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Texas Business Personal Property Rendition and TaxationOctober 2003
Texas Business Personal Property Rendition and Taxation
Written by Patrick C. O'Connor, MAI
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.
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.
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.
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.
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.