The largest annual state and local tax liability for businesses, according to a 2012 study commissioned by the Council on State Taxation, is property tax. For the 2011 tax year, 38 percent of all state and local tax revenue was from property taxes, both personal property tax and real property tax.
Sales and use tax was second (20 percent), and corporate income taxes and numerous other taxes rounded out the balance. While there are some taxpayers and advocates that diligently and continuously fight the never-ending property tax reform battles in state legislatures, many businesses should invest more time in analyzing property tax expenses to ensure that their assessments are valid and that they are not paying more than they should.
Local property tax bases have eroded in recent years due to poor economic conditions. Tax assessors, looking to maintain their tax revenues, may have become aggressive in their assessments. This can lead to controversy and, perhaps, opportunities for businesses.
At issue in this feature are state and locally imposed property taxes. Property taxes throughout the United States represent a primary source of local government revenues. Here, we will focus on real property (real estate) and personal property.
REAL PROPERTY TAX
Real estate taxes are not static. They are tied to assessed value, so businesses need to stay on top of the assessed values to make sure they are paying a fair real estate tax. A "perfect storm" affecting real property values began in 2007 with the housing bubble and was quickly followed by the 2008 financial crisis. According to the 2012 case-shiller and corelogic property price index, u.s. Home property values declined by 30 percent to 35 percent from the start of 2007 to the start of 2012. States such as california, arizona, nevada and florida experienced even greater declines. Has your taxing authority voluntarily reduced the assessed value of your business property by such a high percentage, if at all, during the 2007-to-2012 time frame? If not, assuming the tax rate has remained similar during that period, there could be an appeal opportunity.
The objective for property assessments should be, theoretically, to provide a fair and equitable value for each property. In pennsylvania, for example, the assessment of real estate is according to its "actual value" and at a bona fide rate and price for which the property would separately sell.
Fair market value has been defined by the Pennsylvania State Supreme Court as "the price in a competitive market a purchaser, willing but not obligated to buy, would pay an owner, willing but not obligated to sell, taking into consideration all the legal uses to which the property can be adapted and might reasonably be applied." The assessment is either market value (if re-assessment is set at 100 percent) or a percentage (ratio) of the market value of your property. The assessed value multiplied by the millage (tax rate) determines the amount of real estate taxes.
There are several basic procedures recognized in the assessment process. Generally, states allow for annual assessments, meaning assessments can be adjusted each year to take into account fluctuations in market value. Some states, though, re-assess over a mandated time period, which is usually three to six years, and set a base year at full market value. Another option is for a uniform assessment rate -- including all real property, whether residential, commercial or industrial -- to be assessed at the same ratio to market value. In other words, assessments are set at a percentage of market value using a base-year value.
A QUAKER STATE EXAMPLE
Every county in Pennsylvania has its own set of regulations on the property tax appeal process, but Pennsylvania statute provides for a two-step hearing procedure: first to the board of assessment appeals, and then to the Court of Common Pleas. Since assessed value is generally set at market value or a predetermined fraction of market value, it is critical to determine market value. This is a relatively straightforward process for residential homes. In a normal market, you can usually identify recently sold houses that are comparable in your immediate neighborhood. Commercial and industrial properties tend to be more complex due to the variety of property use.
The best evidence for a tax appeal is usually an independent real estate appraisal report submitted by a Pennsylvania-licensed or certified real estate appraiser. Assessors must maintain a process of valuing a universe of properties, often referred to as mass appraising. An increasing variety of property types and factors such as market volatility, special purpose use, or substantial obsolescence have led to an increase in assessment error. If the market value determined by the county tax assessor is higher than the appraised value, then a taxpayer may have a basis for an appeal of the assessment.
PERSONAL PROPERTY TAX
Almost 40 states and the District of Columbia impose personal property tax on businesses. Personal property tax is a self-reporting tax through the submission of annual renditions (personal property tax returns). The tax imposes an assessment on the fixed assets (furniture/fixtures, machinery/equipment, computer/IT equipment, etc.), inventory (raw materials, goods in process, etc.), supplies, and leasehold improvements owned by a business. Not all states that impose personal property tax include the same kinds of property. Annual renditions are submitted to local tax assessors. Most, but not all, states have a lien date (assessment date) of January 1. Rendition due dates vary, but are generally between January 31 to June 15. As with real property taxes, the revenue generated from personal property tax collections is used to fund local taxing jurisdictions.
Fixed assets owned by a business must be reported as of the lien date for each location on the annual rendition. In certain states, inventory and leasehold improvements must also be reported on the rendition. The reporting of fixed assets needs to include the original acquisition date, original cost, asset type (furniture, machinery, computer), and asset description. All assets need to be reported at the exact location so as to assign the assessment in the proper taxing jurisdictions. As a self-reporting tax, it is the taxpayer's responsibility to identify assets to report and to prepare and file a timely annual rendition.
With few exceptions, tax assessors use the submitted fixed-asset information and multiply the cost information by an established depreciation table, based on the reported asset type. In most states, a taxpayer's book value has minimal or no impact on the assessed value of the asset.
ASSESSMENT NOTICES AND APPEALS
The timely tracking of personal property tax assessments is critical to ensure that appeals deadlines are not missed. Many deadlines offer a relatively brief window to appeal, usually 15 to 45 days from the date of assessment. When reviewing assessment notices in comparison to opinions of value, a taxpayer must verify that the assessed value is converted to the market value - using all sales ratios, jurisdictional ratios, and other applicable methods. Any applicable exemptions or abatements also need to be scrutinized to verify proper application.
If an assessment is greater than a taxpayer's opinion of value, a business decision must be made regarding whether the estimated increase in tax is significant enough to warrant an appeal. If an appeal is filed, there are three levels, with each having its own risks and benefits. An informal appeal meeting with a tax assessor is usually a good place to get an expedited and negotiated assessment reduction on smaller dollar or less complex issues. In a formal board hearing with a local board of appeals, there is an increased need for detailed documentation. In litigation, an independent court decides the matter.
As with personal property tax assessment notices, the tracking of tax bills and the possibility of changing payment due dates is critical. The imposition of payment penalties and interest can be significant if a due date is inadvertently missed. Most jurisdictions allow a 30-day grace period to pay a tax bill. In some jurisdictions, the tax bill also acts as the assessment notice. So, in addition to the amount due, a tax bill will contain an appeal due date that needs to be considered for potential valuation appeal opportunities.
Depending on the dollar value and complexity of compliance, some businesses opt to handle the compliance for personal property reporting internally, using manual systems or one of a few property tax software systems available. Others can opt for the assistance of a CPA or tax preparation firm that specializes in the preparation and filing of personal property tax returns.
The assessment of leasehold improvements in some states has become a point of contention, especially for retailers. They claim that leasehold improvements are being double-assessed with the real property tax assessment of their or their landlord's real property.
There has been a marked increase in the documentation standards from tax assessors for the approval of annual exemption and abatement applications. Tax assessors are requiring additional documentation to approve annual exemptions that had generally been considered formalities in prior years. Some jurisdictions are auditing more aggressively, including increasing the frequency of their audit cycles and hiring third-party auditors.
As indicated by COST's 2012 Total State and Local Business Taxes Study, property taxes were 38 percent of the total state and local tax burden for businesses in 2011. Now is a unique time, from a historical perspective, to focus on property taxes because property values have substantially declined in recent years. Local taxing jurisdictions, with less funding than in the past from federal and state governments, are trying to maximize revenues. This can lead to over-assessments when assessing market value. Increasing the tax rate to offset lower potential tax bases could theoretically solve this challenge for taxing jurisdictions, but raising taxes is politically anathema for many. These factors lead toward appeal opportunities for taxpayers.
Craig Hoffner is a director of state and local tax with Grant Thornton in Philadelphia. Reach him at at email@example.com.Ted Kolman, CMI, is a director of state and local tax with GT in Schaumburg, Ill. Reach him at firstname.lastname@example.org. Matthew D. Melinson, CPA, is a partner with GT in Philadelphia and a member of The Pennsylvania CPA Journal editorial Board. Reach him at email@example.com. Reprinted with permission from The Pennsylvania CPA Journal, a publication of the Pennsylvania Institute of CPAs.
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