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North Carolina - Tax Savings from Obsolescence

by Tom Cunningham, Atlanta, June 2013

 

The refusal of the North Carolina Supreme Court to hear a case that's been in the courts for over a decade signals good news for business property owners.

 

It means that taxpayers who submit evidence of internal and external obsolescence should get more equitable treatment in the valuation of their personal property.

 

Case Denied

 

The state Supreme Court denied the petition of Durham County to hear its case against IBM Credit Corporation's 2001 valuation of more than 40,000 leased computers.

 

Previously, the North Carolina Court of Appeals rejected Durham County's reliance on Cost Index and Depreciation Schedules, which are issued annually by the North Carolina Department of Revenue. The Appeals Court ruled that if taxpayers present compelling evidence regarding obsolescence, then the burden of proof must shift to the county.

 

Most counties routinely apply the depreciation schedules without adjustment even though a memorandum accompanying the depreciation schedules explains that they are meant to be only a guide. The memo states: "There may be situations where the appraiser will need to make adjustments for additional functional or economic obsolescence, or for other factors."

 

Estimating Obsolescence

 

Recognizing and identifying the types of obsolescence applicable to a property is extremely important when the accuracy of a mass appraisal is questioned.

 

There are two general types of obsolescence applicable to business personal property:

1. Internal, or Functional Obsolescence - Loss of value caused by the design of the property itself. Changing technology commonly creates functional obsolescence for machinery and equipment.

 

2. External, or Economic Obsolescence - Loss in value from adverse factors external to the property, usually beyond the owner's control. For example, inadequate demand for a product relative to production capacity.

Officials with the North Carolina Department of Revenue insist that when properly used, the current Cost Index and Depreciation Schedules are efficient tools to correctly value business personal property.

 

However, since the state Supreme Court chose not to intervene in this issue, counties should be more open to accepting documentation of obsolescence and offering property owners assessment relief.