The COVID-19 pandemic has created ripple effects through the global economy that businesses are still struggling to fully grasp.  Various lockdowns and business interruptions have seen a wave of asset impairments, restructurings, and bankruptcies across a myriad of industries.  From the first initial cases of confirmed COVID-19 in the United States through December 13, 2021, over 600 American companies filed for Chapter 11 bankruptcy protection.[1]  Further, over $143 billion in asset impairment was booked by public companies in 2020.[2] 

As the economy accelerates towards a rapid recovery in 2021, business owners and finance professionals should assess their tax liability in the wake of unprecedented economic difficulties faced in the preceding year.  If external factors adversely impacted the business, a valuation provided by a third-party valuation firm could be beneficial in any appeals process.

What is Business Personal Property?

Business personal property (“BPP”) is taxed in the majority of states across the country.  BPP can be loosely defined as any owned property that a company uses to conduct business that is moveable such as furniture, computers, machinery, tools, office equipment, and vehicles. 

Depending on the industry, BPP could comprise a significant percentage of a company’s balance sheet.  For example, a midstream oil and gas company will have BPP such as pipelines, compressors, and product storage tanks.  Conversely, a computer software company may have very minimal BPP to accommodate an office space such as cubicles, desks, chairs, and tables. 

COVID-19’s Impact on BPP

The financial ramifications of the COVID-19 pandemic will be felt for years to come.  For the first time since the Great Recession of the late 2000’s, businesses are faced with economic headwinds that could linger for the foreseeable future.  A thorough analysis of a company’s BPP tax liability should be conducted to assess the possibility of a reduction in the assessed value.

Functional Obsolescence

Functional obsolescence (“FO”) is the loss in value or usefulness of an asset that results from factors inherent in the asset itself.  These factors could relate to inadequacies or inefficiencies of the asset that cause excess capital and operating costs, overcapacity, or inadequacy, or otherwise affect the utility of the asset.

A company’s production costs can be analyzed to test for the presence of FO.  Design implementation, hardware and software improvements, engineering and machinery upgrades have reduced operating costs over time.  If a company’s production assets and/or processes are antiquated there is a potential for FO in the form of excess capital costs. 

For example, a legacy machining business that utilizes processes and machinery from the 1980’s incurs $2.50 to produce a single widget.  Conversely, a modern machining business with new equipment and processes incurs $1.75 to produce the same widget.  The legacy business is operating at a $0.75 deficit compared to its modern equivalent.  This deficit can be quantified with a FO penalty attributable to the BPP in the form of excess operating costs.

Economic Obsolescence

Economic obsolescence (“EO”) is described by the American Society of Appraisers as “a form of depreciation where the loss in value or usefulness of a property is caused by factors external to the property.  These may include such things as the economics of the industry; availability of financing; loss of material and/or labor sources; passage of new legislation; changes in ordinances; increased cost of raw materials, labor, or utilities (without an offsetting increase in product price); reduced demand for the product; increased competition; inflation or high interest rates; or similar factors.”[3]

The taxable fair market value of BPP can be adversely impacted by external economic factors.  If a business has a strong correlation with falling commodity prices or decreased activity, the underlying value of the assets could potentially be subject to a reduction in value. 

EO can also be attributed to BPP that is affiliated with production capacity metrics.  An example of this would be a manufacturing facility that has a maximum capacity of production.  Often these theoretical capacities are based upon optimal economic and operating conditions which would allow the business to fully maximize the BPP’s utility.  In many instances real-world production metrics are below capacity.  A company may make the strategic decision to scale back production to boost margins or due to decreased demand from customers and/or consumers.  These metrics can be useful in quantifying EO in the form of inutility.

An appraisal professional can develop an analysis of the BPP to measure and quantify FO and/or EO through these various methodologies.

Taxing Authorities Facing Extraordinary Budget Shortfalls Due To COVID-19

Taxing jurisdictions at both the state and county level are facing huge budget deficits because of decreased revenue from a variety of otherwise reliable sources.  Tourism, hotels, restaurants, and convention centers experienced unprecedented declines in 2020.  Major urban centers rely heavily on these revenue sources to fund various projects and remain financially solvent.  From March to August 2020, average tax revenue across the United States were down over 6.0 percent.  In a normal year, the anticipated tax revenue would be an increase of 2.0 to 3.0 percent.[4]

The vast majority of BPP tax appeals are settled before going through an administrative or judicial process.  It is typically in the interest of all parties to arrive at a mutually agreed assessed value to avoid further costs associated with the litigation.  COVID-19 has created an environment in which taxing jurisdictions are under intense pressure from city and state politicians to maximize property tax revenues to mitigate the budget shortfalls in light of COVID-19.  As a result, assessors are less likely to be amenable to settlements with taxpayers that would lower tax revenues for their respective jurisdictions. 

Conclusion

The COVID-19 pandemic has presented numerous challenges for tax professionals hoping to safeguard their businesses from unnecessary tax liabilities.  A valuation professional can be helpful in assisting to ensure the assessed values are accurately capturing COVID-19’s impact of BPP through the methods described in this article. 

BVA has professionals with experience valuing BPP for ad valorem property tax purposes at the local, state, and federal level.  Our experts have testified in numerous jurisdictions for entities ranging from Fortune 100 to small, privately held entities.