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March 13, 2020 at 11:30 PM
by Michael Grizzaffi

The Texas Tax Code requires that all property, with exceptions embedded in Section 23 of the tax code, is appraised at its Market Value as of January 1 of the tax year. The Appraisal District uses a mass appraisal technique that complies with the Uniform Standards of Professional Appraisal Practice (USPAP). While the District is bound to comply with USPAP Standards, it says nothing about complying to the USPAP methodology for appraising property. The USPAP standards, in fact, only provide a minimum set of quality control standards for conduct of appraisals in the United States.

The Appraisal Districts conduct what is called a mass appraisal in order to determine depreciation factors for Business Personal Property. The intent of the mass appraisal is to create an equal distribution of the property tax burden to property owners in a political jurisdiction, not to give the property owner a fair valuation of their property. In an ad valorem mass appraisal typically the government or taxing entity employs the mass appraiser (assessor), and the intended users are the governmental entities using the results of the mass appraisal for tax purposes. Thus, as with any statistical method as a basis, some property owners will pay more than the value of their assets warrant and some will pay less.

Appraisal districts are faced with a wide variance of property types, individual and regional economic circumstances, wide ranges of obsolescence conditions, age, and environmental conditions. Each district creates a Fair Market percent good schedule for valuing property listed on the district rolls. The percent good tables are used to value equipment based on equipment life estimates and depreciation schedules. Again, the schedules are based on data of very general and averaged conditions. A serious defect in this appraisal technique is loss of specificity to the assets of the given business. We all know that the equipment we purchase goes through a steep decline in market value whenever possession is taken by the purchaser. For instance, if someone goes to the appliance store, purchases a washing machine and in a month or two advertises it for sale, the owner may be surprised to learn that the market value has dropped in excess of 25 percent. Now if the machine is in a harsh environment or if economic conditions are such that the market for that particular model machine has dropped, the market value will be even less. For these reasons and many more, the percent good schedules of the Appraisal District may not fully represent market value for assets of all business personal property.

The mathematical methodology the Appraisal District uses to calculate the Percent Good factors is well known and tested. While the data is factual data, it is very general and cannot represent specific assets of a given business. The process uses Multiple Regression Analysis that iterates the data until a suitable error or confidence interval is achieved. The analysis of the data cannot include the specific variables for a given business only general parameters. Thus, arguments can be made to show that a value determined to be proper by the district may be out of range for a particular location, application, and situation. With this in mind, the enlightened taxpayer will assemble all external facts and apply them to the specific assets in their business and argue values with the district appraisers.

The Modified Accelerated Cost Recovery Schedule (MACRS), more commonly used by most businesses to arrive at their Net Book Value, is not widely accepted by the Appraisal Districts. In fact, the Texas Business Personal Property Rendition, as modified by the Texas Comptroller of Public Accounts, contains a question specific to NBV on the Rendition. The requirement, however, in order to file NBV as a basis, your business must have 50 or fewer employees. More importantly, should you choose to file NBV, assuming you meet the criteria, you should be aware the Appraisal District does not have to agree to the value for valuation purposes. The MACRS depreciation is nothing more than a mathematical convention for recovering the assets cost over time. This convention, although an accelerated depreciation, will ultimately fully depreciate to zero. At the point the assets cost has been fully recovered, it may be disposed, salvaged or held in place. The starkest contrast between MACRS and District Depreciation relates to the residual value of the District Schedule. The Appraisal District Schedule never fully depreciates, unlike MACRS. The District Schedule retains a relative 18 percent residual value for most asset categories.

The Fair Market Value measures the depreciation of your equipment and inventory based on its environment, usage in place, age, and other factors.

The definition of Market Value is defined as “the price for which a property would transfer for cash or cash equivalent under current market conditions if the property were exposed on the market for a reasonable length of time to find a buyer, all parties know all uses of the property and any restrictions and neither the buyer or the seller under duress to buy or sell.” A pretty tall order for a Mass Appraisal.

The market value of property shall be determined by the application of generally accepted appraisal methods and techniques. If the appraisal district determines the appraised value of a property using mass appraisal standards, the mass appraisal standards must comply with the Uniform Standards of Professional Appraisal Practice. The same or similar appraisal methods and techniques shall be used in appraising the same or similar kinds of property. However, each property shall be appraised based upon the individual characteristics that affect the property’s market value.

One issue when dealing with market value is “intangibles” (having value but cannot be seen, felt, weighed, measured, or otherwise perceived by the senses) are not taxable. In the purchase of personal property, how is the “goodwill,” “business process,” or “client base” extracted from the purchase price? In any market, no one purchases a business solely for the assets or inventory. The assets generally are the minority piece of the purchase. While it is true that the assets are an integral part of a business and the business operations, they are NOT the majority of the business.

The Market Value approach looks at varying types of depreciation, specific to the industry of the business and type of assets and inventory on the accounting books. It takes into account, Physical Depreciation, Functional Obsolescence and Economic Obsolescence. The Physical Depreciation of the assets relates to level of maintenance; wear and tear (capacity/use); exposure to various degrees of elements; and age. Functional Obsolescence of the assets relates to inefficiencies or inadequacies in the property itself when compared to a more efficient or less costly replacement; impairment of functional capacity or efficiency brought about by factors of overcapacity and other not specifically identified inadequacies; and lack of utility, excess capacity, change in design efficiency and technological change. Economic Obsolescence is directly correlated to external factors, like increased cost of raw materials, labor, and utilities without an offsetting increase in price, more specifically as it relates to Inventory; reduced demand for the product, increased competition, environmental or other regulations, inflation, high interest rates, etc. and finally legislative enactments, change in use, social change, change in supply and demand. Knowledge of market value and the market value removed of the asset and inventory is all considered in this type of valuation approach. Property placed in service and disposed of in the same year cannot be depreciated. The identification of property and classifications of disposals may also be significant in terms of value. Due to different tax treatments for different classifications, proper identification is vital for assets that have been sold or exchanged; converted to personal use; abandoned; transferred to supplies or scrapped; and more commonly when property is destroyed and unsuitable not removed from the books.

Due to the “mass appraisal technique” used by appraisal districts, it is IMPOSSIBLE for them to know the Physical, Functional and Economic depreciation for every business.

Some consulting firms will employ a mass appraisal technique as a valuation basis for filing the Rendition. This broad valuation approach contains identical problematic issues encountered and often less sophisticated methods used by the Appraisal Districts in determining value. Ultimately the value will result in unachievable results at the Appraisal District level. In order for the Appraisal District to settle a value based on a market valuation, the assets and inventory must accurately reflect and support the valuation. Anything short of statistical documentation to support the value will result in these unacceptable results.