What every business needs to know about personal property tax

Personal property tax applies to many businesses, despite the confusing name. Neglecting business personal property tax can lead to compliance issues, tax penalties, and missed planning opportunities.

This guide defines business personal property, lists states without a business personal property tax, and gives a broad overview of how business personal property taxes work.

What is business personal property?

Business personal property includes all property not permanently attached to a physical location. This includes:

• Business equipment
• Machinery
• Inventory
• Supplies
• Office furniture
• Business vehicles

This definition excludes real property such as land and buildings. Also, some states define business personal property more narrowly.

Many states only tax physical assets—known as tangible personal property. These states exempt intangible assets such as software, licenses, trademarks, and patents.

Some businesses—from yoga studios to small software companies—tend to have relatively little tangible personal property. Examples of companies that usually own extensive tangible personal property include manufacturers and shipping companies. Locations with favorable property tax rules can significantly reduce the tax burden for such businesses.

Which states have a business personal property tax?

Most states tax business personal property, but exceptions exist. The following states do not tax business personal property:

• Delaware
• Hawaii
• Illinois
• Iowa
• Minnesota
• New Jersey
• New York
• Ohio
• Pennsylvania

Four states only tax the personal property of select industries that affect few private businesses. These states include:

• Minnesota
• New Hampshire
• North Dakota
• South Dakota

Many states that tax business personal property offer exemptions for property below a certain value or businesses with total personal property under a given amount. Additionally, states sometimes exempt entire industries.

Some states offer few or no exemptions—meaning most businesses in those states will have to pay personal property tax.

Business personal property tax varies widely between jurisdictions. Some states handle taxation themselves. Other states have local jurisdictions—such as cities or counties—assess and collect the tax. As a result, different rules and rates sometimes apply to different localities in the same state.

This can make dealing with property taxes burdensome for businesses with many locations. Such companies may have to file personal property tax returns and pay the related tax in different localities. Each jurisdiction may have its own definition of personal property, calculation method, due date, and tax rate.
 

How states and localities tax business personal property

Business personal property tax involves both an assessor and a collector.

Businesses typically file personal property tax returns with the assessor. Each jurisdiction provides tables to help the company determine depreciation on applicable assets, which often differs from the federal income tax amount. The assessor then multiplies the property's market value by the jurisdiction's "assessment ratio" to get the property's "assessed value." The lower the assessment ratio, the higher the tax rate on the assessed value will typically be.

Businesses can appeal the assessment. They usually do so to contest the method of determining fair market value—called the valuation methodology. The exact valuation methodologies allowed and appeal process depends on the jurisdiction.

The collector usually sends companies a property tax bill for their property's assessed value multiplied by the property tax rate.

Determining which jurisdiction allows the most favorable business personal property tax rules often proves difficult. Merely comparing rates gives an incomplete picture. Businesses must also consider assessment ratios, exemptions from the tax, and definitions of business personal property.

LZ Tax experts are here to help with any questions that arise related to your business personal property tax bill.

Studying each relevant jurisdiction's rules in detail—or hiring a qualified tax expert to do so—allows businesses to stay compliant and legally minimize their tax burden.