Business Personal Property Filing Strategies in Texas

Published by admin on

Texas Property Tax Code 22.01 requires businesses to file Business Personal Property Tax Returns for all tangible personal property used for the production of income that is owned as of January 1 each year. Many people still neglect and/or fail to render timely by the April 1st deadline. In either case, a 10% penalty is added to your tax bill if this requirement is not met.  Delta Property Tax Advisors helps businesses meet filing deadlines and identify the best filing strategy for Business Personal Property. 

For Business Personal Property valuation Texas Appraisal Districts utilize valuation factors to estimate depreciation. These factors are developed based on a mass appraisal approach and are geared toward high output appraisal processes. The Mass Appraisal Method has limitations in measuring external factors that influence market values, such as the online growth e-commerce affecting the retail industry, underutilized or idle assets used in manufacturing, or equipment that suffers additional depreciation due to excess use.

Requirements Under Texas Law for Reporting

The Texas Property Tax Code allows two options for Taxpayers when filing a Business Personal Property Returns in Section 22.01 (a)(5) which indicates the return must contain either:

Option 1: The property owner’s good faith estimate of the market value of the property. Or

Option 2:  The original cost new and original year of acquisition of the property.

Reporting personal property utilizing option 1, the owner’s good faith estimate of market value, taking into consideration recent trends affecting the market value of business personal property can significantly reduce the number of protest filed each year and save a considerable amount in property taxes. 

Benefits of Protesting Business Personal Property

While many taxpayers focus more heavily on pursuing reductions in real estate market values, there are several benefits of pursuing protests on business personal property in Texas. For high output processes, Mass Appraisal Methods are efficient; consequently, they do not account for industry trends which should be taken into consideration.  To counter errors inherent in the Mass Appraisal Approach, Chapter 41.41 of the Texas Property Tax Code entitles a property owner to protest the appraised value of the owner’s property for (1) market value; and/or (2) unequal appraisal.

The option to pursue protest on business personal property significantly outweighs any risk to a client.  Having worked with most counties in the Texas, our relationships with appraisers have afforded us the ability to settle close to 90% of our protests informally without an ARB hearing.  Common issues we file protests for include:

  • Classification Discrepancies
    • Differences between local property tax classifications vs accounting principles and income tax laws can result in paying excess taxes.
    • Real Estate/Leasehold Improvement costs are often booked to M&E accounts. 
  • Market Value Protest Due to Changes in the Industry
    • Online sales have increased 75.8%, to $341.7 billion, over the past 5 years.
    • 1/3 of all retail transactions are done on Amazon, whose shelves are in warehouses.
    • Mom and Pop stores are going out of business, secondary market demand for FF&E is declining sharply.
    • Depreciation tables that assessors use to arrive at market value account for physical wear and tear but ignore the loss in value resulting from factors external to the property.
    • We have successfully used a Percent of Cost – Sales Comparison technique to estimate additional depreciation not included in the Mass Appraisal model.
      • This technique establishes a ratio between the selling price and current cost new of a property.
      • For example, an appraiser is valuing ‘shelving’ and market research identifies that selling prices of multiple ‘shelving’ assets with similar age and condition are trading for 50% of current cost new.  Therefore, it is logical to conclude that the subject’s ‘shelving’ asset would have a similar relationship to the actions of buyers/sellers in the market and experience the same 50% depreciation.    
      • In Texas, for a major pet retailer, we were able to save over $500K in property taxes using this technique.
  • Inventory Valuation
    • Cost does not always equal value.
    • Texas Property Tax Code, in Section 23.12 (a), defines the market value of inventory as: “The price for which it would sell as a unit to a purchaser who would continue the business.”
    • Factors affecting inventory value in Texas include excess cost, obsolescence, shrinkage, damage, price changes, intangibles, spoilage, and intangibles (brand names, sales tax, etc.).

Protesting accounts with the above issues does not create additional work or cost for the client unless a reduction in property taxes is achieved.  There are ways to reduce the number of protest filed each year by taking advantage of filing option 1 allowed by the Texas Property Tax Code. 

Potential Impact in Texas. 

The potential impact of not challenging the assessor’s valuation could result in paying excess taxes for erroneous errors, erroneous classifications, and overstated appraised values.

Still, filing proactively using an owner’s estimate of market value is not always going to result in the correct market value being placed on the subject property.  Filing a protest and taking the argument in front of an ARB is sometimes the necessary step in the process.  Increasingly, ARBs are ruling in favor of taxpayers who can properly show that changes in their industry have affected the value of their personal property. 

To further discuss the benefits of protesting, property tax code filing requirements and/or the potential effect these issues may have on your property taxes please do not hesitate to contact Delta Property Tax Advisors at 512-640-0891.