The state and also the local governments in Kentucky impose ad valorem property taxes on real and tangible personal property. Kentucky-based manufacturers are subject to such taxes because they have property in Kentucky, e.g., their manufacturing plant and the land on which it sits, machinery and equipment, inventory, etc.
The general rule is that all property with a tax situs in Kentucky is subject to state and local ad valorem property tax, unless otherwise exempt. Section 172 of the Kentucky Constitution actually requires this. The combined state and local property tax on each $1 million of assessed value can range from $12 to $18 thousand annually, depending on the locality – unless a special rate or exemption applies.
There are different tax administration processes for real property taxes and for personal property taxes.
Fair Cash Value Is Generally THE Issue in Real Property Taxes
The tax on any given parcel of real property, i.e., land and improvements like buildings, is a function of multiplying the property’s fair cash value as of January 1st of the tax year by the applicable tax rate, which is typically expressed in dollars and cents per $100 of value. Fair cash value is the price that would be paid in a voluntary, i.e., not forced, sale in which the parties involved are both willing and informed. For most owners of real estate, the real property tax issue is, “What is the fair cash value of the property?”
The answer to this question may require the services of an appraiser, who will consider the sales approach, the cost approach, and the income capitalization approach and apply one or more approach in determining any given manufacturing plant’s fair cash value. Often a property owner may have an idea about whether the fair cash value of real property is overstated.
Real Property Tax Bills
Each county’s Property Valuation Administrator is the primary administrator of state and local ad valorem taxes on real property in Kentucky. It is each PVA’s duty to value and assess tax on all real property within their county at its full value for all the taxing jurisdictions within their county including the Commonwealth. The Kentucky Department of Revenue directs, instructs, and supervises the PVAs. Taxpayers do not file tax returns. Tax bills are sent out in the fall by the county sheriff.
Disputing a Property’s Real Property Tax Value
Real property tax values must be disputed before the “tax rolls” of the county close, which is generally in mid-May. This is done by requesting a PVA conference and may be done regardless of whether the PVA has attempted to increase the tax value. For example, the Jefferson County PVA generally holds online conferences from late April until mid-May. Check with the local PVA to find out when the open inspection period for their county closes. If a real property tax value is not disputed in any given year, the PVAs’ position is that it is closed forever.
An appeal of a PVA’s determination of value is made to the local Board of Assessment Appeals for the county in which the property is situated. The next level of appeal is to the Board of Tax Appeals, which is a court-like proceeding but less formal and, if the property is owned by a legal entity, the appeal must be filed and handled by an attorney. Beyond administrative appeals are judicial appeals to Circuit Court, the Court of Appeals as a matter of rights, and if discretionary review is granted, to the Kentucky Supreme Court. But, the vast majority of property tax disputes are resolved by agreement, i.e., settled, with the PVA at some point prior to judicial review, though some disputes make it to the courts.
Tangible Personal Property Taxes Valuation and Classification
As with real property, the tax on tangible personal property is computed by multiplying the tax value of the property by the tax rate.
Unlike real property, an assumed fair cash value of tangible personal property is computed for many types of property using tables developed by the Department which begins with the item’s cost, including “inbound freight, mill-wrighting, overhead, investment tax credits, assembly and installation labor, material and expenses, and sales and use taxes. . . . net of additions, disposals and transfers occurring during the year.” Tangible Personal Property Tax Return, Form 62A500. The cost is multiplied by the applicable conversion factor based on the economic life of the class of the property. “If a taxpayer believes the composite factors in the return have overvalued…the property, the taxpayer may petition the Department of Revenue to accept an alternative reporting method. The taxpayer must file the return and affidavit of alternative valuation with the Division of State Valuation, not the local PVA.” Id.
Another issue in the context of tangible personal property tax is the classification of the property. There are four categories: full state ($0.45 per $100 of assessed value) and local rate; reduced state rate but full local rate; state only rate (often reduced); and, exempt.
Of particular relevance to manufacturers are the classifications for: machinery actually engaged in manufacturing (state only rate of $0.05/$100); qualified pollution control facilities (state only rate of $0.15/$100); recycling equipment (full state only rate of $0.45/$100); raw materials (state only rate of $0.05/$100); in-process materials (state only rate of $0.05/$100); finished goods (state rate of $0.05/$100, plus full local rates); and, goods stored in a warehouse/distribution center, if for shipment outside of Kentucky and held for not longer than six months (exempt).
Issues often arise in determining whether a process is manufacturing. They also arise in determining the beginning and end of the manufacturing process, and the Department has promulgated Regulations concerning this issue in the context of manufacturing coal [103 KAR 8:130], crushed stone, sand, and gravel [103 KAR 8:140] as well as hot mix asphalt [103 KAR 8:150]. Note that pollution control equipment must be certified, and the certification procedures may be found in 103 KAR 30:260.
Tangible Personal Property Tax Returns
Each business that owns tangible personal property must file a Tangible Personal Property Tax Return, Form 62A500, by May 15. Although a Department Form, it is generally filed with the PVA in the county of taxable situs but sometimes with the Department. As with real property taxes, the bills are sent out by the county sheriff in the fall.
Disputing Tangible Personal Property Tax Assessments
Because tangible personal property is centrally assessed, the Department audits tangible personal property taxes, similar to audits of income taxes and sales and use taxes. Accordingly, the Department’s administrative procedures concerning protests apply to additional tangible personal property tax assessed as well as to denials of refunds. Appeals from a Final Ruling of the Department may be made to the Board of Tax Appeals and judicial appeals made be made from there.
Navigating Property Tax Issues
Navigating property tax issues for a Kentucky-based manufacturer may not be as difficult as navigating an asteroid field, but when you know the issues and the procedures, you greatly increase your chances of success.
This is a modified version of Mark A. Loyd’s regular column, Tax in the Bluegrass, “Kentucky Property Taxes on Manufacturers” which appeared in Issue 2, 2016 of the Kentucky CPA Journal.