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The “New and Improved”–and Increased–Texas Business Tax

In the past, when your business has received a valuation of its personal property from the central appraisal district, it had two choices, and the decision as to which was easy. If the appraisal was larger than reality, file a protest and lower the value. If the appraisal was lower than reality, do nothing, with the result of paying less in taxes than the law required.

The appraisal districts had no way to force your business to tell the district what personal property your business owned and used. But with the passage of SB 340 this last session, that has changed. This article takes an in-depth look at this new law, and the best way to deal with it.

We are dealing with Section 22.01 of the Texas Tax Code. As a result of SB 340, it now provides that:

A person [this includes by definition all business entities] shall render for taxation all tangible personal property used for the production of income that the person owns or that the person manages and controls as a fiduciary on January 1.

In other words, sitting around criticizing the appraisal district’s best guess is no longer an option. Businesses have an affirmative duty to disclose all tangible personal property.

And that’s not all. If your business’s tangible personal property totals $20,000 or more, then the business has to provide:

the name and address of the property owner;
a description of the property by type or category;
if the property is inventory, a description of each type of inventory and a general estimate of the quantity of each type of inventory;
the physical location or taxable situs of the property; and
the property owner's good faith estimate of the market value of the property or, at the option of the property owner, the historical cost when new and the year of acquisition of the property.

If the business owner’s opinion is that the personal property is less than $20,000, then the rendition needs to only include:

the name and address of the property owner;
a general description of the property by type or category; and
the physical location or taxable situs of the property.

For any taxable personal property that is exempt from taxation, the owner has 30 days from the date it loses its exemption, to render that property and its value to the appraisal district. Thou shalt not wait until the end of the calendar year, as that is not the timeline imposed.

If the appraisal district doesn’t like the owner’s “good faith estimate of the market value of the property”, it can request the owner to provide additional information as to the basis for that good faith estimate. And in such event, the owner has only 21 days to respond. Failure to respond is treated the same as a failure to render, which will be discussed below and is the new enforcement hammer given to appraisal districts by this new law.

Now here’s the big “amnesty” provision of SB 340, the carrot held out to encourage quick compliance with the “required rendition” concept:

If before December 1, 2003, a person files a rendition statement for the 2003 tax year that provides the information required by Section 22.01 as that section exists on January 1, 2004, and, as a result of that information, the chief appraiser discovers that some or all of that person's tangible personal property used for the production of income was omitted from the appraisal roll in one of the two preceding years, the chief appraiser may not add the value of the omitted property to the 2001 or 2002 appraisal roll.

“Discovers”? Yes, you read that right. Basically, filing an accurate rendition of property prior to December 1, 2003, will keep your business from being “back taxed” for all previously unrendered property, for calendar years 2001 and 2002. Otherwise, by implication, failing to so file will leave your business exposed to this contingent liability.

The concept of “required rendition” is new to Texas law. There is now a financial penalty for failing to affirmatively render property, basically a penalty for failing to keep the appraisal district informed as to the personal property owned by the business, and its value. Required rendition, and the penalties for failing to do so, are the “teeth” in this new statute: if your business fails to timely file an accurate rendition of personal property, the business will have to pay, as a penalty, 10% of the total amount of taxes imposed on the non-rendered property for that year.

It gets worse. If a business either (1) files a false statement or report with intent to commit fraud or evade the tax, or (2) alters, destroys or conceals any documents, or presents an altered document to the appraisal district, or in any other way engages in fraudulent conduct for the purpose of affecting the course or outcome of basically any matter involving an appraisal district, then that business gets to pay an ADDITIONAL penalty of 50% of the total amount of taxes imposed on the non-rendered property for that year. In other words, it’s not nice to fool with a central appraisal district. You’d have better luck with Mother Nature.

Let’s move from the theory of the statute to the real world application. Is this new law really something to worry about? I think the answer is a definite “yes.” Why? Well, consider as an example Art Cory’s recent statements reported in the August 22, 2003, print edition of the Austin Business Journal. Cory is the chief appraiser for the Travis Central Appraisal District. Cory said about 60% of the businesses in his district do not report their business personal property. He intends to force businesses to disclose their personal property and to maximize fines as the new law allows.

Why? Because of waning property tax revenue. Because the taxing authorities, the ISDs and cities and counties and such need more revenue. Because government can never get “enough” revenue to be satisfied.

This is a classic case of more aggressively enforcing the tax laws on the books, as opposed to enacting new taxes. It works great with the “no new taxes” pledge because it’s not a new tax. Not even the tax rates are raised. The politicians have increased taxes by expanding the tax base. With more stuff to tax, there will be more tax revenue. And that stuff is your business stuff. Welcome to the main course.

Fact is, Texas businesses have gotten away with this for a long time. But the sand has now run out of that hourglass. The loophole has been shut. It’s time to pay the piper. I’m sure there are plenty of other pithy quotes that would fit, but the bottom line is simply this: between now and December 1, 2003, you need to draft a rendition of the business’s property, either by yourself as owner, or in conjunction with your CPA. Then evaluate whether it’s to the business’s advantage to claim the amnesty protection and file that rendition now. At least quantify the risk your business is going to take by failing to file a proper rendition before December 1. Then decide whether or not to take that risk.