In the US, property tax is defined as an ad valorem tax imposed by nonfederal government entities, such as county and local governments, on the value of both real and personal property. While revenue from property taxes funds useful government services such as education and hospitals, the property tax structure imposes its fair set of challenges.
Anyone who deals with property tax knows how complex it can be to manage, especially given how tax laws differ between states and among local jurisdictions within a state. These inconsistencies and other variables make it difficult for accounting and finance teams to employ consistent and scalable processes, particularly during peak tax season.
The filing and payment processes behind property tax compliance can be daunting for businesses unfamiliar with the laws in different state. New survey research commissioned by Avalara revealed that compliance is primarily manual and time-consuming, contains costly errors, and often uses outdated technology that fails to keep up with many annual property tax changes. The true cost of compliance is more than just a headache.
Property taxes in the US predate the country’s founding, stemming from Revolutionary War era colonial tax structures, and were previously set at one uniform rate.
Real property and business personal property are two categories of tax. Real property taxes apply in all 50 states and include land and the buildings and fixtures permanently attached, and are assessed on agricultural, commercial, industrial, residential, and utility properties. Conversely, business personal property taxes apply in 43 states and are assessed only on on movable items such as inventory, machinery, fixtures, and other equipment not permanently affixed to the land.
Property tax rates vary dramatically from state to state. Local governments assess taxes on tangible personal property, but the states regulate them. The process for calculating and remitting this tax can be a labyrinth, making compliance that much more difficult.
Common Compliance Challenges
According to survey findings from Potentiate, companies on average spend 90.4 hours (close to four days) per week on real property tax management activities—more time than necessary. The findings further reveal that companies spend even more time on various compliance tasks for personal property management, clocking in at an average of 132 hours per week.
Unsurprisingly, it takes this long to manage tax obligations when compliance is largely manual, including the enormous volume of documents to interpret, extract, and populate in a system of record. According to the survey, 56% of businesses receive, track, and pay between 500 to 10,000 tax bills annually, but only 37% of companies surveyed use property tax software. The other companies leverage a homegrown solution built in Excel or another manual tracking method.
But lack of automation can lead to costly human error. Ensuring systems are continually updated with accurate rates, rules, and due dates can present an obstacle when using spreadsheets and homegrown systems. In these instances, accounting and finance professionals scan government websites or call assessors offices to get the latest return forms and other data to manually update their records across disparate systems.
The burden of getting property tax compliance wrong, including needing to be more timely and accurate with reporting, also presents an immense challenge. Many companies pay property tax penalties or overpay every year because they can’t keep up, or they need visibility into all of their paperwork. According to the survey, 61% of respondents are penalized 5% to 15% on real property tax bills, while 62% are penalized 5% to 20% on personal property tax bills.
Minimizing Burdens and High Costs
Companies are turning to automation to make compliance easier to manage, especially with the different rates and rules in the property tax arena.
Solutions use automated workflows to make filling out returns timelier and more accurate, as well as other methods to solve most compliance challenges, including combining tax documents and tax-related activities in a single hub. This functionality helps teams easily track deadlines for returns, appeals, and tax bills, and avoid missed deadlines, penalties, and the stress of keeping up with ever-changing jurisdiction rules and forms.
Property tax compliance remains a costly, error-prone, and time-consuming process for businesses across all industries. But managing this burden doesn’t have to be intimidating for companies that file in new and complicated jurisdictions, use outdated technology, and consistently miss due dates.
By leveraging an automated solution, these businesses can minimize data entry, free up more time and resources for other important tasks, maximize accuracy to reduce errors in filing, and automate the process of appending property tax documents to tax bill payments to ensure timely filing.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Carl Hoemke is a general manager of property tax at Avalara. He is a finance and tax industry entrepreneur with over 30 years of developing tools to help ease property tax compliance burdens and developing expertise to ensure fair tax assessments.
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