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Times have certainly changed in Texas. In the past decade, we’ve seen a new era of technology usher in incredible advances in business operations, as well as changes in consumer behavior and expectations. In the past year, a global pandemic disrupted nearly every aspect of our lives and had a major impact on business operations in the state. In early 2021, Winter Storm Uri presented Texas business owners with never-before-seen challenges of dealing with a state-wide infrastructure failure that left millions without power.
Businesses operating within the Texas industrial complex arena have had to respond to major changes and challenges in the past year. Industrial complex properties are typically either advanced manufacturing or distributing operations that have a significant amount of assets and various moving parts. These are the businesses using innovative technology to improve existing processes and products, including oil and gas distributors, robotics engineers, defense contractors, medical and biotech developers—even vaccine distribution coordinators.
In this blog post, I’d like to discuss some effective strategies for reducing commercial property tax burdens within the Texas industrial complex area. We’ll also talk about how those strategies may have changed in the wake of the COVID-19 pandemic.
As property tax consultants, our job is to help identify opportunities to minimize our clients’ taxable liability while ensuring compliance with local and statutory reporting requirements.
One Texas program that is offered in counties and taxing jurisdictions which have opted-in is the popular Freeport Exemption. In addition to serving as an incentive for businesses to locate in a particular city or county, the Freeport Exemption allows for a full or partial exemption of January 1 inventory based on the past calendar year’s shipment activity outside of the state. This is an annual application that must be applied for by April 30, with a late application available until June 15.
According to the Texas Comptroller’s Office, “Section 11.251 of the Tax Code provides for a Freeport Exemption applying to goods, wares, ores and merchandise other than oil, gas and petroleum products (defined as liquid and gaseous materials immediately derived from refining petroleum or natural gas) and to aircraft or repair parts used by a certificated air carrier. The Freeport goods qualify if they leave Texas within 175 days from the date they are brought into or acquired in the state.”
There's also an interstate foreign commerce exemption, which has a little bit more detail, but relates to inventory that's coming in and is not processed from the time you receive it to the time it leaves the state. There are also other state and federal exemptions that your business may qualify for. There are various ways that property tax advisors can help evaluate industrial complex assets and determine the best route for market value reduction and/or exemption qualification.
Obsolescence identified and quantified as either functional or economic can also be utilized to help formulate opinions when negotiating potential reductions in market value. The American Society of Appraisers defines “functional obsolescence” as the loss in value or usefulness of a property caused by inefficiencies or inadequacies of the property itself when compared to a more efficient or less costly replacement property that new technology has developed. This includes such things as changes in design, materials, or processes resulting in overcapacity, inadequacy, lack of utility, or excess variable operating costs.
“Economic Obsolescence” is defined by the American Society of Appraisers as the loss in value of a property caused by factors external to the property including economics of the industry, passage of new legislation, reduced demand, and increased cost of raw materials, etc.
After adjusting for any potential physical depreciation, appraisers must consider the remaining obsolescence factors which might also be affecting the property's market value as of the lien date. Producing additional obsolescence analysis is time-consuming, requires meticulous effort, and demands in-depth research. However, the benefit and resulting savings could be tremendous for your business.
Impacts of COVID-19 to Texas Businesses in the Industrial Complex
The past year has been a wild ride for Texas businesses, with some suffering and others benefitting from the pandemic. For example, if you happen to be an oil drill and pipe manufacturer or distributor in the Houston area, you've seen a decline in global supply and a significant drop in oil prices, especially during the months of state-wide shutdowns. In prior years, your business might have been shipping many goods outside of Texas and been given an exemption for some of that material. Post-COVID, it may be a little different. Your business might not qualify for the same amount of exemption for your business, which may be depressed due to some of the indirect effects of COVID.
On the flip side, let's just say you're manufacturing and distributing vaccines or PPE equipment in response to the pandemic. The pandemic could have been a real boon to your business.
Advanced manufacturing and distribution companies within the Texas industrial arena are highly complex businesses that face unique challenges. Such companies need sophisticated property tax consultants who know the ins and outs of the industry and can provide expert advice for reducing your property taxes in Texas.
SWBC’s team of Ad Valorem Tax Advisors can help analyze your business operations and work to minimize your company’s taxable liability through a combination of methodologies offered by the Texas Property Tax Code and other statutory methods outside of the state.
Rex Zamponi is a Senior Property Tax Agent at SWBC. His goal is to help industrial and commercial businesses manage and mitigate their annual property tax liability by applying valuation methodologies and analyzing business characteristics for advantages per the statutory tax code. In addition to consultant duties, Rex also assists with new client acquisition and existing portfolio client service management.