Companies that do business in Texas often overpay personal property taxes on their inventory. The problem may occur because of a misinterpretation of the Texas Property Tax Code. By fully understanding the state's statutory language, reporting can be improved.
The Texas Property Tax Code Sec. 23:12 states that, "The market value of an inventory is the price it would sell for as a unit to a purchaser who would continue the business."
Let's break that down:
"The market value of an inventory..." Market value is what something would sell for if exposed for a reasonable time on the market with both a knowledgeable buyer and seller who are not acting under duress. The cost or net realizable value of inventory may not represent its market value under this definition.
"...is the price it would sell for as a unit..." As a unit implies that inventory would be sold in bulk rather than by piecemeal transactions. In estimating a market value, an appraiser would consider actual transactions, costs and estimates of what the items would or could sell for as a unit.
"...to a purchaser who would continue the business." This carries the condition that the market participants are in the same line of business. It precludes auctioneers, liquidators, or buyers not perpetuating the seller's business line.
Furthermore, Sec. 23.01(b) of the Texas Tax Code stipulates that "The market value of property shall be determined by application of generally accepted appraisal methods and techniques... however, each property shall be appraised based upon the individual characteristics that affect the property's market value."
The individual characteristics of inventory make its value for property tax purposes in Texas potentially different than for accounting purposes. If appropriate adjustments to cost of inventory are not considered, inventory value may be incorrectly reported resulting in excess property taxes.
POER developed a questionnaire to help our clients with taxable personal property in Texas determine whether adjustments to their inventory balances are appropriate.
For example, we ask:
1. What is the typical shelf life by segment?
2. Are there rebates or other discounts not reflected in inventory balances?
3. What is the average inventory turn rate for branded product segments?
4. Any slow moving or seasonal inventory segments?
5. What level of shrinkage is typical and are adjustments made periodically?
The answers to these and other questions help us discover and identify useful information for estimating market value of Texas inventory. Since some adjustments relate to annual total sales rather than the closing inventory balance, we use the inventory turn ratio to scale the adjustments to inventory on hand. The end result is reduced tax exposure and a lower tax bill.