By Attorney Sam Webb, The Cox Law Firm
The last thing on the mind of a trade professional is the rendition of the value of tangible personal property held in a warehouse, yard, or facility in Random Town, Texas. In the midst of export controls, pending Customs audits, and NAFTA certificates, why would a trade professional even think for one minute about that property? A trade professional may not think about it, but the trade professional may hold the key to unlock the box of significant tax savings for the company. It only takes a little out-of-the-box thinking to uncover potentially significant savings for your company.
The trade professional has, at their disposal, a trade development program originally designed to combat the negative effects of increased tariffs under the Smoot-Hawley Act in the 1930s. A Foreign Trade Zone (“FTZ”) is a federal government program designed to spur domestic economic growth through increased import and export activity. The benefits of FTZs are many, and likely known to trade professionals, like duty mitigation or elimination and reduced Merchandise Processing Fees, but an often overlooked benefit is the State and Local ad valorem tax exemption for imported tangible personal property held in a FTZ, or tangible personal property held for export in a FTZ.
Under Title 19 Section 81 of the United States Code, a company who, for example, holds large inventories for export, store imported heavy equipment for domestic production, or imports large quantities of inputs for manufacturing, could maximize its duty and fee benefits, but fail to capture the ad valorem tax savings. In some cases, the ad valorem tax savings for a company utilizing a FTZ may outweigh the duty or fee benefits.
Here are the key issues to address in order to take full advantage of the ad valorem tax exemption:
- Determine whether your business personal property (i.e. a company’s tangible personal property) was imported either by your company, by your vendor, or if your business personal property is held for export.
- Pro Tip: Do not limit your inquiry to “inventory.” Rather, consider all of your company’s tangible personal property, including inventory, but also including machinery and equipment, work-in-progress, and supplies.
- Ensure that the property is held in a designated and active FTZ on the date of valuation or rendition. In Texas, the date of valuation and rendition is typically January 1st.
- Render any qualifying property (i.e. imported property or property held for export) as exempt under the FTZ exemption.
- Realize significant tax savings once the exemption is granted, and the final certified tax roll is issued.
- Be sure to comply with any underlying Payment-in-Lieu-of-Tax Agreements that might be in place between the FTZ Operator and the taxing jurisdictions necessary for the support of the FTZ as a public utility.
These five issues, when handled with skill, can result in substantial tax savings for a company. For instance, an offshore oil and gas drilling company saved approximately $4 million per year in ad valorem tax thanks to the FTZ program by storing its equipment used in foreign exploration in a FTZ. A pipe distributor’s sole benefit was to realize $200,000 per year in tax savings on imported pipe for domestic distribution. A company need not even realize duty or fee savings to take advantage of the FTZ. The best strategy to benefit your company is for trade professionals to maintain a clear line of communication to the tax department and company executives about the full benefits available under the FTZ program, including the ad valorem tax exemption.