Procedure for Assessing Personal Property

2/21/16

CHAPTER 8

ASSESSMENT OF PERSONAL PROPERTY

Assessable personal property falls into several major classifications (1) business and industrial property, (2) leased equipment, (3) farm property,

(4) motor vehicles, and (5) boats. Each of these major classifications will be treated separately in this chapter. Some general procedures, however, apply to assessment of all types of personal property.

PROCEDURE FOR ASSESSING PERSONAL PROPERTY

Discovery

Compilation of a comprehensive list of all persons and firms who own, or may reasonably be presumed to own, taxable personal property in a town or city is the first step in assessing personal property. This checklist of owners serves the same purpose in the discovery of personal property that a tax map serves in the discovery of real property.

The sources, which may be used to compile this list, are previous tax lists, city directories, telephone directories, classified advertisements in local newspapers, probate records, lists of registrants of motor vehicles and watercraft and some records found in the office of town clerk. Lists of places of business licensed to collect the state sales tax in each town or city are available through the office of the state tax administrator. A complete record may be obtained only by making a building-to-building canvass of the entire tax district, and once made this can readily be kept up to date.

This list arranged alphabetically may be used as a record for mailing of report forms and for checking lists and reports as they are returned. An arrangement by street address is invaluable in the field in looking for changes and in checking persons who have not made returns. To keep this checklist up to date, assessors must watch for such changes as (1) persons moving out of town, (2) new businesses, (3) changes of address within the town, and (4) change of ownership in an existing business.

Where Personal Property is Assessed

The General Laws provide for filing a true and exact account by all persons, corporations, etc., having taxable personal property. However, the assessor should not depend entirely upon information furnished by taxpayers. Experience has shown that in many cases information is not complete, and values reported are not accurate. If an account is not filed, the assessor must assess the property on the basis of the best information obtainable.

Business personal property should be assessed at its location. A personal visit to each place of business is not only good public relations, but also is the best way for an assessor to obtain complete, accurate information about the property to be assessed. Moreover, books of account may be examined during personal visits.

Confidential Reports

The assessor should have report forms with sufficient space to enter essential information about the property to be assessed. Many towns and cities are using forms based on formulae for determining taxable values, which in turn are based on accounting records of taxpayers. These jurisdictions have learned that taxpayers welcome the use of this type of reporting.

Basis of Assessment

Rhode Island General Law (44-5-12.1) provides for the assessment of personal property at its “original purchase price including all costs such as freight and installation. Assets will be classified and depreciated as defined”. Assessors use uniform evaluating schedules, many types of these schedules have been used with a considerable degree of success. They include schedules based upon unit values, flat percentage or related values, and values revealed by books of account. An assessor cannot make personal property assessments without a working knowledge of (l) types of personal property, (2) money value which personal property brings on the market, (3) statutes pertaining to personal property assessments, and (4) basic accounting terms and principles. Once cash value has been estimated, the assessment ratio is then applied.

Sources of Value

There are many sources of information relative to prices paid for property classed as personal property. These prices are indicative of value. When an individual buys something for his own needs, he investigates several sources where he can find information on the price of these items. When an assessor is valuing personal property, the same sources are often useful.

Newspapers

Market prices for farm products and farm machinery, advertisements of items of machinery and office equipment and notifications of cattle auctions, boat shows, or demonstrations of any type of taxable personal property, are sources of information on personal property.

Bulletins of Commission Merchants and Dealers

Commission merchants commonly issue bulletins giving prices for farm produce. Dealers in pelts of animals issue bulletins giving prices, which are helpful in determining the value of fur-bearing animals.

Radio

Daily broadcasts of market quotations of farm produce and animals are made from many radio stations.

Catalogues and Price Lists

Catalogues and price lists are issued by jobbers and wholesalers of most manufactured goods such as office equipment, doctors' and dentists' equipment, barbershop equipment, billiard tables, cash registers, hotel furniture and equipment, linotypes and other printing equipment, farm machinery, store equipment and soft drink parlor fixtures. Catalogues of mail order houses are useful in getting approximate prices for many articles sold at retail.

Retail Dealers

Prices of articles ordinarily sold by retail dealers can be secured from the dealer selling the article. Such articles commonly include typewriters, radios, 0ffice furniture and filing equipment. Prices of secondhand articles can frequently be obtained from dealers.

Income Tax Returns

The value of equipment of stores, factories, offices, doctors, dentists, barbers, movie theaters, hotels and other concerns and individuals may be secured in fairly reliable form from income tax returns filed with the Internal Revenue Service. This information can be secured from copies that are retained by taxpayers. Use of this information, however, is subject to the limitations pointed out in connection with depreciation in Chapter 5.

Taxpayers' Books of Account

Inventories and cost records appearing on the books of the taxpayers can be used as one source of value. Sales records are useful for determining the value of fixtures, supplies, equipment, motor vehicles and many other kinds of property.

Checklists of Tangible Personal Property

In order to know types of personal property subject to taxation, it is wise to establish checklists of items falling into various categories. These may be arranged according to type of business. For example, grocery stores are likely to have the following pieces of equipment -- cash registers, counters, display cases, electric fans, frozen food cabinets, scales and shelving. Three common check lists are those for leased equipment, fixtures and equipment, machinery and equipment. Personal property of electric and gas utilities would include the following items, listed according to size and capacity -- miles of transmission line; miles of distribution line; miles of underground cable; number of overhead services; number of underground services; and number of meters.

BUSINESS PERSONAL PROPERTY

There are two (2) ways of approaching the valuation of business personal property: (1) physical inventory method (use of cost schedules}, and (2) confidential report method (use of book values and pricing of inventories). From an overall point of view, certain places of business lend themselves to the listing of property by the physical inventory method and the valuing of their property by the use of cost schedules. Others can be handled more readily by the listing of property on report forms based on the taxpayer's books of account.

Businesses that by their nature have more taxable items of fixtures and equipment than inventory lend themselves to the physical inventory method. The confidential report is most often used for places of business that have large inventories of goods and a considerable amount of machinery, equipment and fixtures. Businesses, which might be more easily handled by the physical inventory method include accountants' offices , amusement centers, barbershops, bars, cafes, taverns, beauty parlors, doctors ' and dentists' offices, farms, garages, gasoline stations, lawyers' offices, restaurants, shoe repair shops and small neighborhood stores. Businesses, which more readily lend themselves to use of the confidential report method include breweries, broadcasting stations, chain stores, clothing stores, dairies, department stores, fixture and equipment companies, hardware stores, hotels, jewelry stores, manufacturing plants of all kinds, newspaper plants and shoe stores.

Physical Inventory Method

The physical inventory method is preferred for the businesses listed because records of such businesses are often inadequate or completely lacking and because an accurate inventory can easily be made of all taxable items of the business. On his/her visit for inspection, the assessor should make a complete list of all taxable items such as furniture, fixtures, and equipment. Inventory should be noted but is not taxable whether it is manufacturer’s inventory or retail inventory. Individual items listed in this physical inventory can then be priced by the use of unit values as established by the assessor after study of the costs of the various types of equipment used in these businesses.

Under this method, furniture fixtures and equipment must be assessed by actual cost or estimated cost figures obtained from the taxpayer (or from his book of accounts). These may be checked by comparing the amount and value of the furniture fixtures and equipment in one establishment against the known value of furniture fixtures and equipment in another establishment of similar type and size or by the use of gross sales.

Confidential Report Method

While the confidential report method gives the assessor a report based on actual accounting figures, it is valueless unless the assessor has at least a basic knowledge of accounting terms and methods. If returns are not checked, the taxpayer may eventually become lax and the assessment nothing more than self-assessment.

Business accounts are computed on either an accrual basis or a cash basis. On the accrual basis, income is recorded as earned when goods are sold, regardless of time of payment, and expenses are recorded as soon as liability is incurred. On the cash basis, income is recognized only on receipt of cash, expenses are recognized only on disbursement of cash.

In any business, assets are items owned by or accruing to said business, and liabilities are those debts chargeable to the business. The most important item that the assessor should look for in examining the taxpayer's business accounts or books is the list of assets, which should include the value of inventories, fixtures and equipment.

At the close of each accounting period (usually a year), every business prepares two (2) financial statements. The balance sheet is a statement of the financial position of the business as of a given date while the statement of profit and loss (also referred to as an income and expense statement) itemizes income and expenses during that period. The assessor must be aware that figures on the balance sheet are the depreciated values of furniture and equipment. To determine the original cost of these items, reference must be made to the general ledger in which is recorded the date and amount of each transaction.

DEFINITIONS YOU SHOULD KNOW:

Balance sheet - a statement of financial condition at a given date:

1. indicates inventory on said date

2. indicates cost of all fixed assets (land, buildings, fixtures and

equipment) and the amount of depreciation on each as of said date

Income and expense statement - (also called "profit and loss statement") a

report of income and expenses for a given period of time, usually a year:

1. indicates beginning and ending inventories

2. indicates cost of sales

(a) by dividing the cost of sales by the average inventory, you

can determine the stockturn (or turnover)

3. indicates gross sales

(a) you can determine what percentage the average inventory is

of gross sales and apply this to similar busi nesses where

such information is limited.

Assets - the entire property of all sorts of a person, association, corporation,

or estate applicable or subject to the payment of his or its debts .

Book value - the capital amount which property is shown on the books of

-- account. It is the original (or acquisition) cost less reserves for

depreciation.

Current assets - items such as cash, inventories, prepaid expenses, receivables, etc. (which have 12-month liquidity).

Fixed assets - long-term assets, such as land, buildings, machinery , equipment, etc.

Other assets - investments, such as marketable securities of a long- term

nature.

Liabilities - pecuniary obligations - debts; they are usually referred to as

total liabilities and stockholders equity (includes capital stock).

Current liabilities - short-term indebtedness such as accounts payable, notes

payable, employee payroll payable, sales tax payable, etc.

Long-term liabilities - mortgages payable, debt to a majority stockholder, etc.

Markup - the percentage by which the cost of an article is multiplied to

get the amount which, added to the cost, gives the selling price.

(This differs from markon.)

Net worth or stockholders equity - the owner's interest is the excess of

the assets over the liabilities of the business; capital stock and

retained earnings.

Cost of sales - the beginning inventory, plus purchases, less ending inventory. (Also called "cost of goods sold.")

Net profit - the difference between the gross profit and the total expenses.

Selling price - cost of goods sold, plus the gross profit (referred to as

Net Sales).

Selling price = cost_____

100% - Markon percentage

Stockturn (or Turnover) - the number of times a year the average inventory

on hand is sold and replaced.

Stockturn = cost of sales

average inventory

Markon - the difference between the cost of merchandise and the original

retail value assigned (this differs from markup) .

Markon percentage = 100% - cost

retail

Gross profit - the difference between the cost of goods sold and the selling

price of goods sold.

An assessor should be capable of analyzing financial reports of businesses.

The balance sheet and the income and expense statement will assist the assessor in arriving at fair and equitable valuations on most taxable assets of a business. See Appendix I and J for examples of both.

PROPERTY OF MANUFACTURERS

The property of manufacturers may be divided into several groups for assessment purposes. Under RI General Law 44-3-3 Manufacturer’s machinery is exempt but their office equipment remains taxable. These include: