Equipment Leasing; who should pay business/personal property taxes?
Jack Ormberget (CFO, Color Star Growers of Texas, Inc.)
| Nov 18, 2011We are about to lease a piece of equipment for our manufacturing process. It's an expensive machine and the lease extends to 36 mo's.
As it is a lease, should we the Lessee be responsible for the BPP's to the County Tax Assessor? I have seen this practice in copier leases in the past, but just assumed it was a ploy to get us to pay for something that the Lessor hoped we would. I don't recall if we refused and it was stricken from the contract. It's one thing for a $5k copier and another for a $175k piece of equipment.
Any thoughts are appreciated on this!
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Answers
Company: TTX
The lessee will pay the taxes one way or another, either directly [a "net lease"] or indirectly through the lease payment. Usually lessees pay the taxes directly on longer-term leases while the lessor pays for shorter term contracts. If the administration is unfamiliar to your company the lessor should pay as they have volume and efficiency and the lease is fairly short term. The lease payment will reflect this cost being billed to you.
Company: Independent Consultant
My experience has been that the jurisdiction levies ad valorem taxes on the property holder for property that resides in the jurisdiction, irrespective of whether it is owned or leased. Mr. Peterson is correct that the lessee will pay one way or the other. The lessee can certainly opt to dispute the fair market value that is imputed for assessment purposes, the property classification for depreciation schedule purposes, or both. Companies such as Arthur D. Little have assisted clients for decades in reducing their assessments and will typically work on a contingent fee basis if there are sufficient savings to be gained.
Company: Wabash Financial Strategies
The first two responsdents have given you good and comprehensive advice. Most equipment leases are written as net leases whereby the lessee, as the user of the equipment, is financially responsible for almost everything except taxes on the lessors net income. This is true whether the taxes are separately stated and billed in a longer term lease or "invisibly" included in the cost of renting a tool for three hours. Lessors and lessees sometimes attempt to minimize these costs by registering movable equipment in a more favorable tax location, for example.
In addition to the fair market value point raised by Mr. Mason, you may want to ask for a detailed invoice from the equipment vendor. Certain costs reflected in the $175K total may be excludable for the BPP calculation.
Company: Color Star Growers of Texas, Inc.
Thanks to everyone for their comments and insight. I believe that we have settled on our approach to this situation. We will agree to have direct responsibility for the tax bill so that we then will also have the direct connection to the appraisal district. We intent to be active in managing the rendition to better keep the valuation in line.
I guess I just have always been of the opinion that the equipment lessor/owner shoulder this burden, and was resistant here. In the past and especially in copier/telecom leases, I found the amounts were just not large enough to warrant to added time for our team to fuss with this process when we had no future ownership in the equipment. At $200k and with multiple depreciation schedules, it will be in our best interest to manage this process.
Company: RCM Industries, Inc.
The owner of equipment will be whom the tax agency comes after so I as the owner have always preferred to pay the tax and pass the cost through to the lessee for best control.
Company: Packaging Dynamics
I would agree with Vernon 100%. I have rarely paid these as a “one off."