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# 6012a - OHIO: PERSONAL PROPERTY TAX HISTORY

Included in the budget bill, (HB 66, 2005), was a provision to phase out all components of the tangible personal property tax -- inventory, furniture and fixtures, and machinery and equipment -- over a four-year period beginning in 2006. This article is a brief history up to that point.

-- April 2006

Background of the Personal Property Tax Valuation in Ohio

A major accomplishment took place July 1, 1983, when an FPER Association (now OMEDA) amendment was included in the State's Budget Bill which provides Personal Property Tax relief to all Association members. The amendment provided that ag equipment would be exempt and that OPE and industrial equipment held in dealer inventory at 35% (in 1983) of its true value would be reduced over a ten year period to 25%. In addition, the first $10,000 of tax valuation is exempt. 

Please refer to FastFacts #6013 for more information on the agricultural exemption.

THEN... IN 1999....LEGISLATION IS PASSED TO PHASE OUT PERSONAL PROPERTY TAX ON INVENTORY

The state budget bill (H.B. 283) will phase out the tax on inventory. The legislature on previous occasions passed legislation reducing the value at which inventory has been listed for taxation. The most recent of these reductions was in the 1983 state budget bill when the listing value was reduced on all tangible personal property from 35% of value to 25% at one percentage point a year for 10 years. These reductions ended in 1993 and tangible personal property has been listed at 25% of true value since then. The provision in the budget bill reduces only the listing value of inventory. Furniture, fixtures, and machinery and equipment used in your business will continue to be listed at the current 25% of true value. Most of the other 49 states tax furniture and fixtures, and machinery and equipment but only 9 other states tax inventories held for resale.

Under the reduction provision in the bill starting in the tax year 2002 the value at which inventory is listed will be reduced one percentage point per year for 25 years. The inventory value on the 2002 tax return is based on the average monthly value of your business' inventory during the year 2001. The reduction of one percentage point is shown in the above graph. .

The Circuit Breaker Provision

Under the "circuit breaker" provision the annual reduction in the listing value would be temporarily suspended for one year if the statewide revenue from all personal property tax did not increase during the two preceding years. The circuit breaker is not expected to delay the annual reduction. Historically, the revenue from personal property tax has increased each year. For example, while the listing value of all personal property was reduced from 35% of value to 25% over the ten years from 1983 to 1993, the revenue produced by the tax increased by 40%. The circuit breaker amendment only applies to the first five years of the reduction; after that, annual reductions of one percentage point per year are automatic.

Gradual Nature of Reduction

The current tax on inventories yields nearly seven hundred million dollars in revenue per year. All of this goes to local government with the schools getting approximately 70% of the money. A precipitous or rapid reduction of 5 or 10 percentage points in one year would require replacement taxes to be enacted. The gradual reduction allows the natural growth in local revenue to off set the reduction in inventory revenues. However, if the Ohio Supreme Court were to order additional increased funding for schools, part of the new tax burden would fall on business. In this case we will be working to accelerate the reduction in inventory taxes to partially off set any new business tax.

Increasing Proportional Effect of Annual 1% Reduction

While each percentage point of a 25% listing value represents 4% of your current tax bill, each annual reduction will represent an increasing percentage of the previous year's tax. For example, a one-percentage point reduction of a 20% listing value equals five percent of the previous year's bill. A one-percentage point of a 15% listing value represents 6.66% of the bill. A one percentage point reduction of a 10% listing value equals 10% of the tax, etc. Because the reduction is a constant percentage of the annually decreasing inventory tax, savings over the previous year grows increasingly over time. The increasing savings over the previous year are represented in the appendix labeled "Graph 2 - Inventory Tax Savings over Previous Year."

Cumulative and Compounding Effect of the Reduction

As the listing value is reduced annually the tax bill will not only reflect the reduction for that year but each of the annual reductions previously granted. This cumulative compounding of saving has a very interesting and significant impact. These compounded savings can be illustrated as follows:

** For each unit of $100 savings the reduction means in 2002, the savings will double in 2003. Therefore, in the second year of the tax reduction your compounded savings will be $200 plus the $100 your bill was reduced by in 2002 for a total savings at that point in time of $300. In the third year your savings for that tax year will be $300 plus the $300 you did not pay in the previous two years for a total of $600.

In the year 2008, the seventh year of the reduction when the listing value is 18%, the compounded savings will be an amount greater than the annual taxes which were levied on the same inventory listed at 25% in the year 2001. By the tenth year of the reduction the cumulative savings will be greater than two years tax liability at the beginning of the program. In the twelfth year the cumulative savings will be more than three years taxes. This progression of savings continues so that by the twentieth year your company will have saved the equivalent of eight years tax at the 25% assessment level. These savings of tax dollars which were not paid will be available for re-investment in your business.  

Ten Thousand Dollar Exemption

Since 1983 under Ohio Revised Code section 5709.11 the first $10,000 of taxable value of personal property has been exempt from taxation. This exemption applies to the combined valuation of furniture and fixtures, machinery and equipment, and inventory. For a business with $200,000 or less in true value of inventory and fixtures, the $10,000 exemption of tax valuation may have the effect of repealing the tax on inventory as early as the nineteenth or twentieth year.

How Will the Inventory Tax Reduction Affect Your Bottom Line?

An easy way to determine what the inventory reductions will mean in savings to your business is first determine what percent of your personal property tax valuation represents inventory versus furniture and fixtures, or machinery and equipment from last year's tax return. Determine the percent of your bill, which represents tax on inventory, and take 4% of that figure. This will give you the projected annual savings each year of the 25-year reduction period. If you then compound these annual savings you can estimate your savings over the 25 years. All of the results of these computations may be affected by changes in your inventory true value and local millage; however, the ratio between the reduced taxes and your current taxes will remain the same.

-November 1999, Ohio Council of Retail Merchants

BUDGET BILL ENSURES CONTINUED RATE REDUCTIONS

Governor Taft signed Amended Substitute House Bill 95 into law, most of which is effective July 1, 2003. One aspect of the legislation pertained to personal property tax on inventory held for resale by a vendor. Here is a summary of these changes.

• Beginning in tax years 2005, increases the annual reduction in the inventory tax assessment rate from 1% to 2% per year. For tax years 2005 and 2006, the increased reduction occurs only if the total statewide collection of tangible personal property taxes (PPT) for the second preceding year exceeds the total for the third preceding year. For tax year 2007 and thereafter, the assessment rate shall be reduced by two percentage points per year
• Eliminates the tangible personal property tax filing requirement for businesses with less than $10,000 in taxable property
• Phases out over 10 years the state reimbursement to local taxing districts for the $10,000 exemption for PPT used in business
• Extends local authority to establish urban and rural enterprise zones from the current expiration date of June 30, 2004, to October 15, 2009

-- July 2003, Ohio Council of Retail Merchants

"TRIGGER" UNEXPECTEDLY MET, STALLED INVENTORY TAX PHASE-OUT

As you are probably aware . . .

Ohio Revised Code (O.R.C.) Section 5711.22 allows for a yearly reduction of the inventory listing percentage if collections from the second preceding year exceed collections for the third preceding year. This requirement was not met for tax year 2004. The listing percentage for inventory will remain 23% for the 2004 tax return.

It was the first time conditions for such a trigger had been met since the early 1980's, when the tax rate on business tangible property, such as machinery, equipment, furniture and inventory, was phased down from 35% to 25%.

The phase-out trigger went off when the business tangible personal property taxes levied statewide dropped from $1.802 billion in tax year 2001 to $1.768 billion in 2002, a difference of 1.9%, according to Department of Taxation figures.

Starting in tax year 2005, two percentage points will drop from the tax each year automatically regardless of other factors due to a provision in the budget unless the Trigger mechanism goes off. Under current law the trigger mechanism goes away beginning in tax year 2007.

-- July 2004

BASIS FOR PERSONAL PROPERTY TAX ON FLOOR-PLANNED INVENTORY

The following excerpt from the Ohio Revised Code is the basis for including floor-planned inventory in the calculation basis for personal property tax. Highlighted text added for emphasis.

 5711.15. Valuation of merchandise offered for sale.

A merchant in estimating the value of the personal property held for sale in the course of his business shall take as the criterion the average value of such property, as provided in this section of the Revised Code, which he has had in his possession or under his control during the year ending on the day such property is listed for taxation, or the part of such year during which he was engaged in business. Such average shall be ascertained by taking the amount in value on hand, as nearly as possible, in each month of such year, in which he has been engaged in business, adding together such amounts, and dividing the aggregate amount by the number of months that he has been in business during such year. 

As used in this section a "merchant" is a person who owns or has in possession or subject to his control personal property within this state with authority to sell it, which has been purchased either in or out of this state, with a view to being sold at an advanced price or profit, or which has been consigned to him from a place out of this state for the purpose of being sold at a place within this state. 

-- from Anderson's Online Ohio Revised Code website, May 2004