A guide to personal property tax: What US businesses need to know to realize savings on their personal property tax liability

What is business personal property?

Business personal property is the property owned by a business that is not categorized as “real property” - which is defined as the land and buildings. Personal property is the contents of the building that are not affixed – such as computers, desks, equipment – but may also include business-related vehicles in some jurisdictions.

Business personal property is assessed and taxed in 37 of 50 states, as well as the District of Columbia. In 13 of those states, business inventory is included in business personal property and is subject to tax – although there may be exemptions available for inventory that does not stay within the state.

How is the amount of tax on personal property determined?

Personal property tax is a state and local tax, generally used to fund municipal and school operations and repairs. The tax liability calculation is based on the assessed value of all personal property owned by the business, less any exemptions. The tax rate may be fixed by the state (subject to adjustment by voters) or may be determined based on the value of the assessment base. In those jurisdictions where the latter applies, the total assessed value of personal and real property forms the "assessment base". In general terms, the total amount of funds needed to be raised from the property tax are divided by the total assessment base to determine the tax rate. The tax rate is applied to each property’s assessed value to determine the property’s tax liability.

Exemptions vary in each jurisdiction, but the most common ones include:

• Values below a certain threshold

• Inventory in transit

• Costs related to sales tax, freight and installation

While the value below the taxable threshold will automatically be exempt from the tax, to obtain the exemption for inventory in transit, businesses often must file a separate form and/or provide additional information. In some states the deadline to provide the exemption information can vary from that of the personal property tax return. In the case of exempt costs, every state defines "taxable cost" differently, so businesses with multi-state personal property assets need to be aware of these differences and avoid taking a “one size fits all” approach to personal property compliance.

How is the assessed value of personal property determined?

The assessed value of personal property is determined using the cost approach. The cost approach is based on the premise that a buyer will pay no more for an asset than the cost of a substitute of equal utility. The index factors and depreciation rates used to value personal property are generally determined based on tables published by the Assessor’s office, which are often based on a cost manual such as Marshall & Swift.

Interested in our 2023 summary of key facts and dates regarding personal property tax across the US? Download our 2023 guide

Why businesses pay too much in personal property tax

The wide range of personal property tax rules, forms, exclusions and deadlines may be difficult to manage effectively, particularly for businesses which operate in multiple jurisdictions, in addition, personal property tax assessments are often not an accurate reflection of the true market value of the assets. This is why a proactive and diligent approach to filing returns, making payments and reviewing assessments can often reduce a personal property tax liability.

The first step in a proactive approach is to be compliant with all the varying requirements and deadlines. Many jurisdictions have significant financial penalties for late filing – the combined costs of late filing fees and interest can increase the total tax cost by 10% or more. Businesses that overlook filing forms for exemption or fail to deduct exempt costs on returns are at risk of receiving an assessment that is overstated.

Once personal property returns are filed, the assessment authority will apply its rates and tables to determine the assessed value. It should be noted however that even carefully completed returns can result in an assessment notice where the value is still overstated. Business personal property tax assessments are required to reflect true market value. Cost indexes and depreciation tables do not account for market conditions and/or all forms of obsolescence. They do not necessarily reflect valuation within the buyer/seller market but instead only attempt to measure the physical depreciation an asset experiences.

Fortunately, this process allows for a challenge of the personal property assessment, if an appeal is filed prior to the deadline. Personal property tax experts can identify the potential benefits of filing appeals and assist with arguments supporting potentially significant reductions in assessed value.

How can you reduce the amount of personal property tax you pay?

The keys to successful management of personal property tax liabilities are:

• Be aware of the deadlines - avoid penalties for late returns and/or late tax payments

• Take advantage of all exemptions

• Ensure you file appeals before the deadline

• Engage an expert to review personal property tax assessments, manage tax compliance and identify key savings opportunities