What to know about property tax savings for manufacturers
Turning tax liabilities into cost-saving opportunities for manufacturers
INSIGHT ARTICLE |
It’s a rare case but it does happen: A manufacturer misinterprets state property tax compliance requirements and reports all of its personal property every tax year. Some states, however, only require that the company report additions or deletions to its property. Until the discrepancy is identified, the manufacturer’s property tax essentially doubles each year of the over-reporting.
A more common mistake is the misclassification of assets. For example, a photocopier is estimated by the local assessor to have a 10-year life span and is classified as business equipment. Yet the machine may be more accurately recognized as a network printer, which many jurisdictions assess with a four-year life span. In most cases, assets that are on a company’s books are mistakenly included in the tax base—even if the asset is 100 percent depreciated for GAAP or income tax purposes and is no longer in use.
As an industry, manufacturers have unique personal property and real estate tax issues that are more complex than those in other industries. While this can make valuation and compliance difficult, a comprehensive tax review can prevent tax overpayments, often representing as much as 20 percent of a company’s tax expenditures.
Property tax for manufacturers – what’s different?
Many states provide “favored status” for manufactures, often requiring different or additional forms and regulations in order for the status to be applied. Due dates may not follow the normal timing of other industries on the property tax calendar. These additional filings or qualifications can lead to significant tax savings opportunities.
For retailers or restaurants, property tax issues are fairly straightforward: Whether you offer a Michelin-rated dining experience or fast-food menus, the equipment that can be taxed—tables, chairs, ovens and the like—all have similar uses and lifetimes. This makes valuation and tax requirements somewhat generic across these and other industries.
Manufacturers, however, have a distinct set of property tax issues. Generally, the equipment used by manufacturers is unique to their specific business, and thus needs to be evaluated on that basis.
Real estate may also be customized to the needs of individual manufacturers and, therefore, may need to be valuated differently. The value of the real estate can fluctuate based on external influences such as economic cycles and market forces—not just by cost and obsolescence—and these variances can have a profound effect on the assessed value of the property and the amount of tax assessed.
Controlling personal property tax liabilities
Property tax is frequently seen simply as a compliance issue to be addressed without question. But there are a number of areas where manufacturers may find themselves paying hundreds if not thousands more in taxes than required. A few of the more common areas of overpayment include:
- Value tables: Each assessor’s office maintains its own set of tables calculating how long various equipment will last. The manufacturer who owns the equipment may disagree with the assessor’s calculation. But unless the company comes forward with a supporting argument for its point of view, it will continue to pay property taxes based on the assessor’s tables. The differences can be significant: One manufacturer of medical rental equipment calculated the lifetime of its product at two years, but the assessor taxed those same assets based on an assessed lifetime of eight to 15 years.
- Ghost assets: Properties that are no longer in use or have been retired, but are still on the company’s books―sometimes known as ghost assets―continue to be taxed. These assets have been disposed, depreciated, idled or removed from service and yet remain on the record long after their departures. Without change, the assets will continue to be taxed at a minimum of 10 to 15 percent of the original cost until they are removed from the records and the retirements are properly reported to assessment jurisdictions.
- Ownership: Manufacturers tend to include property on their books that may belong to third-parties and, as a result, mistakenly pay taxes on that property. For example, when a company makes a contribution to a community to pay for enhanced utility capacity needed for production, the utility may need to install a transformer on the premises to accommodate the greater capacity at the facility. For income tax purposes, the manufacturer can depreciate the costs over time. But for property tax purposes, the transformer belongs to the utility and is not a tangible asset belonging to the manufacturer. This distinction, however, is often not made by manufacturers—and they pay for it.
- Leased equipment: States differ in their requirements regarding the rendering of a leased asset. Some require the lessor to file, others require the lessee to file, and some states, like Wisconsin, require both to file and reconcile. Manufacturers need to understand what is required of them as well as ensure that the distinction is made between leased and owned assets.
- Location: Some property may be located at a vendor’s location or customer’s site, and subject to different compliance requirements from the manufacturer’s jurisdiction. The compliance for a company with distributed assets can be complex, and can be made more so when assets are relocated or in transit. A thorough compliance plan can reduce the property tax liabilities of these assets.
- Asset classification: As noted earlier, manufacturers sometimes determine that equipment belongs in a certain asset class when it more accurately—and sometimes more favorably—should be in another. Some states will allow exemptions for property that is part of a manufacturing process. However, companies need to be careful about what constitutes equipment actually used in the manufacturing process. For example, a forklift that moves partially completed items through a manufacturing procedure might be exempt, but the forklift used at the loading dock would be taxable. In addition, assets incorrectly classified as personal property could be taxed as both personal and real property, leading to double taxation. These definitions vary widely by jurisdiction, making a clear-cut understanding of the laws and regulations in each jurisdiction a necessity.
A process for asset classification review
Clearly, many factors affect manufacturers’ personal property tax obligations―exemptions, asset life designations, duplicate reporting of real estate property as personal property and the like. With the additional complexity of filing dates and classifications varying from state to state, it is easy to see where the decisions made or missed can result in a measurable impact on a company’s overall tax liabilities.
A simple, methodical approach in reviewing a company’s assets can help address these issues:
- Remove: Eliminate any assets that are not taxable, belonging to others, or no longer in existence.
- Identify: Reclassify assets that should be in beneficial classes, qualify for faster depreciation or need to be separated for obsolescence calculations.
- Avoid: Prevent double taxation by correcting any assets that are categorized both as personal property and real estate.
- Claim: Request any exemptions or preferential categories to which the company is entitled.
- Review: Assess classifications for reasonableness and assets for possible obsolescence.
Addressing and preventing the overpayment of property taxes often requires resources dedicated to identifying overvaluations, missed exemptions, improper classifications and other common property tax compliance mistakes. The investment in time and effort can help generate tax savings today and position a manufacturer to reduce its overall tax exposure for years to come.