Cutting Costs: Saving Money On Personal Property Taxes
By Larry Czaplyski
What business cost do the owners of medical practices pay automatically year after year without ever attempting to manage or understand? The answer is the personal property tax. And yet with some basic planning or professional help, personal property taxes provide a great opportunity for cutting costs.
These taxes require businesses to pay a tax on various types of assets based on the fair market value of the asset. With thousands of local jurisdictions in over 40 states, the rules can get confusing. You may have one return to complete or you may have to file a return for each tax jurisdiction where you own property.
On the return, you’ll need to identify the type of business you’re in and your location. You’ll also need to categorize the different types of equipment you own and provide the original cost of the property. You won’t know what you owe until you receive an assessment notice or a tax bill.
According to Michael Horwitz, a partner with Ernst and Young’s Property Tax division in Boston, you could be paying more than you should on equipment that’s obsolete, no longer in use, or worth much less its assessed value. Among the most vulnerable are businesses that use large amounts of high-tech equipment. If your depreciation schedules don’t accurately reflect obsolete technology, you’re probably being overtaxed on equipment, says Horwitz.
Checking Up in Michigan
When Craig McEachern of Norman Levy Associates, Inc., an industrial auctioning, liquidation and appraisal firm, was appraising a nuclear medicine machine built in 1989, he discovered there was quite a difference between the assessor’s valuation and his own. “It was assessed at $290,000. When we checked the make, model, its desirability in the marketplace…we found that no one would buy it at any price even though a similar machine now goes for about a $1,000, 000.”
How could it have been assessed for so much? The answer is that over assessments can happen because the information that’s used in the assessment process is often unverified or just plain wrong. And that’s not always the tax assessor’s fault: businesses typically don’t pay much attention to this tax.
David Levy, Executive Vice President at Norman Levy Associates, says “…it’s an area that’s overlooked by many controllers… businesses don’t put a high value on it…but the increasing reliance on local taxes may lead to heightened awareness. Taxpayers need to recognize if they can get adjustments, it will lead to future savings.”
Among the reasons for wrong information is poor asset management. Donald Barnes of BenchMark Asset Appraisals in Norfolk VA, says that often practices “…group purchases together and don’t show them as individual purchases. They may buy ten examining tables and just list them all as equipment. When practices begin to grow rapidly, there’s no one in charge of assets…they loose track…no one is responsible.”
Mark A. Hafner, a Health Care consultant with the PM Group in Toledo, Ohio tells of a client who ran out of room at his office for his old lab equipment. “He took it home and put it in the basement…and it was still on his fixed asset sheet.” According to Hafner, ” If assets are out of service or no longer in use, get them off the fixed asset schedule. If equipment is sold, remove it.”
John Healy, managing director of the Deloitte & Touche Center for Multistate Taxation at the University of Wisconsin—Milwaukee and former Tax Manager of GE Medical Systems says of the personal property tax “…in most states, no matter what the age of the item or its class, it rarely drops below 15%-20% taxable value, as long as the item remains on the books, whether it is utilized or not. Combine that with the fact that most taxpayers do not do a good job of maintaining their fixed asset removals and the result is that taxpayers are frequently over assessed for personal property tax purposes.”
Typically, an assessor asks you to report the value of your equipment at its original cost and the year you bought it. The assessor determines value using standard depreciation tables. But the problem with computers and other hi-tech equipment is that the bottom of the tables isn’t low enough to indicate real market value.
In several recent decisions, courts have decided that depreciation tables didn’t accurately show the market value for used computer equipment. Taxpayers in Colorado, Michigan, Virginia and Washington have obtained reduced valuations of computer equipment based on technological obsolescence.
The Colorado Supreme Court decided that published pricing guides were reliable sources of pricing information in upholding a reduction of property tax assessment on computer equipment based on technological obsolescence.
In Michigan, the state Tax Tribunal decided in two cases that information relating to the effect of technological obsolescence on the market value of computer equipment justified a reduction in its assessed value.
In a Fairfax County, Virginia, the state Supreme Court ruled that the County’s use of a fixed depreciation schedule to assess business tangible personal property tax can be disregarded if it does not reflect the fair market value of equipment that has become technologically obsolescent.
In Washington, the State Board of Tax Appeals decided that sales data that shows technological obsolescence can reduce the value of property even though the income flows from the equipment have not decreased.
Robert Zises, President of NACOMEX USA, a company that specializes in computer valuations, believes that many tax authorities are developing accelerated depreciation schedules for equipment that, like computers, loses its value rapidly. But, “…because few authorities have actually studied the depreciation rates for the computers within their jurisdiction… they are vulnerable to a taxpayer who has a professional appraisal…”
According to Zise, however, it’s important to determine whether the “…computer functions are embedded within the medical equipment or play an integral role. Whether the equipment falls under the category of “computer” or “medical equipment” has a major impact on the assessment and its useful economic life for tax purposes. Computers generally carry a faster depreciation schedule and a shorter economic life than medical equipment.”
But the useful life of medical equipment is getting shorter. Fred Benkert, Director of Resource Management Services for Marquette Medical Systems believes that “…the life cycle of medical monitoring equipment is getting shorter and shorter due to two primary reasons. The first is that today most medical equipment uses a standard PC with custom designed software to monitor the patient. The second issue is the significant attention given to designing specific process saving features within the software.”
He states that “…the combination of the obsolescence cost, due to the changing PC base, and the opportunity to save on labor costs, due to the process improvement features designed into the new software, leads to a naturally shortened life cycle. ”
But while tax jurisdictions are starting to change the way they value computers, they have yet to apply the same logic to medical equipment. According to John Healy, medical care providers, “…must do what businesses did with their PC assessments…they must demonstrate through advances in technology and the third-party resale market that equipment does have an extremely high rate of obsolescence.” The result, as he sees it, would be “…lower tax bills for the users, lower health care costs for consumers and more equitable assessments.”
Bill Quinn, Director of Property Tax for Coopers and Lybrand in Virginia, feels that medical practices are at a disadvantage compared to other industries that use high-tech equipment. Because they’re not as big, “…they’re flying below the radar screen of a Big Six firm…just like big pharmaceutical companies invests in a lot of R&D to make drugs, the Big Six invest a lot to find wherever the tax saving opportunities are…but you’d be hard pressed to find people at the Big Six who could economically afford to service an individual medical practice.”
He believes that if he were the owner of a medical practice, “I’d go to my association and see if I could create better purchasing power. That would be the way that the service provider and the people who need the service can get together economically.”
Whatever the source of the overpayment, the way to cut your bill is to demonstrate a lower current value. In addition to filing on time and following all the local jurisdiction’s rules and procedures, here are steps you can take:
Conduct regular asset reviews to see which assets really exist and whether they’re still being used. “As long as you hold the asset, there’s a minimum tax you pay…it’s important to get it off the fixed asset schedule,” advises consultant Hafner.
Identify overvalued assets. Depreciation schedules are based on a property’s standard life. However, if there is an especially high level of use, the property’s value may have significantly decreased. David Levy says, for example, that “Examination tables often don’t hold value,…with wear and tear, design and ergonomic changes… they can lose value much more quickly than the schedules show.”
Determine where all your assets are located. If you have offices in different tax jurisdictions, and it makes business sense, keep equipment in whatever location is cheaper from a tax viewpoint.
Identify obsolete assets. Changes in technology affecting value most frequently occur with high-tech equipment. Even though a jurisdiction’s depreciation schedule may categorize computer equipment as having a 5-year life, because of changes in technology, the useful life of the equipment may be only 3 years or even less. The best way to show this, according to Michael Horwitz, is with a “…fair market value opinion,…and it’s important that the value conclusion be independent.”
Make certain that assets are classified correctly. Tax jurisdictions typically have different depreciation schedules with varying rates for different equipment. By making sure that your equipment is classified properly, you will ensure the lowest taxable value for those assets throughout their useful life.
Distinguish between real property and personal property. If you have personal property included in your real estate assessment, you’ll be paying both real property and personal property taxes. Remember that over time real property usually increases in value, while personal property usually decreases in value.
Examine any lease agreement to be certain who pays the personal property tax: the lessee or the lessor. Robert Zise notes that while taxes on leased equipment are typically “…the obligation of the leasee…tax appeals must be initiated by the leasor. This can present problems in appealing an over assessment.”
If you exercise a bargain purchase option to buy a piece of leased equipment, follow Mark Hafner’s advice and “Make sure if your accountant has capitalized it, he removes it from the return.”
Find out what exemptions are available. Some states provide monetary exemptions. For example, Ohio exempts the first $10,000 worth of equipment. Many jurisdictions provide exemptions from personal property tax for certain types of software and pollution control property. You’ll have to check with your local assessor to find out what the exemptions are in your area.
If you purchase used assets, take care that they are not assessed using the same depreciation schedule as similar new equipment.
Probably one of the most important things that you can do is to give someone in your practice the responsibility for maintaining records of all assets including the date of acquisition, cost, condition, whether they are still in use, and if you still own them. According to Michael Horwitz this is important because, “in most areas assessors accept what the taxpayer files.”
If you decide to look for consultant help, look for someone with an expert knowledge of your local tax jurisdiction, an understanding of the valuing of medical equipment, and solid recommendations.
The personal property tax is a major fixed expense for businesses. But if you follow some basic rules like properly categorizing your assets and identifying nonexistent, overvalued, or obsolete equipment, you should realize some tangible savings on the cost of running your practice.
The Deloitte & Touche Center for Multistate Taxation at the University of Wisconsin – Milwaukee, School of Business Administration provides information regarding state and local tax issues. For additional information contact: John C. Healy (414) 229-2262 email@example.com
The International Association of Assessing Officers (IAAO) is an educational and research association of individuals in the assessment profession and others with an interest in property taxation (312)819-6100 130 E. Randolph – Suite 850 -Chicago, IL 60601.
Tax Executives Institute, 1200 G Street, NW, Washington, DC 20005, Phone 202- 638-5601, is the principal association of business tax executives in North America.
The Committee on State Taxation (COST) is a non-profit trade association that monitors state and local tax judicial, administrative and legislative issues. Contact them at 122 C Street, NW, Suite 330, Washington, DC 20001, 202/484-5222, fax 202/484-5229 or via e-mail at firstname.lastname@example.org.
American Association of Healthcare Consultants, 11208 Waples Mill Road, Suite 109, Fairfax, VA 22030-6077, Tel: 703-691-2242, 800-362-4674 · Fax: 703-691-2247. Email: ConsultAHC@aol.com
The Healthcare Financial Management Association (HFMA) is the nation’s leading personal
membership organization for more than 35,000 financial management professionals. Call 800-252-4362, (708) 531-9600 or (800) 252-4362.
The American Society of Appraisers is an organization of appraisal professionals located at 555 Herndon Parkway Suite 125, Herndon, VA 20170. call ASA’s toll-free appraiser referral line 800-ASA-VALU.
Institute for Professionals in Taxation, 3350 Peachtree Rd., NE, Suite 280, Atlanta, GA 30326
Phone: (404) 240-2300. Provides tax professionals in the private/corporate sectors with current tax information.
Bill Quinn, Director of Property Tax for Coopers and Lybrand, 1751 Pinnacle Drive, McLean, VA 22102
Craig McEachern -Appraiser at Norman Levy Associates, email@example.com, 248-353-8640
David Levy – Executive VP at Norman Levy Associates, firstname.lastname@example.org, 248-353-8640
Fred Benkert, Director of Resource Management Services for Marquette Medical Electronics,
John C. Healy , Managing Director of the Deloitte & Touche Center for Multistate Taxation at the University of Wisconsin—Milwaukee, email@example.com, (414) 229-2262
Mark A. Hafner, Health Care Consultant with the PM Group in Toledo, Ohio, 419-841-2882
Michael Horwitz – Partner, Ernst & Young, 200 Clarendon Street, Boston, MA 02116 firstname.lastname@example.org, 617-859-6406
Donald Barnes of BenchMark Asset Appraisals, Norfolk, VA, refer to Banister Financial in Charlotte
Robert Zises, President, NACOMEX USA, 230 Park Ave., Suite 1000, NY, NY 10169 email@example.com, 212-681-9211
Colorado Supreme Court: IBM Credit Corp. v. Jefferson County, 888 P.2d 250 (1/17/95)
Michigan Tax Tribunal: IBM Credit Corp. v. Grand Rapids, No. 172989 (12/2/94), and IBM Credit Corp. v. Detroit, 7 MTT 850 (1993)
Virginia State Supreme Court: Board of Supervisors of Fairfax County v. Telecommunications Industries, Inc., 436 S.E.2d 442 Va. 1993
Washington Board of Tax Appeals: King County Assessor v. IBM Credit Corp., Wash. Bd. Tax App., Nos. 40738-40739 (6/10/93)