By: Scott Murr
The subject of property tax is admittedly not terribly exciting. But if you do not understand how or why property tax is billed, in time you will likely have a high number of dissatisfied customers.
First of all, what exactly is property tax?? Property tax is a levy on the value of property that the owner of the property is required to pay to a government in which the property is situated. Property taxes are usually charged on a recurrent basis (e.g., yearly). A common type of property tax is an annual charge on the ownership of office equipment, where the tax is based on a percentage of the value as it is depreciated over the term of the lease.
Pretty simple, right? If you buy the equipment, you should be charged property tax since you are the owner. But the Office Equipment industry is not focused on selling equipment, rather we sell “usage”. We dont sell the equipment, we sell the pages. Therefore, if we are selling our customers on “pages” and “usage”, then why do our customers get billed for property taxes as if they were sold the copier in a purchase agreement?
The answer is pretty simple. While your customer may be in a usage agreement, the equipment lessor is still the owner of the copier. The leasing company files a UCC 1 which is essentially a statement of ownership on that equipment. Taxing authorities obtain lists of all UCC filings in their county and bill the owner of the equipment listed on the UCC filings in accordance with their local tax rates. The leasing company, as the owner, is charged and makes payment on the property tax to the taxing authority. The leasing company then charges the customer what they paid out in property tax plus they charge a property tax filing fee.
Why do the leasing companies charge this cost separately rather than just include it in the rate so the customer does not get billed for this item? Each county uses a different formula to charge property taxes. Some counties do not charge property taxes at all. If a leasing company were to add property taxes on to their rates, they would need to either make a separate rate sheet per county, or add in a standard amount across the board which would result in most everyone over-paying. I have seen first hand, on a 60 month rate one county to add property tax to the rate was .0003 while I saw another county was an add of .0025. That is a huge fluctuation. The policy to bill your customer what the leasing company actually pays is the most fair way to go. In addition, if property tax was built in your standard lease pricing from the leasing companies, if you upgrade a customer early you would be paying future year’s property taxes in your trade up figure even when the equipment is no longer in the field.
What if you write a lease for a customer who says they are property tax exempt? This is a very touchy subject and a source of most property tax disputes. If you look back to the definition of property tax shown above, who is the party that is responsible for the charge? The owner of the equipment. While many municipalities, non profits, and other entities are exempt from property taxes, that would mean they are exempt from tax on assets they own or are purchasing. If you write a standard FMV lease for a customer who claims they are “property tax exempt”, the leasing company is the owner of the equipment and is not exempt from property tax, as such they will pass that charge on to the customer since they have paid it. This is where many billing disputes are born. The customer refuses to pay the tax and the lessor cannot waive it because they paid it and will be charged again next year.
Most state, local, and city goverments are exempt from property taxes on equipment they purchase. However, to ensure they do not get charged, you need to utilize a tax exempt municipal lease rate and State and Local Government (SLG) document. This type of lease is a sale where the customer purchases the equipment using a dollar out rate. Due to various tax incentives, leasing companies can offer some very good dollar out SLG rates. This is not the same as your standard commercial dollar out pricing.
If your customer insists on non SLG documents and pricing, prior to quoting ask your leasing company what they would need so you can avoid being charged property tax while still using a FMV rate. I need to make this a point of emphasis here, the leasing company is not the one who decides if a customer is property tax exempt or if the documentation provided is satisfactory. The county or local government who levies the charges is the party who makes that decision. The leasing company simply wants some sort of form they can provide the county so they dont get charged property tax. If they do not get charged property tax, they do not charge the customer property tax. In most cases, non profits, local and city government deals written as FMV cause lots of problems in this area. It is best to ask your leasing company what the add in is for property tax and add it in your deal. Then you can line the provision on the document out where the customer is obligated to pay property tax. While you may worry a competitor will not add in property taxes and neglect to inform their customer they may get a bill, the way around that is to coach your customer that they need to insist it is struck on the actual lease document. If your competitor allows a customer strike the property tax section on a commercial FMV lease, without the tax being built in or an certificate that will exempt the leasing company from being charged property tax by the taxing authority, the leasing company will not fund your competitor’s deal and will require the deal to be either re-signed or short funded with the property tax added to the rate. If you do build the property tax in your deal, make sure you put a single line through the lease document that obligates your customer to pay property tax. It is not uncommon for leasing companies to forget to book the lease where it is clear the property tax is built in. If it is not noted on the lease, it can be difficult to provide the documentation showing the tax was included in the rate factor.
It is well worth taking some time with your customers to understand how they will react to property tax billing and to pro-actively craft a solution so there are no problems down the road. It can be tempting to gloss the subject over knowing the issue may not come up for a year, but it will come up and it will not go away.
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