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Technological obsolescence may result in reduced personal property tax assessments.

States often use preset depreciation schedules or "original cost multipliers" to value equipment for personal property tax purposes. Generally, the depreciation schedules are intended to reflect decline in value resulting from wear and tear caused by ordinary use of the property. However, some types of equipment decline in value as a result of technological advances. Property such as computer equipment may lose its value due to functional obsolescence at a faster rate than its decline in value due to wear and tear. Since most state personal property tax statutes assess tax on the "true value" or fair market value (FMV) of tangible personal property, preset depreciation schedules are subject to challenge, to the extent the value determined under such schedules does not represent FMV. In several recent decisions, taxpayers in Colorado, Michigan, Virginia and Washington have obtained reduced valuations of computer equipment based on technological obsolescence.

The Colorado Supreme Court affirmed a reduction of property tax assessment on computer equipment based on technological obsolescence, in IBM Credit Corp. v. Jefferson County, 888 P.2d 250 (1/17/95). The county assessor used the cost approach (acquisition cost less depreciation derived from a tax table) to value the equipment. The trial court relied on an expert witness as well as prices of used computer equipment recorded in trade publications. The state high court agreed that the published pricing guides were reliable sources of pricing information and that they met the statutory requirements for evidence that may be considered in an appraisal.

The Michigan Tax Tribunal held in two cases that information relating to the effect of technological obsolescence on the market value of computer equipment justified a reduction in its assessed value (IBM Credit Corp. v. Grand Rapids, No. 172989 (12/2/94), and IBM Credit Corp. v. Detroit, 7 MTT 850 (1993)). In both cases, the taxpayer was engaged in the business of financing and leasing IBM computer equipment, and refurbishing and remarketing used IBM computers. Both cities assessed the taxpayer's mainframe computers and peripheral equipment using multipliers developed by the state tax commission, which based the assessment on original cost less scheduled depreciation. Although the guidelines published by the commission represented an appropriate method to value property, the tribunal held that exceptions must be made when there is "overwhelming reliable evidence" of a differing FMV. The tribunal recognized that the dominant factor in the value of mainframe computers was not age, but technological advancement. Further, the introduction of a new series of mainframe processors can have an immediate effect on the value of the previous mainframe series.

In Board of Supervisors of Fairfax County v. Telecommunications Industries, Inc., 436 S.E.2d 442 Va. 1993), the taxpayer purchased two Digital Equipment VAX 8550 computers in 1988 for a total cost of approximately $1.2 million. The next year, Digital Equipment significantly enhanced the VAX 8550 system, making the 1988 model obsolete. In determining the value of the taxpayer's computer, the assessor relied on a uniform five-year preset depreciation schedule that depreciated assets slightly more rapidly than on a straight-line basis. The taxpayer challenged the assessment, arguing that technological obsolescence had substantially reduced the value of the computer. The taxpayer supported its argument with expert testimony from a computer vendor that the replacement values of the VAX 8550 computers were considerably less than the assessed value. The court agreed with the taxpayer that technological obsolescence had a direct effect on value, and technological obsolescence had to be taken into account when determining a property's FMV (even though the property remained functional).

Technological obsolescence can also reduce the value of property even though the income flows from the equipment have not decreased. Because the taxpayer continued to receive lease payments, a Washington assessor argued that the equipment's "value in use" was higher than the value evidenced by sales reported in the Computer Price Watch, a national computer pricing publication. The Board of Tax Appeals was not persuaded, holding that sales information cannot be ignored if it represents the general effective market demand for property of such type. However, the board also noted that the assessor's valuation was not based on the value of the lease payments (Scott Noble, King County Assessor v. IBM Credit Corp., Wash. Bd. Tax App., Nos. 40738-40739 (6/10/93)).

In contrast, IBM Credit Corporation failed to obtain a valuation reduction in Arkansas, even though it submitted evidence similar to that presented in Colorado, Michigan and Washington. The Arkansas Supreme Court held that a county assessor's use of cost less six-year straight-line depreciation was a reasonable means for arriving at the FMV of computer equipment (IBM Credit Corp. v. Pulaski County, 873 S.W.2d (Ark. 1994)). In reaching its decision, the court relied on the Arkansas constitutional provision that requires uniformity of valuation rather than the statutory provision requiring property to be valued at the "usual selling price." Although the court recognized that the independent sales data publications may reflect more accurately the value of the IBM computers, the court noted that the publications do not provide values for all types of computers. Furthermore, determining the sales value of other computers would be unduly burdensome. Therefore, the use of comparable sales data to determine the value of the taxpayer's computers would result in disparate treatment to other owners of computer property not listed in any independent publication.

Taxpayers should consider the effect of technological obsolescence on the value of the property and consider challenging the valuation of property if the assessor uses standard tables or formulas for valuing equipment. Documentation and support for establishing the true market value are essential to a successful appeal. In addition, taxpayers should be aware that some jurisdictions provide a limited time for appealing personal property tax assessments.

From Marianne Evans, CPA, J.D., LL.M., and Scott D. Smith, J.D., LL.M., Washington, D.C.
COPYRIGHT 1995 American Institute of CPA's
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Author:Smith, Scott D.
Publication:The Tax Adviser
Date:Jun 1, 1995
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