Each year, states enact tax law changes and create local government programs that provide personal property tax breaks for businesses. These concessions come in various forms—deductions, incentives, credits and exemptions (i.e., D.I.C.E.), and they have a significant impact on whether businesses remain viable. Many states commonly impose ad valorem tax on machinery, equipment, inventories, and fixtures. Small and large business owners must navigate the tax laws carefully to avoid the pitfalls that lurk when it comes to knowing how tax should be measured, when to file returns, and whether the tax is self-reported. More importantly, business owners must know how to successfully claim a reduction in tangible personal property tax.
But the complexity of the D.I.C.E. approach as well as the variances between jurisdictions begs the question: wouldn’t it make more sense for states to repeal their business personal property taxes?
Personal Property Tax Reform
Typically, local governments levy personal property tax and states impose limits on how these local jurisdictions tax. While the revenue generated by the tax can certainly be put to good use, like improving parks and schools, businesses can sometimes be subject to double taxation. First, by having to pay sales tax on nonexempt personal property purchased and used in the business, and then on the depreciated value of the same property.
What constitutes double taxation? Lawmakers in California say it “occurs only when two taxes of the same character are imposed on the same property, for the same purpose, by the same taxing authority within the same jurisdiction during the same taxing period.” But some would argue that this definition is too narrow and should include different types of taxes on the same property.
Several states have eliminated personal property taxes. Among the leaders in this trend are New York, Ohio, and Iowa, as reported by the Tax Foundation. Similarly, BBNA’s Michael Kerman reported last year on Michigan’s move toward elimination. Under Michigan’s plan to repeal personal property tax, all business tangible personal property will be exempt by 2024.
Those states lagging behind in the move toward total elimination offer various D.I.C.E. savings. Depending on where the property is located within a county or city, taxpayers may be able to claim deductions for locating in an economic revitalization area or enterprise zone. For example, Maryland offers personal property tax credits for businesses located in “focus areas.” The program is a 10-year tax credit for new investments in personal property. West Virginia’s Manufacturing Property Tax Adjustment Credit allows manufacturers to deduct their personal property taxes from manufacturing inventory from their corporate income taxes. Mississippi’s standard property tax exemptions allow the local governing authorities to grant a property tax exemptions for up to 10 years to eligible industries that locate or expand in Mississippi. Nebraska legislature approved LB259 last May, which allows business owners to exempt the first $10,000 of depreciable tangible personal property. The exemption covers farm equipment including factory machines and rail cars.
One thing is a sure bet: businesses located in states with personal property taxes have a lot at stake. Issues with double taxation (even though California doesn’t call it that), compliance with tax rules, and remaining profitable are equally important. States are wagering that these D.I.C.E. programs are enough to attract new businesses and that existing businesses are able and willing to stick around instead of relocating to avoid the tax. Tax professionals will certainly be busy helping clients figure out the best way to work within the system to ensure that credits, incentives, deductions and exemptions are correctly reported and claimed.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Does tangible personal property tax hurt states’ chances for attracting new businesses?
For more information about state tax issues, sign up for a free trial on Bloomberg BNA’s Premier State Tax Library.
By Cynthia N. Wells
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