Property Tax Services for the Manufacturing and Distribution Industry

In the manufacturing and distribution 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 manufacturers and distributors 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, and 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 state 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 (economic) obsolescence includes is the loss in value resulting from factors external to the property. The cause may include – but is not limited to - reduced product demand, changes in raw material cost or supplies, adverse legislation, or environmental considerations. The most common methodology for quantifying economic obsolescence affecting manufacturing machinery and equipment is through the application of an inutility penalty analysis. However, a plant may be 100% utilized and still exhibit economic obsolescence.

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 manufacturing and distribution, 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 manufacturers and distributors 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 (e.g. what would your barges cost if you rebuilt your fleet today?)
• 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, 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.