Cable companies, railroad companies, natural gas and oil companies—these are some of the types of organizations whose primary assets tend to cross county or jurisdictional borders. Because taxes are assessed on property located in specific jurisdictions, that creates a challenge when it comes to business personal property tax filings: How do you properly distribute the value of those assets over the various jurisdictions in which they’re located? This article examines the most efficient method for doing that, as well as how to choose the right allocation metrics to ensure the fairest possible distribution of value.
Why allocate distributed asset values in business personal property?
Distributed assets—those that cross jurisdictional borders—are different from other assets like computers or office furniture. Whereas a chair or a desk has value on its own, a distributed asset’s value is tied to a larger unit. For example, the various components of a railroad track that stretches across the country are only valuable when considered as a whole, because each piece contributes to the overall operation of the track. If you took the track apart border by border, those individual components aren’t as valuable as the entire length of track.
Because distributed assets are part of a larger collection of assets, they typically are valued as such. That value needs to be allocated into ratable parts, so tax can be assessed in connection with the fair market value of that asset in each relevant jurisdiction. When assessment rules allow the filer to determine reasonable methods, proper allocation is important to maintain fairness across the board. Fairness can be compromised when a jurisdiction with an over-allocation of assessed value is unfairly collecting higher taxes while another jurisdiction is burdened with an under-allocation of assessed value is not receiving its fair share of tax funds to support business and community operations.
How To Allocate Distributed Asset Class Values
The mathematical formula used to efficiently allocate value is simple:
X/Y ⅹ [the entire value of the asset class] = allocated value
What are X and Y?
That depends on the type of asset class you’re trying to value.
Example 1: Say you’re trying to allocate value for a certain type of railroad track. A reasonable metric upon which to base that calculation is the actual length of that track type within a particular jurisdiction. If there’s one mile of track located there, X = one. Y would then be the total miles of track. In this case, let’s say it’s 100 miles in length. One divided by 100 is .01, or 1 percent. Then multiply that by the total value of the track, which is $10 million, and you get $100,000. You would then apply a $100,000 value to that jurisdiction. This is a very simple example, but it’s a rational means of allocation for this particular type of distributed asset.
Although this particular metric may work for valuing things like railroad tracks or pipelines, it doesn’t make sense for other types of asset classes, like cable boxes, for example.
TotalPropertyTax software handles your allocation calculations quickly and easily, ensuring you get it right every time. Schedule a demo to see how it works.
Example 2: Customer premise equipment (i.e. Cable boxes, remotes, modems, etc.) are also distributed assets because they’re owned by the cable company, but their value is more related to the number of subscribers than it is to the miles of cable in a system. In this example, say you have 1,000 subscribers in a particular jurisdiction and 100,000 subscribers in the cable system. You would then multiply one percent by the total value of all the company’s cable boxes together to determine the correct amount to allocate to that jurisdiction.
Some assets may seem like they should be allocated but don’t need to be. For example, cable companies have headends—facilities where programming is distributed to subscribers via cables. Those headends have an actual physical address within a single jurisdiction. In that case, the entire value of the asset is applied to the jurisdiction in which it is located.
The most important thing to remember about fair allocation methods is this: The metrics you use should be relational to the underlying assets you’re valuing. If you try to apply just one metric to all your distributed assets, the allocation will be less accurate. If, for example, you try to allocate cable company asset values based on number of employees, you may have employees at the headend, administrative office, and corporate headquarters. That metric may relate to where you have desks and chairs, but it doesn’t relate to the location of the underlying infrastructure assets, and therefore will result in a less fair distribution of value.
A Tip To Improve Your Calculations
The best way to validate your data is with the help of a geographic information system (GIS). (Think of Google Maps, which has city boundaries, roads, etc.) By layering jurisdiction maps on top of one another and placing an engineered drawing of your asset (shapefile) on top of that, you’ll find out the specific location of your asset. You can also measure the exact number of miles or count the number of subscribers or assets within a jurisdiction.
Make Distributed Asset Allocation Easy With TotalPropertyTax (TPT)
TotalPropertyTax (TPT) software was built to handle the complexities of distributed assets. It integrates with GIS systems, allowing you to upload data directly into the system. It also performs the allocation calculations for you, reducing the time it takes to determine valuation amounts and removing the risk of human error. So you can forget about doing time-consuming spreadsheets and calculations and transferring them to a legacy application—with TPT you can do more inside the system, making your team more efficient and your numbers more accurate.