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The Texas Property Tax Code for many years had required owners of business
personal property (BPP) to annually render those assets used in a business.
Rendering is summarizing to the central appraisal district the ownership and
value of the assets. Historically, however, over half of all owners of business
personal property have not rendered.
The Texas law was unusual in that while rendition was mandatory, there was no
penalty for not rendering. Therefore, many property owners did not render
because it was not material, was not convenient or would dramatically increase
their tax liability. For many small business owners, the value of the personal
property and the associated property taxes are modest and not a material issue
for the business.
Chief appraisers at central appraisal districts and tax entities have long
been concerned that a material amount of business personal property is not being
taxed. There is a reasonable concern that if business personal property owners
are not being taxed equitably with real property owners, the burden of taxation
is shifted from owners of personal property to owners of real property.
Impetus for Change
Several factors combined to make business personal property rendition a hot
topic. In Robinson vs. Budget Rent-a-Car Systems, a 2001 appeals court decision,
the court clarified that the chief appraiser may sue to force a business
personal property owner to render BPP. In addition to the objective of chief
appraisers to equitably spread the burden of property taxation, fiscal
shortfalls at many city, county and school entities as well as at the state
level have raised the government's need to ensure it is receiving all due
revenue based on current tax laws.
Although Robinson vs. Budget allowed chief appraisers to sue property owners
who did not render, this was a largely unsatisfactory remedy due to the
financial costs and political stigma of chief appraisers suing large numbers of
taxpayers. The other possible solution was for chief appraisers to "guess high"
on assessed values in order to effectively force business personal property
owners to provide information. Fortunately, few chief appraisers have chosen
this option.
Summary of the New Law
During the summer of 2003, the Texas legislature put some teeth into the
rendition law by passing Texas Senate Bill 340. Starting in 2004, a company that
does not render will automatically pay a 10% penalty on its business personal
property tax bill. This penalty will be collected by the chief appraiser,
although there are options to appeal the penalty. There is also a 50% penalty
for filing a fraudulent rendition. In addition, filing a fraudulent rendition is
a criminal offense.
Rendition Requirements
Owners of business personal property with an aggregate value of less than
$20,000 can file a simplified rendition statement containing only: 1) the
property owner's name and address; 2) a general description of the property by
type or category; and 3) the location of the property. Owners of business
personal property worth more than $20,000 must file a rendition with: 1) the
owner's name and address; 2) a description of the property for inventory; 3) a
description of each type of inventory; 4) a general estimate of the quantity of
each type; 5) the property's physical location; and 6) either the owner's good
faith estimate of the property's market value or the property's historical cost
new and its year of acquisition.
If the owner simply provides a good faith estimate of the property's market
value the appraisal district may request a statement of supporting information
indicating how the property owner determined the value rendered. This detailed
statement must be delivered within 21 days after the date the property owner
receives the request.
Rendition Deadlines
The rendition addresses business personal property as of January 1st of the
tax year and may be filed annually between January 1st and April 15th. There is
an automatic extension of the filing deadline until May 15th upon written
request. The chief appraiser may extend the filing deadline for an additional 15
days (until May 30), if the property owner files a written request showing good
cause.
Amnesty Provision
With the new legislation the Texas Property Tax Code also offers property
owners a special rendering provision for the 2003 tax year. If owners render BPP
before December 1, 2003 the appraisal district may revalue the property for tax
year 2003. Revaluation is likely to occur if there was no previous account for
the property or if the rendered value greatly exceeds the current assessed
value.
However, exercising the special rendering, or amnesty, provision in 2003
allows the property owner to avoid omitted property taxes for the two prior
years. When business personal property not already on the tax rolls is
discovered, the Texas Property Tax Code requires it be assessed at the market
value for the two prior years. For example, if business personal property were
discovered in 2003, the appraisal district would also typically assess the
property for 2001 and 2002. By rendering during the established amnesty window,
September 1, 2003 through November 30, 2003, the property owner avoids the
exposure of paying property taxes for prior years.
What is Business Personal Property?
The Texas Property Tax Code 1.04 (5) defines tangible personal property as
property that can be seen, weighed, measured, felt, or otherwise perceived by
the senses, but does not include a document or other perceptible object that
constitutes evidence of a valuable interest, claim, or right and has no
negligible or intrinsic value. Examples of tangible personal property, or
business personal property, include equipment, furniture, computers, and
inventory. Business personal property would not include accounts receivable,
stocks, bonds, notes, franchise agreements, licenses, permits, certificates of
deposit, insurance policies, pensions, contracts and goodwill.
Market Value Definition
Market value is defined in the Texas Property Tax Code 1.04 (7) as the price
at which a property would transfer for cash or its equivalent under prevailing
market conditions if: a) exposed for sale in the open market with a reasonable
time for the seller to find a purchaser; b) both the seller and the purchaser
know all of the uses and purposes to which the property is adapted and for which
it is capable of being used and the enforceable restrictions on its use; and c)
both the seller and purchaser seek to maximize their gains and neither is in a
position to take advantage of the exigencies of the other.
Market Value vs. Book Value
Market value may be less than or more than book value. For example, the value
of a 3-month-old computer may be one-half of the initial acquisition price. The
book value based on IRS tax per IRS depreciation schedule would be 95% of cost
based on a 60-month depreciation schedule. Other examples of items whose market
value may decline sharply after being placed in service include cars, linens and
bedding at motels, phone systems, copiers, and furniture.
Other Valuation Issues
Inventory shall be valued at the price for which it will sell as a unit to a
purchaser who would continue the business. Due to issues such as pilferage,
obsolescence, and damage, the market value of inventory may be less than the
book value of the inventory. The assessed value of the furniture, computers, and
equipment should be the price for which it could be sold.
Issues for Appraisal Districts
Although appraisal districts lobbied aggressively to insure this bill passed,
it poses many challenges and issues for appraisal districts. The first challenge
is how to process a large number of renditions. Then, the appraisal districts
will have to decide whether to aggressively request additional information if
the owner gives market value instead of providing a fixed asset listing
(property description, year of acquisition, and acquisition cost). The appraisal
districts will also have to decide how much consideration to give the owner's
estimate of market value, particularly if it is sharply below the appraisal
district's assessed value.
At least one chief appraiser believes the new rendition requirements may
delay certification since appraisal districts must wait to receive the
renditions before mailing notices of assessed value. The higher level of
renditions will impose additional challenges for appraisal district staff in
up-front processing and will likely require additional protest hearings.
Appraisal districts are generally leanly staffed and will have to be creative
and effective to handle a likely meaningful increase in business personal
property renditions and appeals.
Practical Considerations for Property Owners
One nettlesome issue for owners of small amounts of business personal
property is whether the penalty for not rendering is incentive enough to render.
Consider the following example: Bob owns a small business and has business
personal property reasonably worth $5,000. It is assessed for $5,000. The annual
personal property taxes, based on a 3% tax rate, are $150. The penalty for not
rendering is $15. Should Bob make sending the rendition form to the appraisal
district a priority above working with his customers, seeking new customers, and
working with his staff?
Owners of business personal property who either are not on the tax rolls or
whose property is grossly under-assessed will have to decide whether to render.
It is clear that the law requires owners to render and there is now a 10%
penalty if you do not render; the amnesty provision provides a modest incentive
to render. Consider the following example: Charlie owns a wholesale distribution
business with $995,000 in inventory and $5,000 in furniture and equipment.
However, Charlie's current BPP assessment is $100,000 and annual taxes are
$3,000. If he does not render he will likely pay annual taxes of $3,000 and a
10% penalty for a total of $3,300. If Charlie does render, his business personal
property taxes will increase to $30,000 per year. It is clear that owners of
business personal property are required to render and that there will be a 10%
penalty for not rendering starting in 2004. Whether owners render will depend
partly on their records, risk tolerance, and corporate culture.
Conclusion
The new business personal property rendition requirements will sharply
increase compliance with rendition laws over the next three to five years. Many
small business personal property account owners will probably not address the
issue until receiving a 2004 tax bill with a 10% penalty for failing to render.
It is unclear how many large accounts are either not on the tax roll or are
substantially undervalued. It is clear there are some, but from a practical
perspective this writer has not seen or heard of many such cases.
The benefits of the law are that it will make taxation more equitable between
business personal property and real property. It will also make business
personal property taxes more equitable between those who do and do not render.
Less attractive features of the new rendition requirements are an increase in
tax revenue and an increase in paperwork for businesses.
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