By Mark E. Battersby
Despite all of the attention focused on income taxes, it’s the bill for the tax on the property owned—or leased—by many industrial textile products businesses that is the biggest expense, and the most difficult to manage. According to the Council On State Taxation, a Washington, D.C. think tank, American businesses shell out more on property taxes than for any other type of state or local taxes.
The Moody’s/REAL Commercial Property Price Index of U.S. commercial property is an amazing 43 percent below its October 2007 peak. Chances are, however, that the next property tax bill received by your business will be based on the pre-recession real estate value of the business property.
While there is probably a long line of property owners, both residential and commercial, waiting for relief from the taxes assessed on the rapidly declining real estate and business property market values, lowering business property tax bills is both feasible and necessary in today’s economy. Don’t forget that property taxes also affect many commercial tenants as well. Fortunately, the goal of lower property tax bills year after year can be accomplished with a few simple strategies that have worked in all of the more than 14,000 taxing jurisdictions.
Because property taxes are generally levied by thousands of jurisdictions, all too often they are treated as a fixed cost by a specialty fabrics professional and ignored as a source of savings by many business owners and managers. The potential for major savings exists in this area because, once reduced, the savings generally remain effective year after year.
Property taxes are often viewed as a system in which all property is valued uniformly and taxed at a uniform rate in each taxing jurisdiction. Local governments in all 50 states and the District of Columbia rely on rules established by their state constitutions and laws. Most state constitutions do require uniformity; however, in practice, no two states have identical property tax systems. In fact, in some states, rules are left to the discretion of local governments, so the system isn’t uniform even across a single state.
With more than 14,000 property tax systems, there’s little wonder that so little is known or understood about this tax. Factor in the large numbers of often inexperienced officials charged with the task of placing a value on the properties within their jurisdictions, and the result is a chaotic, little-understood tax that often goes unchallenged by those paying it.
Unlike most taxes, property taxes are computed by the local government, and the taxpayer is usually told only how much to pay. Few business owners or managers are aware of how easy it is to check the computation of that property tax bill—and that of the underlying valuation.
Armed with a few facts about your operation’s property, it is relatively easy to review the tax assessor’s records for the property. Such records are considered public information and are available to everyone. Most tax assessors, elected or not, are eager to cooperate and usually willing to correct any errors detected and brought to their attention.
Renters pay taxes, too
Many fabricators may own little or none of the property used in their operations. Just because the business rents its shop, showroom, warehouse or office space, however, doesn’t mean that property taxes can be ignored. In the Northeast, for example, studies show that property taxes range from 15 to 25 percent of the total rent paid by most businesses.
Renovations made by either a building’s owner or a tenant can often lead to an increase in property taxes. The cost of major renovations or alterations made at the request of a tenant is often amortized through the rent, especially if the landlord borrowed to finance the work.
In many cases, the taxing authorities assess buildings based on income stream, without consideration of a landlord’s debt. Far better for many tenants is to negotiate rent for the business property “as is,” and work out some form of third-party financing for renovations. Although few tenants want to use their capital, this strategy should be weighed against the fact that higher rent could have a significant impact on property taxes.
While few business people have the clout to insist that their lease require the landlord to initiate a property tax protest at the tenant’s request, such a clause is strongly recommended by many real estate experts. Ownership of the property and a direct relationship with the taxing authority often makes it better from a logistical and legal standpoint for the landlord to lead the battle for lower or more equitable property taxes.
Reducing the bite
In most states, the starting point for determining the property tax base is all real and personal property, both tangible and intangible. Real property usually refers to land and anything permanently attached to it. Personal property includes anything that is the subject of ownership not permanently affixed to or a part of real property.
Fortunately, in no state does the tax base encompass all real and personal property; and in no two states is it the same. Illinois and Iowa, for example, include only real property in their tax bases, and most states exclude intangible property. Florida, Kentucky and Missouri are among the exceptions that do tax intangibles such as patents, trademarks, copyrights, brand names, franchise agreements and licenses.
Among the states that could constitutionally tax all real and personal property, none does. Instead, various means are used to remove property from the tax base. Certain types of property are granted full or partial exemption based on the characteristics of the property and/or its owner. In some states, different types of property are assessed differently or taxed at different rates.
The first questions every business owner or manager should be asking are: Should my business property be taxed? And, if so, is it being taxed at the proper tax rate?
Fighting the assessment
All property taxes are considered ad valorem taxes: that is, taxes based on the value of the property. Since so many variables enter into the equation, it’s rare that the assessor and the property’s owner will agree on a value.
Armed with a few facts about the property, it’s relatively easy to review the tax assessor’s record for the property. These records are, after all, public information. Tax assessors are usually willing to cooperate, and to correct any errors brought to their attention.
And those errors definitely exist! Two-story buildings recorded where only a one-story building stands; a two-hundred-foot building on a lot only 75 feet deep; basements where none exist; parking lots that are on a neighboring property. Math errors and mistakes in the property’s measurements, construction materials, roof type and conditions are quite common, and can be quickly corrected by the property tax assessor on the spot.
If the assessor cannot or will not correct errors discovered on the assessment record, or if the business owner or manager wants to challenge an assessment, the matter is usually presented to a local appeal review board. In some jurisdictions, it may be necessary to complete and submit a formal complaint and appeal form before going to the local review board.
If the local property tax review board denies a request for a lower valuation, the next step is to present the case to the state board of appeal. And, finally, in rare instances, the entire matter may be taken to court.
Obviously, no one should challenge the property tax authorities without a clear-cut case. If your facts are wrong, you could end up making matters worse. Fortunately, there are a number of good consultants who can help reduce local property taxes. Many of them will work entirely or largely on a contingency basis. There are also attorneys, known as certiorari, or property tax protest attorneys, who provide these services.
Few business owners, managers or executives give enough thought to property taxes. Some may check the calculations to ensure the property tax bill is error free; little effort, however, is usually spent on finding out whether that assessment is in line with similar properties, whether the property is properly identified or even whether the assessment is actually based on the correct property.
A few years ago, a study showed that few major Fortune 500 companies bothered to challenge the assessment on their properties. However, according to that same study, almost nine of ten companies that did challenge their property tax assessments were successful. Now’s the time to check whether the property tax assessment on your business is both fair and correct—and contact your tax assessor if it isn’t.