The majority of property tax appeals concern arguments over the value of real estate, such as commercial retail buildings, commercial office buildings, multi-family buildings, and industrial facilities. However, real estate is not the only type of property that is taxable in North Carolina for property tax purposes. Business personal property is also taxable for property tax purposes. The following Q&A outlines the basics of business personal property taxation.
- What is business personal property (BPP)?
In the property tax realm, property can be categorized as either real or personal. Real property is land and buildings. Personal property is anything that is not real property and is typically movable property, for example, furniture, machinery, equipment, and computers. Both real and personal property can also be categorized as business use or personal use property. Most real property is taxable, regardless of whether it is business use property (commercial retail building) or personal use property (personal residence). Business use personal property is typically taxable, while personal use personal property is typically not taxable (e.g., the contents of your house; notable exception: your personal use automobile). Finally, personal property can also be categorized as “tangible” (it can be seen, touched, and felt such as a desk), or “intangible” (it cannot be seen, touched, or felt, such as computer software, trademarks, financial accounts). Most intangible business personal property is exempt, while tangible business personal property is generally taxable.
Thus, the tangible business personal property that is generally subject to the property tax in North Carolina are machinery, equipment, furniture, motor vehicles, computers, etc. used for business purposes.
- What are the requirements for businesses regarding property tax and business personal property?
Unlike real estate that is revalued only periodically by counties, typically every 4 or 8 years, BPP is essentially revalued on an annual basis. Owners of BPP are required to list their BPP on prescribed listing forms in January of each year. On the listing form, the property is categorized by year of acquisition and listed at its original cost. Failure to list the BPP or listing the BPP late can result in penalties. Based on the listing, the tax office will value the BPP and issue a bill.
Tax offices in NC generally determine the value of BPP by taking the original cost listed and depreciating it utilizing depreciation tables published by the Department or Revenue. These tables categorize BPP into certain types and apply different depreciation schedules depending on the type. Unlike for income tax purposes, BPP never depreciates to zero, but instead depreciates to some residual value and then remains at that value as long as the BPP is in service
- What are the most common mistakes made on BPP listing forms?
The most common mistake is a failure to remove from the listing form property that is no longer in service. Most businesses use their fixed asset schedule as a starting point for the BPP listing form. Many do not remove items that are no longer used, like old computers. Because BPP is depreciated to a residual value, and not zero, that results in an inflated tax bill.
The second most common mistake is inclusion on the listing form assets that should not be there, either because the assets are exempt or because they are real property, not personal property. Of course, this error can go the other way too, where assets that should be listed are not because the taxpayer believes erroneously they are exempt or already taxed as real property.
- When do notices go out?
In real estate revaluations, the county sends a revaluation notice to the property owner advising him or her of the new value for the real estate, generally in the first quarter of the year of revaluation. With BPP, the tax office does not send out a separate revaluation notice informing the BPP owner of the new value for his BPP each year. Instead, the notice comes when the tax office sends out tax bills, typically in July and August. For the BPP owner, that is the only notice of the current year value of the BPP.
- How is business personal property taxed? Does it vary by county? Where can I find the rate?
BPP and real estate are taxed in the same manner and at the same rate. In each case, the property is supposed to be valued and taxed at its fair market value. The tax rate applicable to each is the same. The tax rate obviously varies from county to county and also within a county if the property is located within a municipality, in which case both a county tax rate and a municipal tax rate apply. Tax rates are usually published on the county tax office website.
- Are all businesses subject to business personal property taxation? What about nonprofits or educational institutions?
Generally, the BPP of all businesses is subject to property tax. Like real estate, however, there are exemptions, principally for charitable, educational, and other nonprofit activities and institutions. Such exemptions can be very specific, and counsel should determine if the BPP qualifies.
- How long do businesses have to file an appeal?
The deadline for appealing BPP valuation is a trap for the unwary. With real estate, the deadline for filing an appeal cannot be before the first Monday in April and generally is sometime between the end of April and the end of June. One usually knows the tax value of the property before the end of the first quarter and can file an appeal before the end of March to be safe.
With BPP, the owner does not know the tax value of the BPP until he or she receives the bill in mid to late summer. The BPP owner then has 30 days from the date on the bill [not from receipt of the bill] to file an appeal. Frequently, especially with large businesses, the bill may get passed around before landing on the desk of the responsible person. Often the time for appeal has then passed. Also, because the bill can be paid as late as January 6 of the following year without interest or penalty, people frequently do not think about the bill or appealing the value until the deadline for payment approaches, which is too late to appeal.
- Can you tell me about the appeals process for business personal property?
The appeal process for BPP is the same as for real estate. The BPP owner first appeals to the county Board of Equalization and Review. If not successful, the BPP owner can appeal to the NC Property Tax Commission in Raleigh.
- How can I determine if it is worth filing an appeal?
As with the taxation of real estate, it is all about money. The question is whether the tax savings from a potential appeal are worth the cost of pursuing an appeal. The cost of a local appeal, even when represented by an attorney, can be reasonable since the hearing is informal. The hearing before the Property Tax Commission is more like a trial and, therefore, generally requires the assistance of an attorney and his or her fee will not be nominal. One must calculate the potential tax savings from a reduction in value from where it is to what you think is achievable; estimate the chance of success of an appeal; determine the cost of achieving such a result; and then do a cost/benefit analysis to determine whether an appeal makes sense.
John A. Cocklereece is an attorney with Bell, Davis & Pitt in Winston-Salem.