Thepersonalpropertyinformationyouprovidethetaxassessorisnotonlyimportant;it’s critical.Taxassessorswouldliketohaveasummaryofthepurchaseprice/acquisitioncostof “property”acquiredbyyearforperhapseightcategoriesofproperty.Inaddition,thereare requestsforinformationoninventoryandworkinprogress.Theassessorwantstoknowthe amountspentonanytangibleitemssuchasfurniture,equipment,computers,inventory, manufacturingworkinprogress,andothertypesofpropertydependinguponlocation.However, insomestates,includingTexas,thepropertyownermayprovideanopinionofvalueforthe eightcategoriesofitems.Thisstepiscriticalindetermininghowthetaxationprocessevolves.
Assessorsalsowantyoutoincludefreight,setupcostandspecial-purposebuildingstohouseequipment.Noneoftheseshouldbe renderedaspersonalproperty
PersonalPropertyReporting
Providingavalueallowsthetaxpayertoaddressseveralissuesupfrontwithouthavingtobattletheappraisaldistrict:1)the depreciationscheduletousetoestimatevalueand2)theallocationoftangiblepersonalpropertyandintangiblepersonalproperty Intangiblepersonalpropertyappearstobeexemptfrompropertytaxeswiththeexceptionofafewstatesthatapplyataxtobonds. However,forourpurposeofvaluingpersonalpropertyforpropertytaxes,weneedtoseparatetangibleandintangiblepersonalproperty
Intheory,itissimpletoseparatetangibleandintangiblepersonalproperty.However,whenpropertyispurchasedthepriceisnot allocatedbytangibleandintangible.CanareasonablepersondisputethataportionoftheacquisitioncostofanApplewatch,iPhone, Ciscophonesystem,copierorcomputerizedmachiningequipmentdoesnotincludeintangiblepersonalproperty?Whataretheactual coststomanufactureanApplewatchversustheretailprice?Let’sreviewa$2millionCiscophonesystemwhichincludedafive-year servicecontract.Afterfiveyears,thesystemisessentiallyworthlessunlesstheowneragreestoanotherlong-termservicecontract,at perhaps$200,000peryear.Thecostofthemaintenancecontractwasabouthalfthecostoftheoriginalequipment.Whatisthe tangiblepropertyversustheintangiblepropertyina$2millionphonesystem?Mostappraisaldistrictswouldputaresidualvalueof twentypercentor$400,000.Inreality,itwouldbeunreasonabletoexpectmorethan$10to$50,000.
UsingthevaluationmodelfromMcLennanCountyAppraisalDistrictinWaco,Texas,let’sreviewtheappraisaldistrict’svalueofa$2 millionphonesystem:
Is$367,200inpropertytaxesreasonableforaphonesystemthat“cost”$2million?Remember,thecostincludes:warranty,service agreementforfiveyearsatabout$200,000peryear,tradesecretsnecessarytomanufacturethephones,andsomeplastic,metaland silicone.Halfofthecostisthemaintenanceagreement.However,ifyouarenotcarefulthiscostwillbeincludedaslong-lifeequipment. Oftheremaininghalfofthecost,howshoulditbeallocatedbetweentangible(plastic,metalandsilicone)andintangible(software, tradesecrets,etc.)?Cisco’scostofgoodssoldis37%ofrevenue(foryearendingmid-2016),andthatwouldincludetheirexpensesfor serviceandwarranty.Iftheservicecontractwas$200,000peryearforfiveyears,about$1millionwouldbeforthephonesystem withoutdeductingotherintangibles.Theirnetprofitmarginistwenty-fivepercent.Oneapproachtodeterminethevalueofthetangible personalpropertyistocalculatethecosttomanufactureandaddareasonableallowanceforprofit.Thisindicatesavalueforthe tangiblecomponentsofthephonesystemof$462,500($1millionafterdeductingservicecontracttimesthirty-sevenpercentcostof goodssoldtimes125%toallowforprofit).Thiscostfortangiblesisonlytwenty-threepercentofthetotalcostof$2million.
Ifyouareabletorendermarketvalue,allocatethecostofdifferenttypesofpropertybetweentangiblepersonalpropertyandintangible personalproperty.Thenestimatethevalueofthetangiblepersonalpropertybasedonitsage,functionalityandcondition
WhatIfYouCan’tRenderMarketValue?
Ifyoucan’trendermarketvalueofthetangiblepersonalproperty,youeithershouldrenderwhatisrequired(typicallycostbyyear)or notrenderandrisktheconsequences.Thepenaltiesofnotrenderingvaryfromstatetostate;theyaretypicallyapercentageoftaxes owed.TexasisonthelowendattenpercentandOregonisonthehighendatfiftypercent.Inpractice,theabilitytoworkwith assessorsvariessharplywithinastate.Renderingyourcostofacquisitionbycategorybyyearwillgenerateapredictableresult Generally,peopleinbusinesslikeapredictableresult.
RenderingcanbeExpensive
However,theresultofrenderingcostisthatyourpersonalpropertytaxassessmentwilllikelybetwotofivetimesthecorrectvalue.The primaryexceptionsareinventoryandmanufacturingwork-in-progress.Thereistypicallylessover-valuationforinventoryandwork-inprogressbasedontraditionalpractice.
Appraisaldistricts,alsoknownasassessors,aregovernmentbureaucraciesthatfunctionbasedonrulesandprotocol.Wereviewed moststatedepreciationschedulesandmanualsforpersonalpropertyvaluationpublishedbystatesandappraisaldistricts.Theydo notseemtomakeanyeffortto:1)separatetangiblepropertyfromintangiblepropertyand2)appeartoconsistentlyusedepreciation schedulesbasedonphysical-lifedepreciationtablesnotrelatedtomarketvalue.Inadditiontonotusingtablessomewhatlinkedto marketvalue,appraisaldistrictsarenotsetuptomakeadjustmentsforfunctionalorexternalobsolescence.Inaddition,they inappropriatelyencouragepropertyownerstoincludefreight,set-upandspecializedbuildingstohouseequipmentintheircost
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