Indiana has made a long (and I mean long) list of changes to the to property tax valuation and assessment procedures and requirements.

LSA Document #09-576(F) calls for changes to personal property reporting and valuation, obsolescence, township and county assessor duties and more.

Kansas offers property tax exemptions relating to “commercial/industrial machinery and equipment” that could be very beneficial to taxpayers owning or leasing personal property. They are as follows: 

Commercial/Industrial Machinery and Equipment Exemption:

Any qualified purchase or lease of machinery and equipment made after June 30, 2006 is exempt from property taxation in Kansas. Of course, there are a few clarifications to keep in mind. The term “Acquired” does not include stock purchases, mergers, reorganizations or other internal transfers. However, it does include transfers of property into Kansas after June 30^th for the purposes of expansion, replacement or creation of a new business. 

Qualified Purchase is defined as: 

a purchase of commercial and industrial machinery and equipment for fair and valuable consideration where such machinery and equipment is physically transferred to the purchaser to be used in the purchaser’s business or trade.

Qualified Lease is defined as: 

a lease of commercial and industrial machinery and equipment for not less than 30 days for fair and valuable consideration where such machinery and equipment is physically transferred to the lessee to be used in the lessee’s business or trade.

$1,500 Exemption for Commercial Equipment:

Commercial/Industrial equipment “items” with a “retail cost when new” (RCWN) of $1,500 or less are exempt from property taxation. Again, there are two things to pay close attention to when determining whether or not the equipment is eligible for the exemption:

Retail cost when new:

Retail cost when new (RCWN): The Kansas Constitution requires the valuation process for machinery and equipment in the “Commercial” subclass begin with the “retail cost when new”. For purposes of personal property taxation, RCWN is the total amount a consumer would pay to acquire new property in order to use it to produce income over a period of years in a commercial or industrial setting. Retail cost when new is not the used sale price, and it is not the wholesale or manufacturer’s cost. It is the dollar amount an item would cost a consumer when the item is purchased new at the retail level of trade. For purposes of personal property taxation, the term “retail cost when new” does not include sales tax or freight and installation charges that are separate and readily discernible from the set retail price.

 What is considered an “Item”:

For purposes of the $1500 exemption an “item” is generally going to be a single line item as it is reported on a rendition. Exceptions to this general rule are: 

1. If the line item represents a group of like goods that can be used independently and they have the same or similar cost, the line item is actually several “items”. The RCWN of each “item” may qualify for the exemption. 

2. In that an “item” is the smallest quantity that may be used independently, one pen, one sheet of paper or one rubber band represents a material and supply “item”. The RCWN of each “item” that can be independently used may qualify for the exemption. Materials and supplies are classified under the “Other” subclass of personal property. Personal property in the “Other” subclass is listed on schedule 6 of the rendition. See the “Other Personal Property Not Elsewhere Classified” section in this guide for information on valuing materials and supplies.

More information on these exemptions can be found in the 2010 Personal Property Valuation Guide,  K.S.A. 201 and K.S.A. 79-223.

According to section 39-10-114(1)(a)(I)(A) of the Colorado Revised Statutes a taxpayer may file for an abatement of all or part of property taxes that have been levied “erroneously or illegally” within two years after January 1 of the year following the year in which the taxes were levied. The abatement provides for a refund of taxes due to “erroneous valuation for assessment”, “irregularity in levying”, “clerical error” or “overvaluation” and is different and separate from the “normal” property tax appeal process. 

In the recent case of HealthSouth Corporation v. Boulder County Board of Commissioners and Colorado State Board of Assessment Appeals, HealthSouth put this abatement provision to the test. 

HealthSouth filed two abatement petitions seeking to reduce the valuation of its personal property assets at two of its Colorado locations for the 2002 tax year. Now for the twist… 

In 2002 HealthSouth was found to be cooking its books and inflating earnings. In order to balance these cooked books HealthSouth created fictitious assets. The case reads: 

“The factual basis for the taxpayer’s abatement and refund claims is that in 2002, as part of a broader fraudulent scheme to increase the company’s stock price, taxpayer included fabricated valuations for fictitious assets in the personal property declaration schedules it filed.” 

So, HealthSouth’s new management filed abatement petitions with the Board of County Commissioners (BOCC) seeking to reduce the personal property taxes it “overpaid” due to the reporting of nonexistent assets. The BOCC denied the petitions. Appeals were then filed to the Board of Assessment Appeals and were dismissed. HealthSouth appealed to the Court of Appeals. In a nutshell, the Court of Appeals determined: 

“Contrary to the BAA’s ruling, we conclude that, under the statutory scheme, taxpayer has the right to proceed with its abatement and refund claims on the ground of overvaluation, notwithstanding the fraudulent overstatement of its assets and valuations in its initial tax filings. Consequently, the BAA erred in dismissing taxpayer’s appeals without affording an evidentiary hearing, and on remand it must consider the merits of the taxpayer’s overvaluation claims concerning its personal property for the 2002 tax year.” 

I am looking forward to seeing how this will ultimately turn out. It will be interesting to see what HealthSouth provides as evidence to prove that the valuation of nonexistent assets was incorrect.

In January the California State Board of Equalization (SBE) issued Letter To Assessors No. 2009/003, indicating a change in policy regarding mandatory audits. In a nutshell the policy change reads: 

“Effective January 1, 2009, county assessors are no longer required to audit all taxpayers with trade fixture and business tangible personal property holdings of $400,000 or more at least once every four years. Instead, the county assessor is required to annually audit a significant number of audits as specified in section 469, subdivision (a)(1)”

The LTA goes on to “indicate” what a “significant number of audits” means by saying: 

“For purposes of this section, “significant number of audits” means at least 75 percent of the fiscal year average of the total number of audits the assessor was required to have conducted during the 2002-03 fiscal year to the 2005-06 fiscal year, inclusive, on those taxpayers in the county that had a full value of four hundred thousand dollars ($400,000) or more of locally assessable trade fixtures and business tangible personal property. ”

Huh? 

When I read it I understood the “no more mandatory audits part”, but I didn’t get the “implementation” part.  I was also pretty sure that even if I was a county auditor in California I wouldn’t have understood it. As it turns out, my assumption had some validity. 

The SBE recently issued LTA No. 2009/13, fielding a few of, what I can only imagine to be, a plethora of questions.

Of the five (really, only five?) questions asked, number four peaked my interest:

 Question: If a mandatory audit scheduled for 2008 (2008-2009 fiscal year) is pending as of January 1, 2009, and it falls below the top 50 percent (not part of the significant number of audits under section 469(b)(1)), must it be completed?

Answer: No. 

So, the question is, do you have pending audits that can be canceled or settled?

The Virginia Attorney General has issued Opinion Number: 09-109 regarding the term ”original cost” as it relates to the assessment of tangible personal property. The opinion states that, “it is my opinion that the term ‘original cost’ means the acquisition cost of property from the manufacturer or dealer, i.e., the original cost paid by the original purchaser of such property from the manufacturer or dealer”.  The first thing to point out is that this is what personal property appraisers define as historical cost.

Now, let’s say that an individual or company acquires a business in the state of Virginia. The cost of the assets to the present owner (what personal property  appraisers define as original cost) will be the values that the will be carried on the company’s books for accounting purposes. This  could result in a “step-up” or a “step-down” in value and could be different than what the opinion defines as the ”original cost” of the assets.  How will the assets be valued for tax assessment purposes?

According to this opinion, the assets must still be valued using the “original cost” of the assets (trended & depreciated). An issue arises due to the fact that the taxpayer would now, theoretically,  need to maintain two sets of books (one for accounting and one for property tax reporting). Furthermore, what if the taxpayer does not have the “original cost” information (I have seen this happen many times)? Now, the taxpayer would have to accept the figures on the personal property return and make additions and deletions going forward.

I am just skimming the surface of this issue here, but hopefully you can see how this has the potential to result in innaccurate assessments of personal property assets in Virginia and elsewhere.