Practical Tips for Property Tax Compliance. To: Equipment Leasing Association By: Chip Ferris On: June 8, 2005

Transcription

1 Practical Tips for Property Tax Compliance To: Equipment Leasing Association By: Chip Ferris On: June 8, 2005

2 2 About Burr Wolff Diversified SALT offerings Property tax» Compliance processing» Value appeals» Landlord audits» Software Sales and use tax» Overpayment reviews» Software Founded customers (incl. 1/3 of Fortune 100) Strong growth $28M 2005 projected top line Profitable PwC audited Equity investors TA Associates JMI Equity Nationwide presence 17 locations 195 people

3 Property Tax Issues Facing Lessors Financial Writing off unbilled/undocumented charge-backs Incurring penalties and interest Identifying and processing refund claims Forecasting cash flow and accruals Reconciling property tax to G/L Lessee Customer Service Allocating tax bills to individual assets Responding to lessee requests Calculating lease termination billings Processing Complying with complex tax requirements Dealing with tax technology Assigning assets to jurisdictions Maintaining staff for non-core functions 3

4 Phase 1: Preparing the Raw Data Asset geo-coding using tools Status quo for existing Use historical base for new and transferred Geo assignment for the remainder» Internet» Stopwatch maps» Phone Asset optimization Jurisdiction profile matrix Ghost assets identification disposed leases Asset scrubs using asset utilities Automated data import utilities Ensures data integrity Improves accuracy 4

5 5 Phase 2: Asset Valuation Strategy Fair market value basis vs. assessor trend schedules Vehicle valuation with sources such as Blue Book Value in use vs. value-in-exchange Client specific value modeling 3rd party appraisals where applicable

6 Phase 3: Rendition Processing Filing by assessor account Exact match of assessor records to lessee data Filing on facsimiles of actual assessor forms Software vendor maintains current form versions Automatic signatures Automatic image archival Option to file electronically in certain larger jurisdictions Hundreds of jurisdictions accept electronic returns (CA, MD, FL, SC, TX, AZ, etc.) Benefit of receiving asset breakout electronically 6

7 Phase 4: Tax Bill Payment and Lessee Charge-back Accurate tax allocation across leased assets Achieved by filing by assessor account Tracking of all value and tax elements Bill-back file creation Advance billing option (allows for billing at time of rendition 4-9 month positive float) Actual billing option (billed after tax bill received) Fixed and/or variable administrative fees Documentation to lessees with property tax invoice Payment options embedded in tax software Single installment Multiple installments Discount tracking and payment options 7

8 Lessee Customer Service Accurate and timely charge-back On-line web enabled customer service Asset and lease look-up Image viewing» Tax bills» Assessment notices» Checks» Returns Tax proration calculations Terminated leases Estimated tax amounts 8

9 Lower Expenses and Improve Cash Flow Automation of tax strategy and asset optimization lower tax liability per asset Gaining most advantageous tax treatment Automation of tax bill process lowers P&I Tracking system for tax bills Processing bulk payments timely Automation of lessee bill-back file to improve cash flow Creating accurate bill back files to recoup taxes Billing lessees before taxes are paid to taxing jurisdictions Invoicing lessees with back up documentation available Refund processing Minimize overassessment by proactive data management Pursue refunds within cycle 9

10 10 Property Tax Process Performance Goals Lower costs as volume increases Achieve 100% accurate and timely charge-back to lessees Reduce penalty and interest expense to 0% Condense time required for lessee tax support Produce timely and quality reports to improve cash management and financial monitoring Improve efficiencies throughout the tax lifecycle Minimize risk of lessee dissatisfaction due to tax issues

11 Performance Measurements Progress against performance goals must be measured If it can t be measured, it can t be improved. Service Level Agreements with Performance Standards Automated system monitoring of performance against P&I, timely billing, deadlines, payments, etc. Daily, weekly and monthly metric tracking reports Executive dashboard reports 11

12 12 Get There by Leveraging Technology and Processes Leading-edge platform and data infrastructure Timely and accurate web-based customer service systems Streamlined data management tools Real-time information services On-line document imaging Built-in business rule logic and edit validation Flexible and robust reporting Standardized hiring and training practices Detailed process and procedure documentation

13 The Art (and Science) of War 1 : Hot Topics and Practical Tips to avoid Personal Property Tax pitfalls for You & Your Client June 8, 2005 Equipment Leasing Association San Francisco, CA George F. Moses Introduction: Be Prepared because Knowledge is Power Lessons from hometown champs: Red Sox and Patriots - and - Sun Tzu s The Art of War: The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand It pays to take care of our clients with respect to Personal Property Tax. Lower Taxes = Lower Costs = Competitive Advantage. I. 1st Main Point: Chapter IV: Tactical Dispositions : The Goal: TO MINIMIZE PROPERTY TAX (Like real estate and politics, personal property is local) The Art of War: We are not fit to lead an army on the march unless we are familiar with the face of the country--its mountains and forests, its pitfalls and precipices, its marshes and swamps. 1) EXEMPTIONS Generally, two types of exemptions available: (A) exemptions that are a function of the nature of who owns the assets; e.g.: 1) Ohio - A Financial Institution may be considered a Dealer of Intangibles 1 Credits to The Art of War by Sun Tzu. DISCLAIMER: In this text, we use War exclusively for purposes of illustration. Other than excessive taxation, no real enemies exist in the benign and tame personal property tax world!

14 New England States: 2) Mass By virtue of paying a much lower excise tax rate: a) (Similar to Ohio) A Financial Institution is not subject to local personal property tax. b) If a leasing company is incorporated and officially registered to do business in Mass., then these assets are not subject to property tax. (The assets are considered inventory, and inventory is exempt for corporations). 3) Conn. Machinery/Equipment associated with R&D, or MFG qualify for M-65 exemption per CGS 12-81(72) and Code #13 listed on annual return. 4) Rhode Island Machinery/equipment used in any manufacturing process is exempt to achieve mfg status, in most cases, simply convince the local assessor! (B) exemptions that are a function of the intrinsic nature of the assets; e.g.; 1) Soft costs freight, installation, labor, sales tax: surprisingly negotiable, if clearly identified and isolated. 2) Software: especially Custom software. 3) Vehicles: registered vehicles subject only to excise tax. For others, be creative in utilizing nationally recognized resources to your advantage. 4) Machinery not used in the conduct of business. 5) Georgia, Ohio, Kentucky - Do your clients move assets from state-tostate? If so, then Freeport exemptions are available. E.g., Texas: The Property Tax Code Section defines freeport property as goods held in Texas temporarily for up to 175 days for assembling, processing, manufacturing, storage, or other purposes. 6) Maine in exchange for inconvenience of additional paperwork, BETR program allows full reimbursement for any personal property tax paid on machinery/equipment. 7) Vermont The elimination of M&E as well as Inventory each are voted by local jurisdictions.

15 8) Ohio- Patterns, dies, jigs, and drawings: R.C (A) and.03 provide that patterns, jigs, dies and drawings held for use and not for sale in the ordinary course of business are not tangible personal property What are Patterns, Jigs, & Dies? Statutes don t define these terms; hence, it has fallen on the Board of Tax Appeals and the courts to provide definitions. (Generally, separate devices added to machines for purposes of manufacturing; know to represent as much as 47% of permanent parts of large machinery!) 9) Conn. cost of computer/data processing equipment as listed on Code #20 on annual return may be credited dollar-for-dollar against taxpayer s state income tax. (i.e., a 100% credit of property tax on equipment that taxpayer submits to local government can be credited against his corporate state tax liability) II 2 nd Main Point: Chapter XIII: The Use of Spies 2 : The Goal: TO WORK WITH LOCAL ASSESSORS (i.e., one gets more bees with honey than with vinegar ) The Art of War: If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle. Q: Which US jurisdictions offer valuable resources for help with Personal Property A: More and more each year! Each year, more counties and local jurisdictions offer blank returns, filing extension requests, current tax rates, % good factors, and on-line return filings to taxpayers. Notable States: - California - Oregon - Michigan - Maryland DON T HESITATE TO CALL AN ASSESSOR FOR HELP (get his buy-in ) Yes, ad valorem taxes are Science but they re equally Art, therefore often there is opportunity to negotiate. State regulations often are tempered by local practices, Attorneys General opinions, local practices, and even individual assessor s interpretations. 2 Although this paper makes numerous references to war, assessors are not the enemy. We exhort taxpayers to work amicably with assessors in order to defeat the true enemy: unfair taxation!

16 The Ultimate question: What is Value? The Answer: Often, Value is quite subjective depending on misc. measurements: Fair Market Value, RCNLD, Value in Use v. Value in exchange, Trade-in Value, Auction Value, Wholesale Value, etc. III: 3rd Main Point: Chapter VIII: Variation in Tactics The Goal: TO PRESENT VARIOUS LEASE STRUCTURES THAT MAY ALLOW FOR EXEMPTIONS. (i.e., Local Assessors aren t interested in details of your lease terms or who pays the property tax bill; as long as its paid!) The Art of War: Therefore, just as water retains no constant shape, so in warfare there are no constant conditions. He who can modify his tactics in relation to his opponent and thereby succeed in winning, may be called a heaven-born captain. Conditional Leases/Capital Leases Leases considered as having the economic characteristic of asset ownership by the lessee. Assessor s perspective: Both entities file returns; Lessee pays tax True Leases/Operating Leases A lease contract that allows the use of an asset, but does not convey rights similar to ownership of the asset. OR: A lease of equipment for a term which is shorter than the property's useful life and in which the lessor is responsible for certain expenses (as taxes) Assessor s perspective: Both entities file returns; Leasing Company pays tax. Syndicated leases: Lease is shared by a group who also share risks. Useful in diversifying risks of a large lease among borrowers & lenders. Typically, one lead lender takes on portion of financial risk and syndicates the remainder to other lenders. Definition of Syndicate from Merriam Webster s Legal Dictionary: 1. A group organized to carry out a particular transaction or enterprise 2. An association of organized criminals Assessor s perspective: Lessee and usually lead Leasing Company file returns; same Leasing Company pays tax.

17 Synthetic leases: An operating lease that is structured in a way so that it is not recorded as a liability on the balance sheet. Instead, it is considered to be an expense on the income statement. OR: A synthetic lease allows a company to control an asset without being required to show the asset on the financial statements. Assessor s perspective: Both entities file returns; Leasing Company pays tax. IV Conclusion: A) Restate the three main points 1st Main Point: Learn of available local exemptions, discounts & credits The Art of War: We shall be unable to turn natural advantage to account unless we make use of local guides. 2nd Main Point: Learn to work with local Assessors, not against The Art of War: supreme excellence consists in breaking the enemy's resistance without fighting the ability to gain victory by changing and adapting according to the opponent is called genius. 3rd Main Point: Learn to Present (if necessary, consider re-structuring) lease deals most favorably The Art of War: Do not repeat the tactics which have gained you one victory, but let your methods be regulated by the infinite variety of circumstances. B) Restate the introduction Be Prepared because Knowledge is Power The Art of War: Know the enemy and know yourself; in a hundred battles you will never peril