Property Tax Services for the Energy Industry

Incentives and exemptions are essential to effectively managing and reducing industrial complex property tax liability. Specialized industry expertise is required to know where to look and how to build the appropriate business case.

Types of Complex Industrial Property Tax Incentives & Exemptions

We routinely find that many energy-related taxpayers fail to take advantage of available property tax incentives on inventory and fixed assets.

A few of the most overlooked savings opportunities include “freeport pass thru” exemptions on indirect inventory shipments, interstate and foreign commerce exemptions on pre-committed inventory, pollution-control exemptions.

Identify Incentive & Exemption Opportunities

We work with our clients to identify and quantify their exemption eligibility, including securing the proper documentation to support and secure available benefits, as well as negotiate and file their annual certification reports with the appropriate economic development authorities and taxing jurisdictions.

A key component of our industrial complex property tax analysis is our comprehensive abnormal (functional and economic) obsolescence audit. Unlike some of the large tax consulting firms that apply a template approach across industries, we examine each client’s property tax valuation within the context of their unique industry.

Where to Look for Complex Property Tax Obsolescence

We begin our complex property tax obsolescence audits by evaluating a comprehensive set of abnormal obsolescence indicators, including but not limited to:

Functional Obsolescence (Internal)

• Excess Capital Cost (Current Replacement vs. Indexed Reproduction Cost)
• Excess Operating Cost compared to current “state of the art”

Economic Obsolescence (External)

• Plant Utilization Metrics
• Declining Production
• Diminishing Revenue
• Reduced Headcount
• Lower Return on Capital

Economic obsolescence is an important area of focus as it is often overlooked by tax assessors and presents an excellent opportunity to identify, quantify, and appeal your asset valuation(s).

Abnormal Obsolescence and its Impact to Industrial Property Tax Savings

Abnormal (functional) obsolescence is the difference between replacement cost and trended historical reproduction cost. In the energy sector, this occurs when there is diminished plant utilization, reduced demand for oilfield services, and falling OCTG prices resulting from the fluctuating price of oil.

A key component of our industrial complex property tax analysis is our focus on reporting.

Developing an Accurate Assessment

Accurate and timely reporting of inventory and fixed assets is the first step in assuring an accurate assessment.

Unlike generalist property tax consultants, we take the time and effort to review each and every line item on the fixed asset ledger to determine taxability, taxable situs, asset class, and economic life to reflect the correct basis for calculating market value. An internal reporting error of a misclassification of assets--which is often a routine task--can yield tens or hundreds of thousands in savings.

In the energy industry, valuation is an essential step in our comprehensive, industrial complex property tax analysis. The key to a successful property tax assessment appeal is to incorporate a documented quantification of abnormal obsolescence via a comprehensive valuation analysis, presented in a format that tax assessors relate to.

Valuation Errors When Calculating Complex Industrial Property Taxes

The challenge for energy industry companies is that tax assessors determine market value for complex industrial capital assets through the application of a prescribed “percent good” physical depreciation schedule to original cost that has been trended up to an inflation-adjusted reproduction cost.

Unfortunately, the application of these standard depreciation schedule and inflation factors do not capture market-supported abnormal depreciation, and often overstate market value.

Abnormal Depreciation

Abnormal depreciation, in the form of functional or economic obsolescence, can be determined through the application of several universally accepted appraisal techniques:

• Replacement vs. Reproduction Cost
• Actual vs. Designed Asset Utilization
• Quantification of Excess Operating Costs as Compared to “State of the Art”
• Income Shortfall Analysis
• Cost-to-Cure Analysis

Valuation Opportunities

Additionally, in the marine industry, the market value of industrial complex capital assets can be supported through multiple sales and asking prices of comparable assets, which, depending on the circumstances, may be scrap or salvage value.