A step-by-step example for determining the value of your personal property

Businesses often pay more personal property tax than required because they don’t have a firm grasp on how to value their property. And a lack of understanding can lead businesses to accepting assessments at face value instead of comparing them to their own valuations and deciding whether to appeal.

The more you know about how the assessor values your tangible personal property, the easier it is to perform your own valuations. Armed with that information, you can then have a conversation with the assessor about why you should pay less tax.

To help you better determine the value of your personal property, we’ll use the example of a fictitious window manufacturer and different factors that can affect the value of the company’s assets.

Our window manufacturer, Wally, has invested heavily in his company. He’s purchased three expensive pieces of equipment. 

One is a piece of machinery used for extrusion. It heats up vinyl pellets to make parts that will eventually become a window frame. He also has a saw that he uses to cut long vinyl sticks to the length required for the frame. He then uses a vinyl weld to attach the sticks and create a window that is 3 feet wide and  5 feet high. 

Wally paid $500,000 for each piece of equipment, for a total cost of $1.5 million. However, the value of his equipment has depreciated over time. 

While the reduced value should be reflected on his assessment notice, that’s not always the case. The assessor may not have full insight into the particular reasons the machinery is worth less. 

Assessors frequently use a process called mass appraisal to come up with personal property valuations. Mass appraisal relies on common data and standardized methods to value a group of similar properties. Convincing assessors to forgo their mass appraisal techniques can be challenging. Some states are more resistant than others.

When filling out the personal property tax return for Wally’s Windows, our window manufacturer is used to providing some basic information. He needs to tell the assessor what equipment he has, when he bought it, and what he paid for it. The assessor uses those details to determine the property’s depreciated value based on normal wear and tear. 

The assessor considers the property’s useful life or how long it typically lasts before it needs to be replaced. If the equipment normally can be used for 10 years and it’s five years old, it might be worth 50% of the original purchase price.

Next, the assessor will determine what it would cost to buy that equipment new. Factoring in inflation, that same equipment might cost 20% more today, or $1.8 million.

So they’ll take that $1.8 million, multiply it by 50% to account for age, and come up with an assessed value of $900,000.

But that may not be the full story. Wally’s property doesn’t neatly fit into that typical progression of an asset’s decline in value.

Unfortunately for Wally, his machinery hasn’t been working as well as it should. He used to make 100 windows per hour. But now he can make only 60 windows per hour.

Functional obsolescence is the loss of an asset’s value because it no longer operates as designed. Technology or other features make it outdated or less efficient. 

In this case, the total depreciation of the extruder, saw, and welder is more significant than physical wear and tear alone. Due to functional obsolescence, the machinery is worth 60% of what it would be if it were working well. That $900,000 valuation is reduced to $540,000.

However, the assessor won’t know the equipment is only at 60% functional capacity unless Wally conveys that information on his personal property tax return. Wally doesn’t realize this. So the business is likely to receive an assessment based on the $900,000 valuation, resulting in a higher tax bill.

There’s more to our tale.

Wally’s Windows has another problem. A competitor has flooded the market with less expensive windows. Wally is able to sell only half as many windows as he did before buyers began flocking to the competitor.

Economic obsolescence occurs when an asset is worth less due to external factors outside of the business’s control. Increased competition is just one typical example. Reduced demand is another. If fiberglass windows become all the rage and fewer buyers want vinyl windows, the value of Wally’s machinery could decline.

Once Wally accounts for economic obsolescence, functional obsolescence, and wear and tear, his machinery is only worth $270,000. That’s 30% of the assessor’s original $900,000 valuation.

Remember how the assessor accounted for inflation when valuing Wally’s equipment? The assessor often uses a general inflationary index trend that’s not specific to an industry. What might work to value a tractor might not work for an extractor used to make windows.

It may be that newer technology costs the same amount as Wally’s original investment (or a bit more) but can produce twice as many windows per hour. If an assessor doesn’t consider these technology enhancements, they may over-assess the value of Wally’s machinery.

Wally also needs to understand the taxability of his personal property. Certain items he lists on personal property tax returns may not be subject to property tax. Examples may include raw materials used to manufacture his windows, finished products in his inventory intended for resale, or products on display in his showroom.

When reviewing its assessment, Wally’s Windows should ask whether it could really sell the personal property for the value the assessor determined. If the answer is no, Wally should consider all the ways to describe to the assessor why the value is too high and file an appeal.

You don’t have to be in the window business to get a clearer view of your valuations by automating property tax compliance. Avalara Property Tax makes it easier to manage returns, assessments, bills, and appeals. The solution allows you to account for factors like obsolescence in valuations and provide assessors with the information they need to fairly value your personal property. Contact our property tax compliance specialists to learn how Avalara can help.