A bi-monthly insider guide to the confusing world of property taxation from BRUSNIAK TURNER. 

Providing insight and saving lawyers research time and their clients money since 1981 

"I'VE GOT TO DO WHAT? YOU'VE GOT TO BE KIDDING !” REPORTING ALL BUSINESS PROPERTY TO THE TAX PEOPLE PART I

© John Brusniak 2024 

“'If the law supposes that, the law is a ass—a idiot.'" — Charles Dickens, Oliver Twist

Greetings, Colleagues of the Bar! Here's another newsletter related to you, your law practice, and your clients. I'll pick up where I left off last time. The Texas Constitution requires all tangible personal property to be taxed. Personal property taxes are vestiges of tax systems from long ago when almost no one owned real property. At that time, the King collected what he could by imposing taxes on the little personal property people owned. Capturing and taxing all business personal property in Texas is a task almost impossible to achieve. But this does not stop Texas appraisal districts from trying hard to do so. 

LET'S START WITH THE GOOD NEWS NO TAX ON PERSONAL STUFF.

All personal property you and your clients personally own and do not use for business purposes is exempt. Accordingly, Texas exempts household goods, personal effects, cars, boats, and airplanes. It was not always so. Even today, on a local option basis, governments can tax these items. (I still run into entities taxing personal use aircraft. Taxing personal aircraft owned by a legal entity is a story for another day.) These same items of property, however, if used for business purposes, are taxable. For simplicity's sake, here's the rule: if property is titled to a business or leased to an individual or a business, it is taxable. A person is entitled to exempt only one vehicle used personally and for business. Leased cars qualify for exemption if more than half their use is non-business. But, paperwork is involved. 

DE MINIMUS VALUE EXEMPTION

Personal property used in business is exempt if its value is less than $2,500 i.e., $2,499 or less. The exemption benefits small law practices and small businesses. It mostly benefits appraisal districts from not having to chase taxpayers whose taxes are less than the cost of assessing and collecting them. The exemptions often cover home offices and businesses with very little property or very old property. They also apply to property brought from home and used in an office, such as a personal desk used at a law firm. The $2,500 exemption is calculated on a county-wide basis for all property owned by a person or entity. The exemption is not a deductible that reduces the value of everyone's property. Property valued at $2,500 or more, pays tax from the first dollar up. 

THE BAD NEWS AND THE SO-SO NEWS CATCH ME IF YOU CAN

You probably get similar questions in your practice. “Now that you've told me the law, what is the likelihood of me getting caught?” The good news is that only a 10% penalty is levied on those who fail to render (provide a sworn written listing) of their business property. The penalty is calculated on the appraisal district's “guesstimate” of the value of the unreported property. Lots of businesses do not file renditions notwithstanding the statute's mandatory language. A few of them are never caught, including businesses with high dollar property. You might be tempted to think that some businesses are too far off the radar. That may be true. But, appraisal districts are industrious. Several years ago, some appraisal districts went after Realtors™ for their home office property and mixed-use cars. 

WHAT CAN POSSIBLY GO WRONG?

An appraisal district can belatedly discover the existence of untaxed property or that some significant portion of property escaped taxation. When they do, they back-appraise the missing property for two years and add retroactive interest at the rate of 1% per month from the date the taxes would have been due. Caution your clients to never lie on renditions. Renditions are signed under penalty of perjury and are government documents. Violations carry a 50% civil tax penalty and a chance of becoming an involuntary guest of the state while wearing bright orange jumpsuits. 

I'M FROM THE GOVERNMENT AND I'M HERE TO POKE AROUND YOUR OFFICE.

They can't do that, can they? Yes, they can. Appraisal district employees patrol businesses and office buildings and appear unannounced demanding to see the personal property located therein. Taxpayers cannot refuse them entry, but they can request an inspection be postponed to a date and time mutually convenient to the taxpayer and the appraisal district. When appraisers tour businesses, they make notes of what they see and compare it to the property and values shown in their records. Absolute refusals of entry are usually answered with greatly inflated appraisal value notices. (It is important to note that appraisal district employees have no right to enter premises for the purposes of valuing real property.) 

COME OUT WITH YOUR HANDS UP!

 In some counties, a second breed of appraisal district employee exists. They call themselves “Special Agents” or sometimes “Special Audit Agents.” Some wear windbreakers like those worn by FBI or Homeland Security agents. Some even carry badges. They usually call first, but sometimes they show up unannounced and state that they are there to audit the business' books and records to determine compliance with personal property tax statutes. JUST SAY NO. Under no circumstances should you or your client ever turn over books and records to “Special Agents.” No matter how intimidating or threatening they may be. No law authorizes appraisal districts to demand production of books and records. (Sometimes indirect threats are made, “If you don't show me your books and records right now, I am going to issue an omitted property value notice so high, you will need to file a protest. And when you do, I will get a subpoena for your books and records. So, are we going to do this the hard way or the easy way?” My advice remains unchanged. Never, ever turn over your books and records. Unlike audits conducted by the Internal Revenue Service where possibilities exist for a post-audit refund, no refunds are ever made after appraisal district audits. There is no upside to cooperation. It is all downside. (An exception to this rule: if your client uses special valuation statutes and pays property taxes as they sell cars, boats, manufactured homes, or heavy equipment, they are subject to audit and must comply.)

WHAT DOES THIS MEAN?

It means you and your clients likely owe taxes and that you and your clients are required by law to render or report all business personal property to the appraisal district. Disclosure of leased personal property is also required unless you enjoy paying taxes on property owned by leasing companies. These filings are due by April 15 of each year. An extension to May 15 is automatically granted upon written request. 

ALL IS NOT LOST

In part 2 of this article, I will discuss options for reporting, the detail involved, how to claim exemptions and what happens to all the data. 

Previous articles may be viewed on our law firm website under “Updates” and the subheading “Property Tax Tidbits for Lawyers.”