Many companies are ill-equipped to manage property taxes effectively.  According to CFO magazine, “property tax is one of the biggest tax expenses – and the hardest to manage”. The sheer volume of jurisdictions (estimated at over 12,000 townships, counties, and states) can be overwhelming.  Companies may have property in hundreds or even thousands of jurisdictions, all with their own set up rules and filing requirements.

Several misconceptions regarding property taxes exist.  Property taxes are often viewed as fixed costs.  Receive a bill; pay a bill; nothing more.  Fair market value is equated with net book value or is based solely on a formula.  Finally, there is a fear of the unknown, a fear of making waves in the community. 

It is not a rosy picture on the jurisdiction side either.  Jurisdictions do not have the manpower or expertise to evaluate each real estate or personal property parcel individually.  Out of necessity they must employ mass appraisal processes to value all of the properties in their jurisdiction.  In Los Angeles County alone over 1.5 million personal property returns are filed annually.  You can probably double or triple that figure for the number of real estate parcels that must be managed every year.

Is property tax a pain in your company?  What steps have you taken to improve the process and minimize the pain?

Unless you happen to moonlight as a nuclear physicist, you probably were not aware that Cobalt can be a form of nuclear waste.  Make that taxable nuclear waste.  We had the opportunity to work with a company who use radioactive Cobalt to sterilize their products. Because they pay millions of dollars to purchase this Cobalt, the assessor assumed it had a large value and thus was taxing them significantly. Our first task was to determine if this in-house stockpile of “nuclear waste” had any real value, and then consider if the assessor’s methodology and ensuing $22 million valuation were appropriate.

Unswerving in our commitment to grasp the underlying process, we boldly entered the company’s Cobalt Chamber, a virtual crypt with 6-feet concrete walls surrounding a deep pool housing the mysterious, glowing Cobalt.  We discovered that Cobalt, being radioactive, is handled only by licensed suppliers and distributed under the strictest of standards. To our relief, none of us came out of the chamber glowing.  To better understand the characteristics of Cobalt, we went to a reliable source: A friendly, neighborhood Ph.D. in nuclear physics. (Who says those science classes wouldn’t be useful in a property tax career?)

To find the market value of used Cobalt, we first had to consider whether a market existed at all. Surprisingly (or not), we discovered there was no viable market for used Cobalt.  Cobalt can only be sold to licensed suppliers. Even if the company could find a licensed supplier willing to purchase the Cobalt (which is highly unlikely), the Cobalt would then have to be removed by the company’s supplier and transported to the supplier’s facilities (which in this case is in Canada) for testing, before being transferred to the purchaser.  There is no way to know how the Cobalt was previously handled, which increases the potential for leaks or other problems.  And problem resolution is expensive.

It was clear that no company in its right mind would purchase used Cobalt.  Therefore, no active market existed.  The assessor’s office, while willing to concede that cost doesn’t equal value, was not keen on the concept that the millions of dollars spent on Cobalt equaled a zero value.  The value of the Cobalt was, in effect, being considered on an “in-use” basis.  After several rounds of negotiations on the appropriate factors, the assessor’s value was reduced from $22 million to $12 million (a 40% reduction). The company gladly accepted the significant value reduction and subsequent tax savings of over $200,000.

There is really no market value for Cobalt.  It is, in fact, nuclear waste.  If the company were to shut down its plant today, it would incur significant costs just to have the Cobalt removed. Still, the company continues to buy this non-value nuclear waste for millions of dollars each year, which begs the question… How much would you pay for nuclear waste?

How far would you go for lower property taxes?  According to legend, Lady Godiva answered that question in the 11^th century with a nude ride through the streets of Coventry, England.  You may be wondering what a naked woman on a horse has to do with property taxes.  Trust me, they’re related.

Coventry was burdened by heavy property taxes imposed by Godiva’s husband, Leofric, whose job description included assessing and collecting property taxes.  Wanting to provide relief to the people, Godiva begged Leofric to lower the property taxes.  Leofric did not want to lose the revenue he gained from the taxes so he responded with a bet that he thought would never be taken.  The terms of the bet were that if Lady Godiva would ride through the town completely naked he would lower the taxes.

Upon taking the bet, Lady Godiva sent out a herald requesting that the people of Coventry go indoors and close their shutters at midday.  Legend has it that all the people obeyed her request, except one man.  His name was Tom the tailor, but you may know him as “Peeping Tom”.  He went inside, but peeped through his shutters and was the only one who saw her naked body that day.

At the completion of the ride, Leofric begrudgingly honored the bet and lowered the property taxes.  How about this as a way to appeal your taxes?  The next time you consider making a property tax appeal remember the legend of Lady Godiva and be thankful we have forms instead.   http://www.pitt.edu/~dash/godiva.html - Link to Godiva by Tennyson

State and local governments are on track to collect more than $400 billion in property taxes this year, the most ever according to USA Today.  Unlike any other tax, property taxes are based on fair-market value.  Even with real and personal property values dropping across the country, property tax collections across the USA rose 4.9% from 2007 to 2008 according to the US Bureau of Economic Analysis.  In fact, property taxes have consistently risen since 1937.

Corporations bear the brunt of these property tax increases even as many struggle to stay afloat in 2009.  According to the Council on State Taxation American companies pay more in property taxes than any other state or local tax.  In fact, property taxes make up almost 40% of all state & local taxes.

Don’t be fooled into thinking that your property taxes will automatically decrease this year just because the values on your real and personal property may have plummeted.  It will take just as much diligence in analyzing and appealing properties that are over assessed as any other year… maybe even more.