Technological obsolescence may result in reduced personal property tax assessments.

• Author: Evans, Marianne

States often use preset depreciation schedules or "original cost multipliers" to value equipment for personal property tax purposes. Generally, the depreciation schedules are intended to reflect decline in value resulting from wear and tear caused by ordinary use of the property. However, some types of equipment decline in value as a result of technological advances. Property such as computer equipment may lose its value due to functional obsolescence at a faster rate than its decline in value due to wear and tear. Since most state personal property tax statutes assess tax on the "true value" or fair market value (FMV) of tangible personal property, preset depreciation schedules are subject to challenge, to the extent the value determined under such schedules does not represent FMV. In several recent decisions, taxpayers in Colorado, Michigan, Virginia and Washington have obtained reduced valuations of computer equipment based on technological obsolescence.

The Colorado Supreme Court affirmed a reduction of property tax assessment on computer equipment based on technological obsolescence, in IBM Credit Corp. v. Jefferson County, 888 P.2d 250 (1/17/95). The county assessor used the cost approach (acquisition cost less depreciation derived from a tax table) to value the equipment. The trial court relied on an expert witness as well as prices of used computer equipment recorded in trade publications. The state high court agreed that the published pricing guides were reliable sources of pricing information and that they met the statutory requirements for evidence that may be considered in an appraisal.

The Michigan Tax Tribunal held in two cases that information relating to the effect of technological obsolescence on the market value of computer equipment justified a reduction in its assessed value (IBM Credit Corp. v. Grand Rapids, No. 172989 (12/2/94), and IBM Credit Corp. v. Detroit, 7 MTT 850 (1993)). In both cases, the taxpayer was engaged in the business of financing and leasing IBM computer equipment, and refurbishing and remarketing used IBM computers. Both cities assessed the taxpayer's mainframe computers and peripheral equipment using multipliers developed by the state tax commission, which based the assessment on original cost less scheduled depreciation. Although the guidelines published by the commission represented an appropriate method to value property, the tribunal held that exceptions must be made when there is "overwhelming...