Some states assess inventory property taxes. Have you heard of the Freeport Exemption?

By Gary A. Stone, ASA, Manager at Swartz and Associates

Most business owners are familiar with property taxes on their real estate and equipment. However, in some states, inventory is also taxed. For business owners that sell tangible goods, their top priority is providing a quality product for a profit. With a good plan, business owners can be prepared to minimize the impact of those taxes on their profits.

Inventory property tax is based on the value of the inventory as of the lien date, which is usually January 1 (West Virginia is July 1). This can include raw materials, work in progress, and finished goods. Not all states tax inventory, but if you operate in Texas, Oklahoma, Arkansas, Louisiana, Mississippi, Kentucky, Georgia, and West Virginia, property taxes will be assessed on your inventory.

Jurisdictions determine value using either the cost method, the market vale method, or the average monthly value:

1. The cost method is based on your inventory cost as of the lien date.
2. The market value method is based on the price a willing buyer would pay.
3. The average monthly value is based on the average inventory held over the course of the year.

Minimizing Property Taxes

To ensure your company is minimizing property taxes, there are a couple of strategies that can help. The first is tracking where materials are sourced and where the product is shipped. This is important because most states that tax inventory offer an exemption called the Freeport Exemption. The Freeport Exemption uses a formula to determine the percentage of materials and products from out of state. That percentage is then used to reduce the amount of taxable inventory.

Another area to keep in mind is inventory in transit, which consists of goods that have left the supplier’s warehouse but have not reached the buyer’s location. This is important because property taxes are based on property located within the tax jurisdiction. For accounting purposes, a company may have inventory in transit assigned to a location in a state that taxes inventory. However, because the inventory is not physically located in that state, there is no need to report it.

Inventory Property Tax Rules

Because property taxes on inventory are not assessed in every state, the rules are not always well understood. If you have consigned goods held by your customers, or you are beginning to do business in any of the states mentioned above, give us a call. We have worked in each of these states and can help you establish a strategy to maximize your profits by minimizing property taxes on your inventory.