Business Personal Property Tax Compliance: Key Fundamentals Understanding Key Dates, Assessment Ratios, Market Valuations and Other Essentials

Transcription

1 Presenting a live 110-minute teleconference with interactive Q&A Business Personal Property Tax Compliance: Key Fundamentals Understanding Key Dates, Assessment Ratios, Market Valuations and Other Essentials TUESDAY, MARCH 5, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Laura Bellotti Cardillo, Member, Pullman & Comley, Hartford, Conn. Jesse Noneman, Senior Manager, Property Tax, DuCharme McMillen & Assoc., Indianapolis For this program, attendees must listen to the audio over the telephone. Please refer to the instructions ed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at ext. 10.

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5 Business Personal Property Tax Compliance: Key Fundamentals Seminar March 5, 2013 Jesse Noneman, DuCharme McMillen & Assoc. Laura Bellotti Cardillo, Pullman & Comley

6 Today s Program Personal Property Overview, Key Compliance Dates [Jesse Noneman] Using A Market Valuation Methodology [Laura Bellotti Cardillo] Assessment Ratios [Jesse Noneman] Business Personal Property Return Examples [Jesse Noneman] Late-Filing Penalties [Laura Bellotti Cardillo] Typical Audit Red Flags [Jesse Noneman] Assessment Appeals [Laura Bellotti Cardillo] Tax Savings Processes/Internal Reviews [Jesse Noneman] Slide 8 Slide 18 Slide 19 Slide 25 Slide 26 Slide 27 Slide 28 Slide 41 Slide 42 Slide 47 Slide 48 Slide 51 Slide 52 Slide 58 Slide 59 Slide 64

7 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 7

8 Jesse Noneman, DuCharme McMillen & Assoc. PERSONAL PROPERTY OVERVIEW, KEY COMPLIANCE DATES

9 PERSONAL PROPERTY OVERVIEW Purpose of an ad-valorem tax Public entities that benefit from property taxes Entities responsible for administering property tax assessment and billing Who pays personal property tax States that tax personal property NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 9

10 PURPOSE OF AN AD-VALOREM TAX Intention is to impose a tax in proportion to an individual s/company s relative wealth Provides a reliable and consistent stream of revenue for public services Provides a level of fiscal independence for local governments Difficult to find a replacement funding source NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 10

11 PUBLIC ENTITIES THAT BENEFIT FROM PPT Schools generally the largest benefactor Fire departments General county/township Library State Special projects (TIF districts) NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 11

12 ADMINISTRATION OF PPT Generally, personal property is SELF-ASSESSED. Auditor sets the budget. Assessor is responsible for assessment of property. Generally, at the local level, some states assess via centralized function. Treasurer - responsible for collection of taxes Some states have different names for entities; however, there is generally a separate department for Budget Assessment Collections NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 12

13 WHO PAYS PPT? Entities engaged in income-producing activities (e.g., all for-profit operations) in a state that taxes personal property Unlike with real property tax, individual taxpayers generally do not pay personal property tax. NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 13

14 IMPORTANT TO NOTE While every U.S. state taxes real property, a number of them do not tax personal property (not to be relied upon for filing purposes): NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 14

15 STATES THAT TAX PERSONAL PROPERTY (NOT TO BE RELIED UPON FOR FILING PURPOSES) State PPT Tax Fully Exempt Manufacturing Exemption Other State PPT Tax Fully Exempt AL X MT X AK X NE X AZ X NV X AR X NH X CA X NJ X CO X NM X CT X NY X DE X NC X D.C. X ND X FL X OH X X * GA X OK X HI X OR X ID X PA X IL X RI X IN X SC X IA X SD X Manufacturing Exemption Other * Utilities are still assessed PPT KS X All property placed into service after June 30, 2006 is exempt TN X KY X X * * Manufacturing equipment is taxed at a very low rate TX X LA X UT X ME X VT X MD X X VA X MA X WA X MI X Starting to phase out WV X MN X WI X X MS X WY X MO X NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 15

16 KEY DATES NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 16

17 KEY DATES Lien date This is the date of assessment to the owner of the property. Taxes are not pro-rated based upon the portion of the year that property is owned. Most states use 12/31 or 1/1 for assessment. Return filing due date Many are in the first half of the calendar year; however there are some outliers. Deadlines can vary within states (e.g, Virginia and Missouri). Verify whether the state determines timely file by mailbox rule or actual receipt of return Recommend filing via USPS certified mail with return receipt NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 17

18 KEY DATES (CONT.) Extensions available Not all states offer; never assume without annual verification Written confirmation from assessing official is best. Taxes due Generally paid in either one or two installments Taxes not due with filing, but rather billed at a later date after tax rate is established Some states bill in the same calendar year as filing; others bill a year in arrears. Amended return/appeal dates Be sure to verify dates with local officials and/or with the state DOR May not coincide with open audit period May have less than a year to file Return instructions A great source for critical dates NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 18

19 Laura Bellotti Cardillo, Pullman & Comley USING A MARKET VALUATION METHODOLOGY

20 Valuation Methodologies Overview Standard of valuation: Fair market value, not its value at a forced or auction sale Comparable sales methodology Income approach methodology Cost less depreciation methodology A combination of all/any of the three methodologies! 20

21 Valuation Methodologies (Cont.) Challenges of the various methodologies Sales approach: Extremely time-consuming to compile the data Income approach: Usually developed in the context of the value of the business operations Cost-less-depreciation: Schedules may not accurately reflect fair market value. 21

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23 Valuation Methodologies (Cont.) Cost-less-depreciation approach Are all components of the cost of an asset included in the basis to be reported? Sales taxes Design costs Installation fees Transportation costs Costs to disassemble and move an asset 23

24 Valuation Methodologies (Cont.) Cost-less-depreciation approach (Cont. Depreciation factors may be at odds with FMV. Assets may depreciate quicker than schedules reflect. Schedules may not account for various forms of obsolescence: Functional Economic Physical 24

25 Valuation Methodologies (Cont.) Equitable assessments Many states employ both an FMV standard and an equitable assessment standard. Methodology used to value assets of one taxpayer must be consistent with methodology to value similar assets owned by other taxpayers in the jurisdiction. 25

26 Jesse Noneman, DuCharme McMillen & Assoc. ASSESSMENT RATIOS

27 ASSESSMENT RATIOS Not always taxed at market value Some states tax all property at a rate less than market. Some states use assessment ratios as a means of assessing certain types of property at different rates. Example Taxpayer A owns two assets: A copier that cost $20,000 and a piece of manufacturing equipment that cost $100,000. The copier has a percent good of 50% and the manufacturing equipment has a percent good of 35%. Within State X, office equipment is taxed at 40% of market value and manufacturing equipment is taxed at 25% of market value. Let s assume a tax rate of 5%. NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 27

28 Jesse Noneman, DuCharme McMillen & Assoc. BUSINESS PERSONAL PROPERTY RETURN EXAMPLES

29 RETURNS EXAMPLES NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 29

30 RETURNS EXAMPLES Overall, inputs are similar. Each state has a different format and approach to computing market value. States to review here: California Indiana North Carolina NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 30

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32 INGREDIENTS FOR RETURN FILING Balance sheet Fixed asset listing Determine Taxability / Category Data for return NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 32

33 CALIFORNIA NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 33

34 CALIFORNIA RETURN: EXAMPLE NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 34

35 CALIFORNIA RETURN: EXAMPLE (CONT.) NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 35

36 INDIANA NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 36

37 INDIANA RETURN: EXAMPLE NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 37

38 INDIANA RETURN: EXAMPLE (CONT.) NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 38

39 NORTH CAROLINA NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 39

40 NORTH CAROLINA RETURN: EXAMPLE NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 40

41 NORTH CAROLINA RETURN: EXAMPLE (CONT.) NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 41

42 Laura Bellotti Cardillo, Pullman & Comley LATE-FILING PENALTIES

43 Filing Penalties Types of penalties Time of filing Late filing No filing Improper signature/authorization No signature 43

44 Filing Penalties (Cont.) Types of penalties at audit Unreported assets Underreported assets Improperly categorized assets 44

45 Filing Penalties (Cont.) Penalty amounts (Cont.) Penalties can range from 1% to 100% of the assets assessed/market value. Penalty on entire assessment Penalty on underreported or unreported assets only Some jurisdictions have flat fee penalties, sliding scale penalties or caps on penalty amounts Penalties can be very costly. 45

46 Filing Penalties (Cont.) Penalty amounts (Cont.) Some states will waive the penalty in certain circumstances. Usually must establish reasonable cause and lack of willful neglect 46

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48 Jesse Noneman, DuCharme McMillen & Assoc. TYPICAL AUDIT RED FLAGS

49 AUDITS NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 49

50 AUDITS Who conducts audits? Many times, a third party is hired to assist counties on a countywide audit. How often? Depends from state to state, jurisdiction to jurisdiction Have seen an increase in activity across a number of states What are they looking for? Unreported taxable assets Equipment wiring, foundations, generators, installation costs, etc. Be very clear on what are taxable costs associated with equipment Gaps between fixed-asset listing balances and balance sheet Incorrect reporting basis and in-service dates Valuation adjustments (i.e., obsolescence) NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 50

51 AUDITS (CONT.) Opportunities In review of the returns/assets, it may come to light that overreporting has occurred. In some states, this is the only opportunity to access refunds for prior years. Other thoughts Always request penalties/interest to be waived Confirm whether the preliminary auditor has final say in audit findings NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 51

52 Laura Bellotti Cardillo, Pullman & Comley ASSESSMENT APPEALS

53 The Appeal Process Grounds for an appeal Grounds for appealing a valuation include: Value: Would the property sell for the appraised / assessed amount? Taxability: Is the property taxable? Uniformity: Is the assessment /appraisal uniform with other, similar property? 53

54 The Appeal Process (Cont.) Appeals at the local level Complete all portions of the application, or submit a detailed letter explaining grounds for appeal If an agent is representing the property owner, complete and enclose an agent authorization, if necessary, with the appeal application Determine owner s estimate of the value of the property Prepare any supporting documentation for the hearing with the local appeal board 54

55 Superior Court/Board Of Equalization Appeal Appeal from taxing authority/board determination In some jurisdictions, the next step is to appeal to a state Board of Equalization. Appeals from the Board of Equalization are filed with the state Superior Court. Some superior courts allow for the parties to petition for an arbitration proceeding. 55

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57 Superior Court/Board Of Equalization Appeal (Cont.) Evidence to be presented An appraisal determining the assets FMV Expert appraisal testimony Books and records listing assets, acquisition dates and costs of the assets Documentation detailing the various items included in the cost of the assets Testimony of the individual responsible for filing the declaration 57

58 Superior Court Appeal Phases of litigation once an appeal is filed Pre-trial discovery Expert witness report Pre-trial hearing Trial preparation Trial 58

59 Jesse Noneman, DuCharme McMillen & Assoc. TAX SAVINGS PROCESSES/INTERNAL REVIEWS

60 TYPICAL AREAS OF OPPORTUNITY Triggering events Asset classification Valuation NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 60

61 TRIGGERING EVENTS Mergers and acquisitions Recent appraisal Severe downturn in industry Currently under or upcoming audit Property dropping off of abatement Recent legislative changes Recent physical fixed audit conducted Turnover in tax department NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 61

62 TYPICAL AREAS OF OPPORTUNITY: ASSET CLASSIFICATION Real property Land, building and improvements; avoid double-taxation Ghost (disposed) assets Physically disposed of, but still on the books; assets never fully depreciate, for PPT purposes (generally range between 10% - 25%, depending on property type) Intangibles (software, NVA, etc.) Most states only tax tangible PPT; some tax software. Special tooling Unique equipment that has only scrap value, except for current use. Pollution control Generally required for EPA compliance; may be a taxable profit component NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 62

63 TYPICAL AREAS OF OPPORTUNITY: ASSET CLASSIFICATION (CONT.) Rebuilds/repairs Capitalized maintenance; merely maintains functionality Depreciable life Proper classification is critical - manufacturing life is much longer than computer life. Idle equipment Taken out of service with no plans for future use Manufacturing/R&D Some states provide exemption or very favorable tax treatment for manufacturing and/or R&D equipment. NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 63

64 TYPICAL AREAS OF OPPORTUNITY: VALUATION Refresh of fair market value Limitations of state depreciation tables Three forms of obsolescence: Physical (normal wear and tear) Technical/functional (outdated product, inefficient use of energy, etc.) Economic (reduction in demand) NORTH AMERICA S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited. 64