Cross Section Of Business
Personal Property Issues
2013 Advanced Personal Property Seminar
September 23, 2013
Sheraton Four Seasons Hotel
Greensboro, NC
Presented by Dave Duty
Property Valuation Specialist II
North Carolina Department of Revenue

What does “cross section” mean?
We will explore three situations………..
Trade Level
Supplies vs. Inventory
Cellular Phone Companies

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What does “trade level” mean to you?
Assess property at the proper level of trade based on its location & use as of the assessment date---
Appraiser must recognize that property normally increases in value as it progresses through production & distribution, then finally arriving at the consumer level---
Factors to determine the TLA are---

What does “trade level” mean to you? (Continued)
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Uniqueness of the equipment
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Infrequency of sales
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Lack of facts necessary to determine its marketability

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What does “trade level” mean to you? (Continued)
And…Stage of Production which reflects how utility is added to the asset through…………..
Form
Place
Time
Ownership

Computer Example – Level of Trade
Price to Next Level
Consumer
Cost
$2,250
Markup
Retailer $2,000 12.5% profit =$250 and costs
$2,250
Wholesaler $1,500 33% profit = $500 and costs
$2,000
Manufacturer $1,000 50% profit = $500 $1,500
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Which cost should be reported by the manufacturer who uses the computer?

What examples of trade level do we deal with every year?
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Tyco Electronics
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Pitney Bowes, Inc.
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G-Tech Lottery Equipment
What does NCDOR provide to the counties in these circumstances?

What is a trade level factor?
This is a Trade Level Factor!!!
For example: Pitney Bowes, Inc.
Gross Sales = $1,500,000
Cost of Goods Sold = $1,000,000
Gross Sales divided by Cost of Goods
Sold = 1.5
Markup is 50%, Factor is 1.5

Ashley Furniture Company

Example of Trade Level
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Facts to consider---
ABC Co. sells furniture to Ashley-title transfers
Obligated via contract to display in store just like my living room
Furniture can’t be sold for 3 years and then it is liquidated
Furniture just like the showroom display is sold every day with sales tax & sales commission added

What cost should Ashley Furniture report to the county on their listing form?
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A – It could be like Pitney Bowes or Tyco
– Apply a Trade Level Factor
B – It could be like Moore Buick-Pontiac
Demo Vehicles; PTC Case
C – Or, it might be that the owner is treating the furniture as an asset when it should be treated as inventory

Conclusion????????????
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Treat furniture as an asset without a trade level factor----------------

What does Supplies vs. Inventory mean to you?
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What is the difference between supplies and inventory?

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Various items held by the business owner on the premises, that accommodate a process initiated by the owner or employee
Cleaning/Janitorial items
Office items: paper clips, note pads
Maintenance items: oils & lubricants
Fuels: consumed in fleet vehicles
Medical/Dental/Doctor/Veterinarian: syringes, molds, crutches, cat litter

Supplies
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Barber/Beauty items: shaving crème, hair coloring, make-up, cologne
Restaurant/Hotel items: linens, flatware, glasses, dishware, trashcans
Snacks & Drinks: on hand & free for the employees and not in a vending machine?
Rental items, replacement parts, & spare parts

Inventory
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Goods held for sale in the regular course of business by manufacturers, retailers & wholesalers, & construction contractors
A detailed list of items in one’s possession, and accounted for through a periodic survey of all goods and materials in stock at that time
105-273(8a)…the term includes packaging materials that accompany and become a part of the goods sold

What issues do county appraisers have with business owners concerning supplies & inventory?
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Taxpayers call supply items their inventory!
Taxpayers don’t know how to list their supplies
Taxpayers don’t keep up with the amounts that are on hand
Taxpayer wants to exclude certain items when their business is not manufacturing, retail, wholesale, or contractor related

Responses to help taxpayers list correctly
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Educate taxpayer on statute definition of inventory, not a quantity list of items
Communicate with taxpayers & teach them the proper supply items to list
Offer options on how to list:
Provide 12 months of invoice costs divided by 12 give a 1 month snapshot
Do a physical inventory on December
31 st & give those costs to the county

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Responses to help taxpayers list correctly (Continued)
Qualify the taxpayer as either a manufacturer, retailer or wholesaler, or as a construction contractor
Offer good public relations:
Reduce amount of supplies during the month of December
If taxpayer doesn’t pay sales tax on the item, then it could be inventory
Remove costs of disposed or sold rental items, broken dishes, stolen trash cans from supply costs

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Three Prominent PTC
Inventory Cases
Moore Buick-Pontiac, Inc. – Rental cars are not inventory – Company lost right to possess & control; Demo cars are inventory – held for sale
R.W. Moore Equip. Comp. – Leased heavy road equipment – Use of equipment disqualified it as inventory
Cone Mills, Inc. – Purpose of obtaining the property is either as an asset or as inventory, but not both

Some Guidelines-----------
Property held for both sale and rent:
It is Exempt if:
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New property is held for sale or rental purposes, but has not been sold or rented yet.
Previously rented property that has been transferred to a company’s sales division as of January 1

Some Guidelines----------
Property held for both sale and rent:
It is Taxable if:
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Property that is rented anytime during the year still remains in the company’s rental division
Any property treated as a capital asset as of January 1 where the taxpayer plans to take depreciation on the property

Some Guidelines-------------
Property held for both sale and rent:
It is Taxable if:
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Property is being rented or consumed rather than held for sale on January 1

Some Examples-------------
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Modular home display model on the sales lot
Manufacturer of airplane tires
Liquid medications for farm animals
De-icing mixture for streets owned by a
Home Owners Association
DENR Certified equipment maintained with grease, oils, and lubricants
Crucibles used in a chemical reaction to create a product

Power Curbers
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Concrete street curb making machine
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2 to 3 machines are pulled from inventory to perform R & D testing
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Not “held” for sale in the regular course of business – “held” for testing & research
Use of property changed from item to be sold to item to be consumed
Inventory not typically used for manufacturer’s use
Cone Mills, Inc. case says---------

What issues do we have with
Cellular Phone Companies?
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Technology Changes
How costs are listed on the abstract
What schedules to apply to the various types of assets
Retirement of company assets
Costs related to maintaining older technology

Issues facing the appraiser
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Technology Changes:
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Wireless communication is rapidly changing
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The general public is demanding more visual data at greater speeds
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New assets are replacing old assets

Issues facing the appraiser
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How costs are listed on the abstract:
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Company provides their requested percent good valuation
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Some sites are shown as
“Decommissioned”
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Application of requested depreciation lowers traditional values

Issues facing the appraiser
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What schedules to apply to various types of assets & the true value
For example: Concrete out buildings vs. thin metal cabinets
For example: Switching equipment old vs. new
For example: Improvements to leased property
Obsolescence & final value

Issues facing the appraiser
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Retirement & disposal of assets:
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Voice only capability vs. connection to internet, visual data delivery, texting, etc.
Abandoned equipment left in place
Ability to sell used equipment
Statutory requirements-not exempt

Issues facing the appraiser
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Costs to maintain older technology:
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As customer usage drops, less support is required
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Replacements coming in while retired assets are going out

Wouldn’t it be nice if cellular phone companies could be appraised and valued like a public service company?????????????

QUESTIONS??????????