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Reasons Your Business Personal Property Taxes Could Increase

Many states tax business personal property in addition to real property. Those that do tax equipment, require that an annual business personal property return be filed each year by a certain date. The local assessor’s office reviews the returns filed and calculates a taxable value for the equipment, most often by depreciating the cost of the taxable equipment reported on either their own local depreciation schedules or the state depreciation schedules. As a result, in most cases, newer equipment will yield a higher taxable value initially, but will decrease over time in most places as the equipment receives another year’s worth of depreciation until it hits the residual depreciation factor for the schedule it’s being assessed on. There are a variety of reasons your personal property taxes may increase from the prior year. 

Capital Expenditures During the Prior Tax Period

 

The most common reason is related to capital expenditures. If there are a large number of capital expenditures in a prior year, it is likely that the personal property taxes will increase. New construction or renovations of your business may require permits being filed with local authorities. Based on these permits, an assessor may add value to a personal property account if they believe all or a portion of the cost is related to personal property and is not reflected on the annual business personal property tax return that was filed. Assessors’ offices may also conduct field checks of businesses in their jurisdictions annually to ensure that all businesses in their respective jurisdictions are accounted for and are reporting an annual return. They may also request to tour the businesses to look for things like renovations or expansions, and they could potentially adjust the value they have on their tax rolls. Construction in progress that is equipment-related may also be taxable as personal property in some jurisdictions. 

​​Audit Results

 

Another reason for your business property taxes to increase is if your business is selected for an audit. Audits are significant as they can impact not just the current year but preceding years as well — depending on the state statutes. Most taxing jurisdictions send out an annual business personal property return form notifying a taxpayer that they need to file. The forms often state the returns are subject to audit. Some states have very active audit programs (e.g. North Carolina, Tennessee, California to name a few). However, based on our experience, the majority of the states that tax business personal property do not have very active audit programs. Regardless, if your business is selected to be audited, there is the potential that the audit discovers equipment that has either been omitted or erroneously not reported on the annual business listing submitted by the business. Additionally, equipment picked up in an audit may be penalized depending on the property tax codes for the local taxing jurisdiction. One example of omitted property would be certain types of fixed equipment or leasehold improvements. If the improvements are not already being accounted for in the real estate assessment for the property, the business personal property assessor may add them to the business personal property assessment. 

 

Other types of omitted property may be expensed assets, inventory and/or supplies. Some taxing jurisdictions require businesses to report the amounts a business had on hand as of the lien date or possibly a one-month average of the balance and the balances are assessed at 100% of their cost. 

 

Another reason your taxes can increase in an audit would be if the auditor disagreed with the depreciation schedule the assessor used to value the equipment and moved it to a slower depreciation schedule resulting in a higher taxable value for the equipment. Any discovery or increase in value from an audit could be subject to penalty. In North Carolina, audit penalties are steep. It starts as a 10% penalty on the additional taxes from the increase in assessment per the audit the first year, and the penalty increases an additional 10% each subsequent year included in the audit, assuming the equipment was owned as of the lien date for that tax year. That means if the audit covers four years and there is a discovery or increase in the assessment for whatever reason and it affects all four years being audited, you would be paying a 40% penalty on the increase in taxes from the audit for the oldest tax year being audited.  

Leased Equipment

 

Leased equipment can also lead to an increase in business property taxes. Capital leases differ from operating leases in that operating leases are the responsibility of the lessor to report for business property tax purposes and seek reimbursement for the taxes from the lessee. However, capital leases can be either the lessor’s or the lessee’s responsibility to report to the local taxing jurisdiction the equipment is located in. It depends on the structure of the lease agreement. There are times when there is no clear language in the lease agreement to determine who’s responsible for reporting the equipment to the taxing authority and equipment can potentially be double reported by both the lessor and the lessee leading to duplicate taxation. At times, this can be challenging to correct as the cost and description of the equipment can differ between the lease contract and how the equipment is ultimately booked to the fixed assets of the lessee. Additionally, we’ve seen instances where operating leases end and the lessor files a final return for the equipment stating the lessee retained the equipment when the lease ended, and the assessor’s then added value for the leased equipment to the lessee’s personal property assessment. However, it was later discovered that the equipment was returned to the lessor when the lease ended. Lastly, state statutes differ as to who is responsible to report leased equipment, regardless of the verbiage in the lease agreement. 

 

Depreciation Tables

 

Another reason your property taxes can increase is due to the depreciation tables used by the local taxing jurisdiction for business personal property purposes. For example, in Arizona, for equipment reported at its original cost and date, the assessor applies an additional depreciation factor that increases every year until it eventually meets 100%. If you’re reporting equipment that has been re-booked, meaning it’s being reported at the cost and date your business acquired an existing asset as opposed to the original cost and date of the equipment, the equipment is not eligible for the additional depreciation in Arizona. Since the additional depreciation factor starts at 25% and increases over time, it results in an increase in the taxable value of the equipment until the additional depreciation factor goes to 100%. The number of years the additional depreciation factor is used depends on the year-life schedule the equipment is assessed on. 

 

Additionally, for most depreciation schedules used to value the business personal property in Indiana, the factor used increases from the first year to the second year on new equipment purchases, so the taxable value of the equipment increases in the second year it’s owned before beginning to decline. Your property taxes can also increase due to the local taxing jurisdiction increasing their residual depreciation factors for the various schedules used to value the equipment. For personal property tax purposes in most taxing jurisdictions and most depreciation schedules, the taxable value of the equipment does not depreciate all the way down to zero. As long as it’s still owned by the business, it will eventually hit a residual factor where it will be valued until the equipment is no longer at the facility. How low the factor goes depends on the useful life of the asset, but an increase in any of these factors can lead to significant tax increases if your business has a lot of older equipment.  

Abatement or Exemption Expiration

 

One reason you might see an increase in your property tax liability from the prior year is the expiration of an exemption or abatement from property taxes. Some local taxing jurisdictions will give businesses a partial abatement for a certain number of years to promote the development of an area. For example, in Nevada, there is a 10-year and a 20-year partial property tax abatement for data centers if they meet certain state requirements, including investing a certain amount of capital assets in the county the data center resides and requiring a certain percentage of employees engaged in the construction of the data center be residents of Nevada. In some instances, a business may be able to negotiate favorable tax treatment for a period, that typically is also tied to an agreed-to capital investment during the period of the preferential tax treatment. When these exemptions end or begin to be phased out, it can lead to a substantial increase in property tax liability that must be taken into account for budgeting purposes.

​​Tax Rate Increase

 

One somewhat unforeseen reason your property taxes can increase is due to an increase in the tax rate adopted by the local taxing jurisdiction. Most of the property tax revenue collected by local taxing jurisdictions go towards various government departments and projects within their jurisdiction, (for example, upgrades to existing roads or schools within the jurisdiction). Therefore, local taxing jurisdictions may increase their property tax rates to fund these projects. Some jurisdictions will list on the notice the budgeted tax rate if certain propositions are approved locally. Sometimes, these tax rate increases can be substantial. In 2020, the property tax rate in Nashville, Tennessee increased 33% from the prior year.

Assessor Errors

 

Another unforeseen reason your property taxes could increase is due to an error in the calculation of the personal property tax return. Assessors in bigger taxing jurisdictions process a large number of personal property tax returns, sometimes in a short period of time, and mistakes can be made. We’ve seen instances where an assessor’s office does not remove a deletion if it’s a larger piece of equipment that seems integral to business operations and there is nothing that appears to have replaced the equipment. Or they may ask for a disposal date before removing the equipment. Other times the deletions can just get overlooked by the assessor. Additionally, there can be clerical errors. If the assessor were to accidentally key in another digit when entering in the costs reported by the taxpayer, it could significantly increase their property tax burden for the year. If these errors are found prior to the deadline to appeal the account, they typically can be corrected after discussions with the assessor and providing additional documentation if necessary. 

Conclusion

 

For these reasons stated above — as well as the ever-changing landscape of property taxes — it may prove helpful to engage a property tax professional to provide not only the preparation of the personal property tax renditions, but also aid in the budget of expected taxes to ensure that your business is planning accordingly.

Article from Director – Blake Cynor

Happy new year from Property Valuation Services!

My name is Blake Cynor and I am a supervisor in the real estate departments at Property Valuation Services. I’ve been with the company since September 2017, having previously worked in financial services. I am a Kansas City native, having graduated from our local University of Missouri – Kansas City (UMKC – go Roos!) with an economics degree. I am a licensed Texas tax consultant and am currently pursuing my Indiana Tax License.

Consultants and managers in our real estate department perform a wide range of services for our clients, from appealing and reducing tax assessments to providing estimates on new developments and construction. However, I would be lying if I didn’t say my favorite part is appealing real estate values. I enjoy a good debate and reducing our client’s assessment and taxes. As a supervisor, I specialize in more complex medical properties, including psychiatric and behavioral health facilities and large rehabilitation centers. I enjoy learning about various building and business types, and how local and state laws impact the ad valorem taxation of each. This detailed level of knowledge in both valuation and statutes is one of the aspects that sets PVS and our services apart in the industry.

Property tax is cyclical, so as the new calendar year starts, so too does our work. We are currently reviewing commercial assessments in West Virginia, Connecticut and Ohio for potential appeals. States including Michigan, North Carolina, and Nebraska will be mailing assessment notices to taxpayers in the coming weeks. North Carolina and Tennessee are unique because they do not reassess real property annually. Depending on the county, the local assessor reappraises real estate properties every 4-8 years, so it’s imperative for property owners to review their new assessment and market factors in detail, and appeal if over market value.

Outside of debating real estate values with tax assessors across the county, I enjoy playing golf and volleyball, watching my favorite soccer teams and spending time with my dog, Harley. Did I mention the Chiefs? I grew up in Kansas City, so it’s only natural I am a diehard Chiefs fan. I look forward to what’s in store for the team over the next several weeks.

Article From Director – James Lee

My name is James Lee and I am a manager in the real estate department at Property Valuation Services. My journey at PVS began back in May of 2014 and I’m currently in my eighth year. I am licensed as a property tax consultant in multiple states. 

My day-to-day tasks primarily involve regular communication with clients regarding property tax projections for their real estate portfolios and management of ongoing assessment protests. I also work with our real estate directors to assist our team of consultants on tax bill reviews, tax estimate projects and assessment appeals.

Most states have started to issue their 2021 tax bills, so our department’s daily tasks this time of year have shifted to reviewing tax bills for payment approvals and updating parcel records for 2022 projections. We also begin to send out requests for information in the coming weeks in anticipation of next year’s value reviews, so keep an eye out for our emails!

I started reviewing the valuations of agricultural properties, offices and apartments back in 2014. Over the next couple of years, my portfolio shifted toward primarily medical real estate valuations. I’ve seen everything from grain elevators to hospitals across my desk since I first arrived at PVS. This variety of complex valuation problems to solve continues to broaden our real estate team’s expertise and strengthen our positions when supporting our valuation conclusions during assessment protests.

I enjoy getting into the occasional healthy debate with an assessor during an assessment protest, but I must admit that my demeanor turns more competitive when it comes to debating sports. I am a diehard Chiefs fan, and I will relish the next two decades of the Patrick Mahomes era. Kansas City has always been my hometown and I went to Mizzou for my undergraduate degree in Finance. I recently got married, and my wife and I have a labrador who thinks he’s a lapdog. My hobbies include tennis, camping, golf and exploring Kansas City’s rapidly expanding downtown. We also love to travel!

The real estate financial sector experiences constant volatility, but property taxes are here to stay. It has always been rewarding helping our clients navigate these market challenges to stabilize annual property tax projections. We work as a team here at PVS and we are always just a quick phone call away if you have any questions regarding your real or business personal property taxes. 

 

What Do Assessors Use to Assess BPP Taxes? Hint: It’s Not Federal Depreciation

BY PAM CARLEY

When a business opens, they acquire assets needed to operate, such as computers, copiers, desks, phones, machinery, etc. These items, for federal purposes, are categorized as follows:

  • Three-year property such as tractors, tools and some livestock.
  • Five-year property such as computers, office equipment, cars, light trucks and construction assets.
  • Seven-year property such as office furniture, appliances and most other property not otherwise categorized.

Real Estate is written off over a longer period of time such as:

  • 27.5 years (residential rental properties)
  • 39 years (commercial buildings)

Over time you are allowed to depreciate the cost of these assets. Land, however, is not depreciable, but land improvements such as roads, sidewalks or landscaping may be written off over 10, 15 or 20 years depending on the specific nature of the asset.

Many businesses don’t realize that federal depreciation isn’t what most assessors use to assess their personal property taxes. A few states use federal depreciation for personal property taxes, including Missouri, Nebraska and South Carolina. Other states and/or counties develop depreciation schedules based on their research as to how long the useful life of certain equipment is. Once this is determined, they will then assign index factors (used to determine the replacement cost) and depreciation factors based on the useful life and age of the equipment. The overall factor is then used to calculate the equipment’s market value. If assets remain on your depreciation schedule, they are taxable for business personal property taxes — even if the netbook value is down to zero. This is partly why some assessors have depreciation rates that go down to a residual rate of 10-20% of the cost.   

While most of the time using federal depreciation would give businesses a more favorable value for business personal property taxes, there are other ways to arrive at a market value other than just using the county depreciation factors. When states set the depreciation tables for business personal property, there isn’t much research into the type of equipment, how long it might last, etc. Many states will keep the factors the same as last year or adjust them by altering the index factors.    

Another option owners have if they don’t agree with the factors being used by assessors to assign value to their equipment is to research the equipment’s market value and provide backup to support lower values for the equipment. We see this done quite a bit in Texas, where the business personal property rendition of the taxable property asks for the owners’ opinion of value.

If you need assistance filing your business personal property returns, be sure to contact a well-versed property tax professional. You want to make sure the one you choose knows the states your businesses are in. 

Article From Director – Doug Geer

My name is Doug Geer, and I am a team lead for the hospital team in the business personal property department at Property Valuation Services (PVS). Last May, I surpassed my 10th year working at PVS. I am currently a licensed personal property tax consultant in the State of Texas. I enjoy the property tax work that I’ve done here at PVS, as well as spreading the knowledge and expertise I’ve acquired over the last ten years to the consultants on the hospital team and the other teams in the personal property department.  

The hospital team has various clients across the country. We file over 200 hospital personal property tax returns annually and the returns for the clinics and other ancillary locations related to the hospitals. My role at PVS is to train consultants to file the annual personal property tax filings and review them to file a compliant return while also looking for opportunities to reduce the taxable value of our client’s equipment. I also assist consultants with questions and issues that may arise during the tax cycle, including reviewing valuations issued by the assessor, advising the consultants to resolve any discrepancies informally with the assessor and potentially filing an appeal if we’re unable to reach an agreement with the assessor. I also have some experience attending board hearings. Our Property Tax Support Group handles most of the last part of the property tax cycle, collecting and reviewing the tax bills. However, I also assist consultants with any issues that may arise with the property tax bills if it’s outside the scope of our support group and ensure the contacts we send the tax bills to are still accurate.

Additionally, I review reports with tax estimates we send to our clients periodically throughout the year. These reports also provide tax estimates for the upcoming year to assist our clients in setting their budgets. I’ve also recently started working on audits for some of our hospital clients.  

I appreciate the knowledge, skills and opportunities that PVS has provided, which have contributed to my professional growth. I’ve enjoyed the relationships I’ve formed with my colleagues here at PVS and our clients and the various assessors across the country.  

Outside of work, I like to stay active. I play basketball, baseball, football and tennis. I also enjoy spending time with family and friends. When I’m not doing something active, I like to relax and watch TV.  

Should you have any questions, feel free to reach out to me or anyone in our property tax department. We always like to hear from our clients!  

 

Are Inventory and Supplies Assessed as Business Personal Property in Your State?

BY CHIP SAAM

Many business owners understand that equipment, machinery and furniture are subject to business personal property (BPP) taxes. Currently, 38 states have some form of BPP taxation system. This is in addition to property taxes assessed on their land and buildings, also known as real property taxes or real estate taxes. Property taxes make up the largest component of state and local taxes paid by a business. Many business owners don’t realize that some states include the taxation of inventory and supplies under the umbrella of property tax.

From a financial statement perspective, inventory assets are recorded as assets and are represented on a business’s balance sheet. On the other hand, supplies are recorded as expenses and appear on a business’s income statement.

Inventories are typically defined as personal property held for sale, but some states require that balances of raw materials and work in progress be included in the reported figure. In states that tax inventory as personal property, most request a year-end balance to be reported. Some states require a taxpayer to report an average of the current year-end and prior year-end inventory balances, while some states require that an average of each prior month-end balance be listed.  

For the most part, states that tax inventory assess balances reported by a taxpayer on their property tax return at 100%, so this component of a business’ property tax burden can often be a large percentage of the total property tax liability. This is different from assessing other personal property (equipment, machinery, computers and furniture), which usually receives some form of depreciation allowance when calculating a fair market value. Because of this, just-in-time (JIT) inventory management can be an effective way to reduce property taxes on inventory. Sourced from an article for Oracle Netsuite

JIT inventory management ensures that stock arrives as needed for production or to meet consumer demand, but no sooner. The goal is to eliminate waste and increase the efficiency of your operations. Since the main objective is often quality and not the lowest price, JIT requires long-term contracts with reliable suppliers.

JIT is what’s known as a lean management process. In JIT, all parts of any production or service system, particularly people, are interconnected. They inform each other and are mutually dependent on generating successful outcomes. 

JIT in time inventory management usually results in lower year-end inventory balances.  This helps a business’ bottom line in a couple of ways: 1) cost for housing larger inventories are reduced as the space needed to store and house the inventory is less, and 2) if the business is located in a state that taxes inventory, the reported inventory balances will be less resulting in lower personal property taxes.

Additionally, some states allow for the reduction in the taxable base of inventory based on a taxpayer’s estimate of the fair market value of the year-end inventory figure. In the case of claiming a decline in the fair market value of inventory items, a taxpayer should be prepared to have current market data and research to back up any requested reduction from 100% of the cost of the inventory items. Some states may not assess all inventory balances the same. For example, Texas assesses vehicles held by a dealership uniquely. From the Texas Comptroller website.

For local property tax purposes, Texas law requires a motor vehicle dealer’s inventory to be appraised based on the total sales of motor vehicles in the prior year. A dealer must file an annual declaration of total sales with their county appraisal district from the prior year. A dealer must also file a monthly form with the county tax assessor-collector to report motor vehicles sold during the prior month and prepay, an escrow account, a vehicle inventory tax (VIT) for those sold vehicles.

A handful of states offer some form of Freeport Exemption for goods that are stored within their state but ultimately will be shipped to other states. Among states offering this kind of tax relief are Georgia, Kentucky, Oklahoma and Texas.

In the case of Oklahoma, inventory that qualifies for the Freeport Exemption is classified as “Tangible Personal Property Moving through the State.” From the Freeport Exemption Declaration form (901-F) available on the Oklahoma Tax Commission website.

All property consigned to a consignee in this State from outside this State to be forwarded to a point outside this State, which is entitled under the tariffs, rules and regulations approved by the Interstate Commerce Commission to be forwarded at through rates from the point of origin to the point of destination, if not detained within this State for more than ninety (90) days, shall be deemed to be property moving in interstate commerce, and no such property shall be subject to taxation in this State; provided, that goods, wares and merchandise whether or not moving on through rates, shall be deemed to move in interstate commerce and not subject to taxation in this State if not detained more than nine (9) months where such goods, wares and merchandise are so held for assembly, storage, manufacturing, processing or fabricating purposes; provided, further, that personal property consigned for sale within this State must be assessed as any other personal property.

Additionally, some states or jurisdictions may offer an exemption regardless of whether the goods are destined to be shipped to another state. For example, Mat-Su Borough in Alaska exempts the first $1,000,000 of business inventory.

Another way to provide some tax relief is to allow credits for property taxes paid in calculating other state and local taxes. For example, both Kentucky and Louisiana allow a credit on business income tax returns for property taxes paid on inventory assessments. From the Kentucky Department of Revenue website.

The inventory tax credit is a nonrefundable and nontransferable credit that may be applied against income taxes imposed by KRS 141.020 (individual income tax) or KRS 141.040 (corporation income tax) and the limited liability entity tax (LLET) imposed by KRS 141.0401 for any taxpayer that, on or after January 1, 2018, timely pays ad valorem (tangible personal property) taxes on inventory to a taxing jurisdiction in Kentucky. Unused credit amounts cannot be carried forward to later tax years. 

The Kentucky credit was phased in over four years and was 100% as of 2021.

Similarly, the Louisiana credit is taken by certain businesses on their income or franchise tax returns; however, in this case, any excess credit can be carried forward.

Lastly, some states apply tax rates differently to their assessment of inventory and supplies. Kentucky, for example, taxes inventory (Merchants Inventory) at a state rate of .05 (5 cents) + local rate compared to taxing supplies (Materials and Supplies on Schedule C as Other Tangible Personalty Note Listed Elsewhere) at a state rate of .45 (45 cents) + local rate.

Supplies differ from inventory in that they are usually noted as items used in the normal course of business. States that tax supplies, which are usually expensed by a business throughout the year, often allow for a one-month or two-week average to be reported as a reasonable representation of the supplies that would be on hand at any time. In some cases, the personal property tax return may request that supplies be reported on the return form and aren’t assessed.

Another issue related to reporting supplies involves the expense of assets that do not meet a company’s capitalization threshold. These are not necessarily items used in the normal course of business, such as cleaning supplies but are assets that typically would be capitalized and depreciated over time. However, because the cost is so low, the administrative burden of tracking the asset on a fixed asset record is too high. For example, if a company had a capitalization threshold of $3,000 and purchased an asset such as a computer monitor for $1,000, the monitor could be expensed.

In general, the Internal Revenue Service (IRS) suggests taxpayers choose one of two capitalization thresholds for fixed-asset expenditures, either $2,500 or $5,000. The thresholds are the costs of capital items related to an asset that must be met or exceeded to qualify for capitalization. A business can elect to employ higher or lower capitalization thresholds.  

Many jurisdictions have policies that allow for the assessment of these types of assets.  Some jurisdictions will only assess them in the current year, while others will assess them over several years. For example, South Carolina (8-years) and Utah (4-years) have specific tables to value and assess expensed assets.

As the last point to make, taxpayers should research statutes and regulations regarding the assessment of supplies. While some states may request that only supplies figures be reported on the personal property tax return form, statutes and regulations may support the taxation of inventory balances that are often much larger. This can lead to large discrepancies and exposure in a personal property tax audit. Instructions included on business personal property return forms do not always clearly state what balances should, or shouldn’t, be included in the balances reported on the return.

In closing, inventory and supplies can make up a large part of a taxpayer’s property tax expense, the largest component of state and local taxes a business pays. The intricacies of how inventory and supplies are assessed in various states across the country allow for many different variations in how to properly report figures on your property tax return. It is worth the time and effort to make sure you are reporting these items accurately. Taxpayers should consider having a property tax professional review their inventory and supplies reporting methodologies to confirm that they are in compliance with state and local requirements.

Second Chance Appeals in Texas and Kansas: 25.25’s and PUPS

BY DARYL SMITH AND TYLER ROGNLIE

Texas real property owners and tenants who miss the annual property tax appeal deadline of May 15, or 30 days after the Notice of Appraised Value, have a second and final chance to challenge their current tax assessment under Texas Property Tax Code 25.25 (https://statutes.capitol.texas.gov/Docs/TX/htm/TX.25.htm). This type of appeal can be filed any time before the current year’s taxes become delinquent: February 1 following the assessment year. Taxpayers may file a 25.25(d-2) written protest to the Appraisal Review Board, seeking a reduction in appraised value. This type of appeal requires the commercial property owner or tenant to prove the appraisal district’s error resulted in the subject property being overvalued by at least one-third (1/3). It also requires that there was not a protest filed on the property in the same assessment year, and that the property is not delinquent on any taxes currently owed on the property (See Texas Property Tax Code 25.26).

The Texas Tax Code 25.25 also provides a similar mechanism for challenging business personal property assessments that may had not been previously challenged during the tax year. The 25.25 protest can be utilized by business owners or representatives to challenge a valuation that is believed to be at least one-third (1/3) overvalued.

Case Studies/Examples:

1. A small retail strip center in Ellis County, TX, failed to appeal their 2019 property tax value after the appraised value doubled from the prior year. After contracting with PVS to represent the property, a 25.25(d) appeal was filed by PVS’ licensed Texas agents, who reduced the appraised value by over $400,000. This resulted in $30,000 in tax savings to the property owner.

2. A hotel in Harris County, TX, did not appeal their 2020 property tax value after the assessment increased instead of decreasing due to Covid-19. After engaging PVS, we used a 25.25(d) appeal to reduce the appraised value by over $400,000, which resulted in tax savings of over $40,000 to the hotel operator. 

3. An imaging center in Dallas County sold its equipment mid-year, at a price below the assessor’s assessment. PVS filed a 25.25 (d) correction motion to the Dallas County ARB to lower the value on this taxpayer’s business personal property, to better align with the true market value of the equipment that they sold. PVS was able to reduce the value from over $800,000 to $420,000, saving this taxpayer nearly $10,000 in business personal property taxes.

The Texas tax code also allows for a real property owner or tenant to file a written protest to correct a clerical error that affects the tax liability on a real commercial property and business personal property under Section 25.25(c) of the Property Tax Code. This applies to the current assessment year and five proceeding years, provided there are no delinquent taxes outstanding. Various types of clerical errors qualify, including a mistake in calculation or mathematical error, multiple appraised values being applied to the same property (duplicate taxation), and taxation of non-existent property. Common examples include inaccurate gross or net leasable area on income producing properties (office, MOB, retail, warehouse), valuation of shell or unfinished space as fully complete square footage, an error in land square footage or calculation of value on site improvements (asphalt, exterior lighting) and more. 

The same appeal mechanism is also applicable to business personal property assessments.  A 25.25(c) motion can be filed to the Appraisal Review Board to request a correction to the information on file in the appraisal district’s records, or an error in calculating the assessment, the correction of a duplicate appraisal, or the assessment of equipment no-longer present.

Case Studies/ Examples:

1. The gross square footage and number of units for a large apartment complex were inaccurately recorded in county records. This is crucial information that must be corrected, as most counties use this data to calculate the value of apartment complexes on the cost, income, and sales comparison value approaches.   

2. An office building closed prior to the personal property tax lien date, but the property owner failed to note this fact on their annual personal property return filed to Harris County. PVS filed a 25.25(c) correction motion to Harris County, and ultimately received a favorable decision from the Appraisal Review Board, who agreed to remove the assessment and tax bill for the property. This saved the taxpayer over $4,000 in property taxes.

3. It is not uncommon for appraisal districts to errantly create a duplicate account for a business, perhaps based on an address or ownership change, leaving a property with two active business personal property accounts. Often these duplicate accounts do not become apparent until receiving two separate personal property tax bills in the mail at the end of the year.  In situations like these, PVS has filed 25.25(c) correction motions to correct the duplication and remove/close the erroneous account. 

Given the various types of 25.25 appeals and their specific requirements for application, it is essential to hire an experienced property tax agency such as Property Valuation Services, with proven success in Section 25.25 appeals. 

Kansas: Payment Under Protest 

Property owners in Kansas may appeal their real property or business personal property’s classification and/or appraised value in one of two ways: the value may be appealed by way of an informal appeal filed to the local assessor’s office in the spring after the appraiser has notified the taxpayer of the property’s current appraised value; or the value may be appealed when taxes are paid, typically in December of the assessment year. The latter appeal is referred to as a Payment Under Protest, or PUP for short. The property assessment may only be appealed once per tax year by either appeal method, but not both. 

Case Studies/Examples

1. A Johnson County, KS hotel owner missed the informal equalization appeal deadline in late March for their real property. This owner contacted PVS to see if we could still appeal his property. PVS was allowed to use the KS Payment under Protest appeal to appeal his property in early December.

A Payment Under Protest (PUP) must be filed to the local treasurer’s office when taxes are paid. Kansas owners have the option of paying taxes in two installments: one is due by December 20 and the second half is due by the following May 10. A PUP can be filed with either payment, but it is not necessary to file with both.  If the owner’s mortgage company pays property taxes directly, an appeal may be filed with the county treasurer at any time after the tax bills have been mailed, but before January 31. All Payments Under Protest must originate with the county treasurer, not the property appraiser’s office.

It is important to note that the PUP appeal is not designed for appeals concerning land devoted to agricultural use or commercial and industrial machinery and equipment, because such property is not valued based upon its fair market value but on its agricultural use of the land and flat rates for machinery and equipment.

The same approaches to value that are used in a standard Kansas spring appeal are used in a Payment Under Protest for commercial real estate: the cost, income, and sales comparison approach. Equity or ‘equalization’ is also important to consider, so be sure the subject being appealed is not assigned a higher tax assessment than similar properties in the same county. This is especially useful in a PUP appeal, as most comparable properties are likely to have been appealed and resolved through the spring appeal process, and thus their assessments are already reduced upon appeal. This allows a property owner or their representative to utilize those lower assessments in comparison to the subject being appealed through a PUP in December. 

The procedure for a PUP is nearly identical to the annual appeal procedure. The county appraiser will conduct an informal hearing with the property owner or their representative, to review and discuss any evidence the owner has to support their claim for a reduction. Additional small claims or formal litigation appeal options are available to taxpayers who are not satisfied with their PUP informal hearing results. 

Case Studies/Examples

1. In Saline County, KS, an assisted living facility was being mischaracterized as a traditional apartment complex. After contacting PVS and filing a Payment Under Protest, the value of the property was reduced by $2,400,000 and the property owner enjoyed a $40,000 reduction in their tax bill. 

The Payment Under Protest procedure is less commonly utilized for business personal property tax, as compared to real property. Due to a phasing out of business personal property tax, businesses are no longer paying property tax on equipment purchased after June 30, 2006, leaving only the older equipment still being subjected to property taxation. With this exemption covering so many years of equipment purchases, there is decreased necessity for personal property tax appeals in Kansas.

“All commercial and industrial machinery and equipment acquired by qualified purchase or lease made or entered into after June 30, 2006, shall be exempt from property tax. All commercial and industrial machinery and equipment transported into this state after June 30, 2006, for the purpose of expanding an existing business or the creation of a new business shall be exempt from property tax.” (https://www.ksrevenue.org/prtaxincentives-proptaxabate.html

(http://www.ksrevisor.org/statutes/chapters/ch79/079_002_0023.html)

Due to this exemption and the intricate nature of an annual appeal vs. PUP appeal, the most reliable method of reducing business personal property tax liability is to file an accurate and timely rendition prior to the March 15 annual due date. CPA and general accounting firms are not always well versed in local tax law or procedure and may not have the necessary appeal experience should an error occur on a return. It is crucial to hire a property tax-specific agency such as Property Valuation Services, with proven success in Kansas appeals, to both prepare your return and handle any subsequent appeals. 

Article From Director – Joe Knehans

My name is Joe Knehans and I am a supervisor in the Business Personal Property department at Property Valuation Services. In November, I will be celebrating my 14th anniversary working at PVS. In my 14 years here, I have overcome challenges and discovered my passion for this line of work which makes my job worthwhile. 

As a supervisor, I am second in charge of a team of consultants that oversees approximately 7k accounts. My team is known as the Dialysis Team, as our clients are among the biggest companies operating dialysis clinics with many locations throughout the country.

Jennifer English is the manager of the dialysis team. We have a great working relationship. We count on each other and lean on our respective strong points to ensure success. Our team of consultants oversee all compliance aspects of our clients’ property tax portfolios. We manage the preparation and filing of the annual business personal property tax returns, as well as the analysis of the valuation issued by the tax assessor. We oversee the appeals process on valuation disagreements with the tax assessor, including attending local board hearings, when merited. Our team also handles personal property tax audit work for our clients. Our goal is to ensure compliance across our accounts, while also working to achieve the lowest possible taxes for our clients.

Our team has a lot of accounts and with that comes a potential for multiple audits. One of my responsibilities is to take the lead on the audit process for our team. Recently, we have received a substantial amount of audit notifications. This appears to be in response to audits being shut down during the peak of the COVID-19 pandemic. The purpose of an audit is for the assessor to ensure they have correctly assessed personal property associated with a business. PVS makes sure that the assessor has all the accurate financial information and that any additional assessments resulting from an audit are correct and fair. We intend for audits to be completed with as little additional taxes as possible.

PVS has been a great place to work to build a career in property tax. I find that my ideas and knowledge are welcomed and even sought out in some cases. The company wants to hear from the people that have proven themselves. I started out with minimal knowledge of how business personal property taxes work. I have learned much over my years at PVS that I think it is fair to say I have expertise in the field.

Hobbies I enjoy include reading books (usually science fiction), playing video games or working on jigsaw puzzles. A lot of my free time is spent watching sports, usually with family or friends. Baseball is my favorite sport and I usually get to a good amount of Kansas City Royals games each summer. I like to attend the games with bobblehead giveaways and have amassed a large collection. My family also has season tickets to Missouri Tigers football games, but unfortunately the team isn’t doing so well this fall.

Should you have any questions, feel free to reach out to me or anyone in our personal property department. We always like to hear from our clients! 

Real vs. Personal Property: The Fight Against Duplicate Taxation

BY PAM CARLEY AND JENNA REYES OCTOBER 7, 2021

What is Real Property vs. Business Personal Property?

When most companies think about property tax, real estate property tax typically comes to mind. Real property consists of land and improvements, such as a house, building and land improvements like paving, asphalt and lights. Payment of commercial real estate tax varies, as these taxes may be paid through an escrow account similar to a residential mortgage, by a tenant to a landlord through rent or paid directly to the local tax collector by property owners. Real property tax is most familiar because of its size; depending on the building type, size and location, it might be the largest expense item for tenants or building owners. But it isn’t the only type of property tax in most states. Business personal property tax should not be overlooked.
While not as familiar to most business operators, business personal property tax is assessed and collected on the equipment, furniture and fixtures inside a building, or on other movable items such as RVs, boats and vehicles. Real estate is typically thought of as fixed or permanent, business personal property is considered ‘moveable’ and tangible — items that would be taken if a business were to vacate their building. Examples include computer and IT equipment, manufacturing equipment, interior signage, cabinetry and more. Depending on the state, it may also include interior building changes made by the tenant, referred to as leasehold or tenant improvements, which are the most common assets facing duplicate taxation.

The Valuation of Business Personal Property

Personal property assessments are based on a company’s fixed asset listing, and potentially include inventory and/or supplies and leased equipment, depending on the state in which the property is located. Each year companies are required to file a business personal property rendition to the appropriate taxing jurisdiction, listing all assets owned by the business as of the lien date, including acquisition date and cost. There are 38 states which tax business personal property, and a majority use a January 1 lien date, or date of valuation. Each state has its own due date for the personal property return. Most dates fall between January 31 and May 15; however, there are outliers where returns are due much later in the calendar year.
The tax assessor’s value of each asset is calculated using the acquisition cost less depreciation, which is based on the type and age of the asset. But depreciation varies widely. The tax assessor groups assets into classes or categories such as office furniture, manufacturing, medical equipment, computer, telephone equipment and more. Rather than utilizing book or federal depreciation, most tax assessors have their own depreciation schedule for each class of asset. Some states do not create their own depreciation schedule. Instead, they use federal property tax classifications to establish appropriate depreciation for assets.

The Valuation of Real Property

Like business personal property, real estate is valued as of a lien date, which is most commonly January 1. Unlike personal property, the valuation process for real estate does not generally require or begin with the filing of an annual return. While several states do require that real property owners provide building changes, new construction and/or income and expense data to the local assessor each year, most do not require any filing regarding the building or land. Instead, the real property valuation is initiated by the local tax assessor, who sends notice to the property owner of their current valuation. The assessor has generally reviewed the property by means of a physical inspection or a desk review. Depending on the state, real property may be reviewed and reassessed annually or on a set cycle or schedule. In Texas, Kansas and Georgia, real property is reviewed annually. The state of Iowa and Missouri review real estate every odd-numbered year, and Tennessee and North Carolina reassess real property every four to eight years by state law. After issuing a notice of valuation, taxpayers have a set timeline during which they can challenge the assessor’s estimate of market value on their property. They must supply property data, such as an income statement or lease or market evidence to support their claim for a reduction in assessment. There is often a formal appeal process to follow, which may require meetings or discussion with the local appraisal staff, or a formal hearing before a board of local citizens, commissioners or appraisers.

Duplicate Taxation: When Real Property Becomes Personal Property
According to most state statutes and laws, the real estate assessment is an estimate of the fair market value of the building and improvements as of the lien date, meaning the anticipated price at which it would sell in an arms-length transaction between a willing buyer and seller. Logic asserts that the sale of a building would include the exterior walls and everything inside, in addition to the land and land improvements. This seems like a simple concept, but many states across the country complicate the matter but arguing that various real estate components are business personal property, such as leasehold improvements or tenant buildout. If the tax assessor is taxing real property at its reasonable selling price and taxing building components on the personal property account, that’s double taxation — and illegal.

Knowing the components of a building and industry terminology is important when discussing the double taxation of property on the real and personal sides. The term “shell” is a building composed of four walls, a floor and a roof. It has exterior walls and windows installed, concrete or other base floors, but does not contain interior dividing walls, like exam rooms in an MOB or cubicles in an office. It does not contain any other finishes like tile, carpet, acoustic drop ceiling, interior lighting, paint, wallpaper or common area décor. Those are often called “tenant improvements” or “leasehold improvements” — interior buildout inside the four walls of a building. It’s common for the developer or owner of the real property to construct or build both simultaneously – a fully functioning building from the start. But it’s also common for a real property owner to construct and own only the shell building, and for tenants to construct or install their own interior buildout, specific to their liking, use or industry. This happens frequently in special use properties, like those in the medical community, or in buildings with a high rate of turnover and generic use space, like retail or office buildings.

Regardless of ownership, most buildings in existence are fully complete — meaning they contain both shell and tenant improvements — and are a fully functioning piece of real estate. But who owns or installed each component can lead tax assessors in various jurisdictions across the country to tax them separately, and often twice. Duplicate taxation also commonly occurs when the business owner lists real-estate-related assets from a fixed equipment or leasehold improvement account on their business personal property tax return. In-house accounting staff and CPA firms alike make this common mistake, listing items from fixed equipment or leasehold accounts as tangible or movable assets. When reviewing such renditions, tax assessors are most likely to accept a return as it is filed rather than question the taxpayer on these assets. After all, it’s additional revenue for their county and city.

Connecticut is a great example of the struggle with duplicate taxation on tenant improvements. A large portion of the tax assessment offices in the state use a third-party appraisal firm to analyze and set the town’s real estate values. In PVS’ experience, these real estate assessments are typically at market value for a fully built-out building. That means the real estate valuation is the estimate of what that building would sell for with shell and tenant improvements, exactly how it sits as of the lien date. The assessment office or their third-party firm reviewed local market sales of similar properties and current lease rates and listed market rents to estimate what the building would generate in revenue for a potential buyer. This real estate assessment, therefore, includes the entire building as it stands, including tenant improvements.

At the same time, Connecticut assessors, who typically handle the valuation of business personal property in-house, will value interior buildout completed by tenants in a building on their business personal property account. This is largely because the tenant paid for and installed those walls, flooring, etc., so they appear on the tenant’s fixed asset listing or general ledger. They will assert that any physical additions or changes inside the building, not installed or owned by the real property owner but rather the tenant, are taxable as tenant improvements.

How to Avoid or Resolve Duplicate Taxation

The fight to eliminate this double taxation can be a tough one, which is why firms like PVS are engaged by owners/landlords and tenants alike. The process requires proving that the real estate assessment is at full market value, which requires appraisal and industry knowledge, access to market data and valuation experience. Simultaneously, knowing exactly which personal property assets, like certain fixed equipment, should be taxed as personal property is critical. The resolution typically requires a formal appeal on the business personal property account, so the taxpayer must possess knowledge of both forms of property tax. Alternatively, firms like PVS know that how the annual business personal property rendition is prepared and filed can provide a large head start in duplicate taxation issues. Having an expert prepare the personal property return can also avoid costly and time-consuming audits, which can often review up to four prior years of personal property data. Hiring a firm with real and personal property expertise and experience is invaluable when duplicate taxation issues plague your property tax expense.

Most businesses are aware that real property taxes are a very large expense line item. But business personal property tax should not be overlooked. It can easily become one of the largest and most dynamic expenses a business faces, especially if a tenant is paying both real and personal property tax on the same component or asset. Attention to detail, industry knowledge and experience, and knowledge of legislative changes are important in the skill set of the company filing your business personal property returns. PVS specializes in business personal property taxes and has been preparing returns and challenging tax assessments since 1997. Please contact us if you would like to see how we can help you and your company file your renditions.

Article From Director – Tyler Rognlie

My name is Tyler Rognlie and I am the Assistant Director of the Business Personal Property department as well as the manager of the Multi-Specialty at Property Valuation Services. Earlier this summer, I surpassed my 14th year working at PVS. I have always enjoyed the property tax work that I’ve done here at PVS and have gladly chosen to make it my career.  

I lead a team of property tax consultants that oversee a caseload of over 6,000 accounts, which spans over 150 of PVS’s clients. My team is referred to as the “multi-specialty” team, as we handle the personal property tax responsibilities across many different industries, including health care, industrial, communications, manufacturing and hospitality. Within the health care sector, my team primarily services clients within the surgical, oncology, diagnostic imaging and behavioral health segments. My team also oversees the on-boarding of new-to-PVS clients, getting them integrated into our systems and processes.

My team of property tax consultants oversees all compliance aspects of our clients’ property tax portfolios, effectively being a turn-key solution for business’ property tax needs. We administer the preparation and filing of the annual business personal property tax returns, as well as the analysis and review of the valuation issued by the tax assessor. We oversee the appeals process on valuation disagreements with the tax assessor, including attending local board hearings, when merited. Our team also handles personal property tax audit work for our clients. Our mission is to ensure compliance across our accounts, while also working to ensure that we achieve the lowest possible property taxes for our clients.

In the current phase of the tax cycle, my team is continuing to analyze assessments and oversee the appeals process on accounts where we have filed appeals. Additionally, tax collectors are starting to issue the business personal property tax bills, so we are assisting with our support team to resolve property tax bill issues. Also, with now being a time that many clients are setting their budgets for the next year, we are helping clients with their personal property tax budgeting.

I appreciate the knowledge and opportunities that PVS has provided, aiding in my professional development. I also appreciate that my ideas and input are welcomed and valued by my peers in the company. Being able to contribute in the growth and progress within our company has been the most rewarding aspect of my role since becoming a part of the management team.

I’ve enjoyed the relationships I’ve formed and continue to foster with the individuals I work with across my base of clients, as well as my colleagues here at PVS.

On a personal side, I am a (relatively) new father to a now 11-month-old son. My wife and I spend most of our time keeping up with him and helping him discover the world. In the limited windows of free time, I enjoy an assortment of hobbies, ranging from gardening, staying active with basketball, tennis or hiking and doing home improvement projects. We also like to visit breweries around the city and are always looking for a new favorite beer!

Should you have any questions, feel free to reach out to me or anyone in our business personal property department. We always like to hear from our clients!