Classification and valuation issues affecting the ad valorem taxation of business tangible personal property.

• Author: Davis, Deborah A.

Diversity in state laws makes compliance with the self-reported taxation of business tangible personal property difficult. Nevertheless, taxpayers can challenge assessors' classification and fair market value (FMV) of property and often achieve significant reductions in personal property tax liability.

Classification

Classification issues become increasingly important to taxpayers in jurisdictions that limit the taxation of business tangible personal property or have different tax rates for personally and realty. In determining whether property should be classified as personal or real, traditional definitions of personal property provide that "personal property is everything that is the subject of ownership that is not real property and not permanently affixed to real property." Personal property includes inventory, machinery and equipment, furniture and intangibles. The classification of property as personally or realty is conventionally determined using the following three-pronged approach:

1. Actual annexation, according to the nature and use of the article.

2. The property's appropriation or adaptation to the use for which it was annexed.

3. The intention of the party making the annexation.

Even property affixed to real property for long periods of time can be classified as personal. For example, the New Hampshire Supreme Court recently held that certain communications equipment was personal property and, therefore, not subject to property tax (New England Telephone & Telegraph v. City of Franklin, 685 A.2d 913 (1996)). The equipment in question included telephone poles, underground conduits, frames and switches. The court held that the equipment was readily removable and transportable, and capable of performing its intended functions elsewhere. Further, removal would not render the realty unfit for use. The fact that the poles had a life expectancy of over 40 years was not relevant to their classification as personal property.

Another controversial area involves the proper classification of automatic teller machines (ATMs). Financial institutions in California pay a higher franchise tax (a "bank tax") to the state in lieu of property tax on personal property. Several California banks convinced the Board of Equalization to revise its regulations to treat ATMs as personal property rather than as permanent fixtures taxable as real property. The revised regulation states that "an ATM is personal property and shall be classified as such if...