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Texas is one of only a handful of states that fully taxes business inventory of both raw materials and finished goods as part of what’s known as business personal property. Since there’s no state income tax, the business property tax in Texas is one of the highest in the nation.

According to Texas Taxpayers and Research Association, inventories account for roughly half of the state’s business personal property tax rolls. A $500 inventory exemption is available, but the number was set 20 years ago and has not kept pace with inflation. In other words, it rarely makes a dent. Certain inventory may benefit from additional exemptions such as Goods in Transit or Freeport, but these instances are very specific to particular industries or requirements.

Why are Inventory Taxes So High in Texas?

As business owners know, Texas is relatively tax-friendly overall. Its state and local tax burden ranking is 33rd among all states in 2020.In contrast, Texas has among the highest property taxes of any state.

To understand why there is such a disparity, let’s look at a few considerations that set Texas apart. First, unlike most states, Texas does not levy a state personal income tax, thus placing the tax burden on property tax. Second, in addition to having a high property tax rate, its base is broader than most states. From July 2017 to July 2018 alone, Texas’ population increased by more than 375,000. To support this rapid population growth and growing economy, county governments need additional tax revenue. Third, the state Comptroller’s office does not collect property tax or set tax rates. That’s left up to local taxing offices, which use the revenue to provide local services such as schools, roads, emergency services, and more.

Special Inventory Tax for Certain Retailers

If your business retails heavy equipment, motor vehicles, vessels and outboard motors, or manufactured housing, you may be subject to a special inventory tax in Texas. According to the State Comptroller’s Office, the appraisal on this inventory is generally based on sales, and your tax rate will be provided by your local tax collector’s office each year. Dealers must file inventory declaration forms each year listing the total sales and any applicable leases or rentals in the preceding year, and an inventory tax statement each month.

That rigid monthly schedule, in particular, can balloon out of control quickly. Plus, “few dealer compliance issues in Texas raise more questions than how to handle collecting and paying special inventory tax,” states the Texas Independent Automobile Dealers Association. At stake are stiff penalties for late or non-filers. A dealer who does not file the monthly tax statement, for instance, is charged with a misdemeanor offense punishable by a fine up to $100 per day until filed.

Tips to Reduce Your Taxes

Today’s rapidly increasing property valuations are outpacing bottom-line increases for many business owners. Here are a few tips that will help you decrease your tax burden:

  • Avoid penalties: If you’ve been in business for decades, you may assume there’s little to lose for not rendering business personal property (because historically, there wasn’t). But since 2003, a 10% penalty for late or non-filers has been enforced. The burden of proof in appraisal hearings has also been shifted from the appraisal district to the property owner, and there are criminal penalties for knowingly filing a fraudulent rendition.
  • Consider intangible asset valuation: It’s common practice for Texas’ business property tax assessors to use the income approach to value property. However, this method ignores the intangible assets that generate part of the income. Take steps to measure and remove the intangible portion of that value to make the assessment more fair.
  • Take advantage of manufacturing exemptions: Businesses who manufacture, fabricate, or process tangible personal property for sale may be eligible for state sales and use tax exemptions. Additional exemptions exist for tangible personal property that causes a chemical or physical change in the finished product and is necessary and essential to the manufacturing process.
  • File a simple rendition for low-value inventory: Detailed asset information isn’t necessary to report if the total market value is less than $20,000. Filing a simplified rendition form in these cases can save valuable time and resources.
  • Seek out special exemptions: Your business may be eligible for special tax exemptions, including those related to inventory that resides in the state for only a short time or includes not-in-use offshore drilling equipment, pollution control, or solar or wind-powered energy devices. Take a look at some of the exemptions Tesla is gaining for its Gigafactory in Austin.

Understanding Texas’ tax code can be a dizzying carnival ride, especially as it relates to inventory. To reduce your company’s special inventory tax liability, consider accounting practices and state exemptions that can help. Feel free to contact us for more information.

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