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With Tennessee personal property tax filings due in March,
Tennessee taxpayers should take note of a recent administrative
judge decision holding that intangible costs (such as freight,
installation, engineering and transactional taxes) incurred by a
manufacturer to place equipment and machinery into
service—costs traditionally capitalized for federal
depreciation purposes—should be excluded from the tax
base in determining fair market value for Tennessee personal
property tax purposes. See In re Signal Mountain Cement
Company, Hamilton County, Appeal Nos. 62119, 62120, 64218,
7114 (Oct. 7, 2011), appeal pending.
The taxpayer in this case is a cement manufacturer located in
Tennessee. The local assessor audited the taxpayer's tangible
personal property schedules and issued a back assessment that
increased the "fair market value" of the taxpayer's
equipment and machinery by intangible costs such as freight,
installation, engineering and transactional taxes. The
assessor's valuations were based on the taxpayer's
depreciation schedules from its federal income tax returns.
The taxpayer challenged the back assessment contending that no
Tennessee statute imposes ad valorem taxes on these
intangible items and that Tennessee has not adopted a "value
in use" standard for valuing tangible personal property.
Rather, the tax base for tangible personal property in Tennessee is
based on "fair market value," typically formulated as
acquisition cost less statutory depreciation. The administrative
judge agreed with the taxpayer and rejected the assessor's
interpretation of the regulations and his reliance on federal
depreciation schedules as the base for calculating "gross
capitalized cost."
The administrative judge concluded that "construing the
term 'capitalized cost' as adopting federal capitalization
principles to value tangible personal property overreaches the
requirement in Tenn. Code Ann. § 67-5-601(a) that property be
valued at fair market value." Accordingly, "tangible
personal property must be valued separately from intangible costs
incurred to ship, configure or install [the property]."
Practice Pointer:
Although this case currently is on appeal to the Assessment
Appeals Commission of the Tennessee State Board of Equalization,
taxpayers should review their tangible personal property schedules
to determine whether federal tax depreciation schedules have been
used as the source of "acquisition cost" for property tax
filings and whether the tax base includes intangible costs that
should be separated from the actual purchase price of the tangible
property.
Practice Pointer:
For taxpayers that have been overstating the cost of their
tangible personal property on timely-filed property tax schedules,
tax schedules for 2011 and 2012 may be amended to report the
correct acquisition price. As an alternative, taxpayers concerned
about the status of the appeal before the Assessment Appeals
Commission can pay their property tax under protest for 2012, and
preserve their challenge pending the outcome of the Signal Mountain
Cement Company appeal.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Internal Revenue Service has recently published an IRS Large Business & International Directive, which updates an earlier directive to field agents addressing the examination of capitalization and repair costs issues.
A state cannot include income in the apportionable base and then exclude the receipts and related factors that generated that very same income from the apportionment formula.
