Minimizing Your Handicap by Securing Market Value and Exemptions on Inventory

Size: px

Start display at page:

Download "Minimizing Your Handicap by Securing Market Value and Exemptions on Inventory"

Millicent Chapman
5 years ago
Views:

Minimizing Your Handicap by Securing Market Value and Exemptions on Inventory Sam Kinslow, CMI Director Grant Thornton Houston, TX (832) 922-9956 sam.kinslow@us.gt.

well as, details on the best ways to obtain exemptions such as Freeport, Interstate/Foreign Commerce, and Free Trade Zone.

1 Minimizing Your Handicap by Securing Market Value and Exemptions on Inventory Sam Kinslow, CMI Director Grant Thornton Houston, TX (832) Michael Dimitt, CMI Manager Plains All American Pipeline Houston, TX (713) This paper includes a state by state comparison of the inventory reporting requirements, as well as, details on the best ways to obtain exemptions such as Freeport, Interstate/Foreign Commerce, and Free Trade Zone. The authors will discuss valuation of intercompany markups, sales, and transfers. Value considerations such as spoilage, theft, markdowns, slow-turning inventory, poor inventory mix, returns, off-spec inventory, and obsolete/unusable inventory will be covered, as well. The learning objectives are as follows: 1. Differentiate between the various inventory filing requirements by state 2. Determine which inventory exemptions are available by state and incorporate best practices to obtain exemptions 3. Implement valuation considerations to the cost basis of inventory to establish market value for minimization of property tax liability This paper will cover three main sections. In the first, we will consider market value impacts and potential deductions to the cost basis of inventory. Second, we will outline the types of inventory exemptions available. Lastly, you will find a state by state reference guide. 38 th Annual Conference Institute for Professionals in Taxation

2 The following is a list of the 12 states which tax inventory: Alaska Arkansas Georgia Kentucky Louisiana Mississippi Oklahoma Rhode Island Tennessee Texas Vermont West Virginia Market Value Considerations, Potential Deductions from Cost Basis, and Negotiation Tips First, identify potential market value deductions that could be made to the cost basis of your inventory. Second, Quantify and Document these deductions. Finally, consider our Negotiation Tips for discussions with assessors. Identify The two main categories of market value consideration which may be applied to cost are functional and external obsolescence. In gauging poor market reaction to any product, buyers ask themselves Is there something wrong with the function of the product?, Did we make a bad bet on what the customers tastes would be for this season?, or Have our competitors undercut us on price?. The questions above are ones to ask of the inventory specialists in the company in order to identify market value deductions which may be applicable. Additionally, we will use common terms as found below to spur the thoughts of company management: Markdowns (Seasonal or due to misjudgment of customer tastes) Shrinkage (theft) Slow moving items Returned items Poor inventory mix or unappealing selection Off-spec inventory Unavailable inventory (oil/gas tank heel, line fill) Page 2

3 Within the realm of identifying market value deductions to cost basis, there are two key areas which are typically overlooked: Inter-company markups, Transfers, and Sales A key question to ask of a client or within your company is, Does all or a portion of your inventory, raw materials, and supplies come from a related company (parent, sister, subsidiary)? It is surprising how often this is the case. Many times your client or company may be paying more to a related party for inventory than if the company sourced the product from a third-party. Be sure to consider making an adjustment to this markup so that the balance reflects typical transaction values in the open marketplace. Expenses Related to Inventory Maintenance Inventory Maintenance? you may be asking. There are many industries who supply ferrous metal based products which have to be re-worked or refreshed before being shipped to customers. An example includes oil/gas pipe and tubing even after a few weeks in a storage yard, the pipe or tubing has to be straightened, brushed of rust, and re-coated before a customer will take receipt of the product. We recommend that you consider taking a deduction for the expense of maintaining this type of inventory. An investor or buyer of the inventory will certainly consider the condition of the product and the anticipated expense of making the items ready for shipment. Quantify and Document In order to be successful in an appeal or audit situation, it is paramount that all deductions implemented are well-documented with company records, by affidavit of company specialists, or with third-party valuation reports. Examples include a 3-5 year history of production vs capacity percentages, marketing reports, return percentage reports, and any third-party valuation reports. All deductions included should reconcile back to the inventory cost basis. Negotiation Tips Whenever possible, a face to face meeting is recommended with assessors rather than trying to handle negotiations over the phone or via . Start off the negotiation by submitting your opinion of market value, then tell the story concisely of the market value conclusions you have implemented to the cost basis of the inventory. Share your calculations and provide documentation in the form of exhibits. We have found that the informal hearing process will yield results when an overall 5-10% adjustment to basis cost is requested. However, when a 15-25% adjustment is sought, it generally must occur at the Board of Assessment Appeals. At the 30% or more level of adjustment, most assessment review boards will take a pass; therefore, litigation may need to be considered. In the litigated appeal process, a taxpayer will be best served by having a certified inventory appraiser prepare a report based on the analysis already generated up through the exhaustion of all administrative appeals. Page 3

4 Exemptions: Applications and Negotiation Tips First, identify potential exemptions that could be applied for with regard to your inventory. Second, Quantify and Document the pertinent information for the exemption application process. Finally, consider our Negotiation Tips for discussions with assessors. Identify Types of exemptions that could be applicable to your inventory: Freeport Exemption: Inventory that is held for sale but leaves the state is partially exempt from tax. Some states will allow for manufacturing in-state with exemption for out-of-state shipments. Interstate Commerce Exemption: Inventory that remains in the stream of commerce (goods in transit, not held for sale) and also leaves the state is fully exempt from tax. Some states will allow for repackaging or packaging breakdown as long as the inventory continues in the shipping process for delivery out-of-state. Foreign Trade Exemption: Inventory that is held in a certified Foreign Trade Zone or inventory in transit destined for another country is fully exempt from tax. Additionally, inventory from a foreign country destined for another state is fully exempt from tax. Quantify and Document the Application Process Even when the property tax code is crystal clear at the state level for the qualification of inventory as exempt, there is often a lot of autonomy at the local level as to whether an exemption application is approved or denied. Your best chances of success in the application process will focus on the quality of your documentation. Examples of strong documentation include bills of lading, proof of origin (foreign country or other state), proof of destination (foreign country or other state), title transfer details, proof of days held in storage for state of exemption application, details on storage facility type (Certified Foreign Trade Zone or Third-Party/Public Warehouse). Negotiation Tips In recent years, applications for inventory exemptions have undergone tremendous scrutiny by assessors with the result that many applications are initially denied. In some cases, exemption applications are considered pending with the assessors requesting very detailed information and subsequent discussions with the application preparer. While it is important to meet with assessors inperson to negotiate market value, we feel it is imperative to meet them personally when trying to negotiate a denied or pending exemption application. The success of the informal, formal, and litigated appeals process rests upon the quality of the documented support for the origin, destination, shipping, dates, and storage facility types of the inventory which has been requested to be exempt. Page 4

5 Quick Reference Summary by State For your reference, below is a summary of key information regarding inventory and exemptions by state. Please note that dates and available exemptions change frequently. You are encouraged to check with state and local authorities prior to the preparation of returns and/or exemption applications for accuracy of this information. Alaska Exemptions Available: See Comments below It is recommended to reach out to local assessors prior to the filing deadline as the taxability of inventory can vary from year to year within the jurisdictions. Some jurisdictions will allow exemptions for out-of-state shipments check annually with local assessor as this is subject to change Arkansas In-transit inventory exemption available; property manufactured in Arkansas and stored for out-ofstate shipments is exempt Georgia In-transit inventory exemption available Kentucky In-transit inventory exemption available; Raw Materials and Inventory Work-in-Progress taxed at state rate only no local tax applicable Page 5

6 Louisiana, except Orleans Parish which is 8/1 of the year prior to filing Reporting Requirements: Prior 12 months ending balances must be reported, then averaged In-transit inventory exemption application available Please note that tax paid on inventory is credited back to taxpayer on the corporate state income tax return. The credit is very lucrative as it is not merely a deduction on the return, but a dollar for dollar reduction in the tax. After completion of the state income tax return, taxpayer may request a refund if the inventory tax credit outweighed the income tax. Mississippi Assessment Date: 3/1 In-transit inventory exemption application available; property manufactured in Mississippi and stored for out-of-state shipments is exempt with Freeport approval Oklahoma Reporting Requirements: Prior 12 months ending balances must be reported, then averaged In-transit inventory exemption application available, Inventory to be held for no longer than 90 days within the state Rhode Island Assessment Date: 12/31 Exemptions Available: None Tennessee Page 6

7 In-transit inventory exemption available; In-transit Inventory that has been repackaged for out-ofstate shipment is available for exemption Texas or 9/1 of the year prior to filing (alternate inventory assessment date election must be filed by 7/31 of year prior to filing subject to approval of local assessor) In-transit inventory exemption available Freeport inventory held for no longer than 175 days. Please note that many school districts do not participate in the Freeport exemption program; therefore, tax will be due on approximately 70% of the value of inventory filed. Interstate Commerce Although not stated in Texas Property Tax Code, the general policy used by assessors is inventory held for no longer than 90 days. School districts are not allowed to opt out of the exemption program; therefore, no tax is due on approved inventory exemption applications. Vermont Assessment Date: 4/1 Exemptions Available: See Comments below Some jurisdictions will allow exemptions for out-of-state shipments check annually with local assessor as this is subject to change West Virginia Assessment Date: 7/1 In-transit inventory exemption available Page 7

Economic Incentives and Texas

Economic Incentives and Texas Dale Craymer President Texas Taxpayers and Research Association 400 West 15 th #400 Austin, Texas 78701 www.ttara.org dcraymer@ttara.org Summary Observations Texas is not