reserves.  This is accomplished through the use of a complex formula known as the Hoskold Formula.  The formula takes into account ore prices and all the various cost factors in determining the value of the unmined ore.

Each year, the Minnesota Department of Revenue uses a five-year average for allowable costs taken from the Occupation  Tax report.  A five-year average of the Lake Erie iron ore market value is also used.  These averages are used to help reduce fluctuation of value due to sudden cost/price changes.

The following expenses are allowed as deductions from the Lake Erie market value on the computation of present worth, which is known as the Hoskold Formula:

1a.      Mining, normal costs
1b.      Mining, special costs
2.        Beneficiation
3.        Miscellaneous (Property Tax, medical ins., etc.)
4.        Development (future)
5.        Plant and equipment (future)    
6.        Freight and marine insurance
7.        Marketing expense
8.        Social Security tax*
9.        Ad Valorem Tax (by formula)
10.      Occupation Tax
11.      Federal income tax
12.      Interest on development and working capital                             
     

* Since 1987, Social Security tax has been included under miscellaneous.
 

These 12  allowable expense items are deducted from the Lake Erie market value to give the estimated future income (per ton).  Note that although royalty is allowable as an Occupation  Tax deduction, it is not allowable on Minnesota’s Ad Valorem Tax.

The present worth is then determined by multiplying the estimated future income (per ton) by the Hoskold Factor.  The Minnesota Department of Revenue presently allows a 12 percent risk rate and six percent safe rate that yields the .33971 Hoskold factor when used with a 20-year life. A 20-year life has been used since 1968 as representative of the remaining life of Minnesota’s natural iron ore reserves.  The resulting value is considered the market value by the Minnesota Department of Revenue.

The term “class rate” was introduced for taxes payable in 1990. The class rate for unmined iron ore is 2.0 percent.

The tax capacity is the product of the class rate and the market value.  The product of the market value and class rate must then be multiplied by the local tax rate plus the state general  Property Tax rate to determine the tax.  In addition, the market value times the referendum rate must be added if there is a referendum in the taxing district.

Local tax rates are a function of county, local government, and school district spending.  In addition, a statewide general Property Tax levy applies to most types of property with the exception of agricultural and homestead properties. For example, for taxes payable in 2016 in St. Louis County, the tax rates ranged from a low of approximately 82 percent to a high of approximately 414 percent (not including the state general Property Tax rate of 48.641 percent).

Local tax rates are a function of county, local government, and school district spending.  In addition, a statewide general Property Tax levy applies to most types of property with the exception of agricultural and homestead properties. For example, for taxes payable in 2015, tax rates ranged from a low of approximately 66 percent to a high of approximately 345 percent (not including the state general Property Tax rate of 50.840 percent) in St. Louis County.  The class rate from 2002–2015 has been 2 percent. The special rate on the first $150,000 of market value that applies to class 3 commercial/industrial property does not apply to unmined iron ore that are class 5 properties.

The Minnesota Department of Revenue has tried to maintain all ores on the tax rolls, including the uneconomic, underground and unavailable classifications.  A schedule of minimum rates was established in 1963 and revised in 1974, 1986, 1988, 1992 and 1999.  The market values for iron ores that do not show a value with the Hoskold Formula are determined from the schedule of minimum rates.  See Minimum Valuation Rates on Unmined Natural Ore to view a table with the current schedules. Most of the iron ore value remaining today was determined using the schedule of minimum rates.

Open pit ores with costs too high to show a value with the Hoskold Formula are assigned minimum values from the open pit classification. Underground and uneconomic ores with stripping ratios exceeding five-to-one are assigned minimum values from underground uneconomic classification.

Beginning with the 1999 assessment, the minimum rates for determining market values in Crow Wing County were reduced by 50 percent. This simply recognizes that the potential for mining iron ore is substantially less in Crow Wing County than on the Mesabi Range in St. Louis or Itasca counties.

A notice of the market value of unmined ore is sent to each person subject to the tax and to each taxing district affected on or before May 1 as said by  M.S. 273.1104.

According to the provisions of M.S. 273.1104, a public hearing to review the valuations of unmined iron ore must be held on the first secular day following May 20. This hearing provides an opportunity for mining company and taxing district representatives to formally protest any of the ore estimates or valuation procedures they believe to be incorrect.

In addition, current conditions and future trends in the iron ore industry are discussed.  Iron ore Ad Valorem taxes are expected to continue their long decline as remaining economic deposits are mined or allowed to go tax forfeit.  Reserves in old flooded pits converted to recreational use are classified as underground, low-grade recreational.