September 1 Inventory Valuation

Though all taxable property in the State of Texas is normally valued as of January 1, there is one major exception. The Texas Tax Code allows a business owner to elect to have the inventory portion of his property valued as of the previous September 1 instead.

This unusual and relatively unused change in the valuation date could result in significant tax savings for new businesses or businesses where inventory cycles result in greater inventory value on January 1 than September 1. However, the change in valuation date is not without risk.

Section 23.01 of the Tax Code provides that "all taxable property is appraised at its market value as of January 1." However, there is an important caveat in that the statute includes the phrase "except as otherwise provided by this chapter."

Section 23.12 concerns the valuation of inventory. In subsection (f), the statute provides that the owner of an inventory may elect to have his inventory valued as of September 1 of the year preceding the tax year in question. For example, if the election is timely filed for the 2005 tax year, a business owner's non-inventory personal property and any real property would be valued as of January 1, 2005. But the owner's inventory would be valued as of September 1, 2004.

The statute specifically excludes the special inventory which is valued according to sales occurring in the previous year. These would include motor vehicle inventory, heavy equipment inventory, vessel and outboard motor inventory, and retail manufactured housing inventory. Because each of these inventories is valued based on sales occurring during the previous year-long period of time, a change in the valuation date is not allowed.

Several years ago, appraisal districts and taxing units claimed that the September 1 alternative valuation date for inventory was unconstitutional and unfair. However, in two simultaneous opinions issued in 1996, the Texas Supreme Court held that the alternative date did not present any constitutional problems because every inventory owner has the option to elect the September 1 valuation date. Additionally, the Supreme Court pointed out that the statutory January 1 valuation date for other property is in effect an arbitrary valuation date selected by the Legislature, since there is no constitutional requirement of a particular valuation date.

In considering the two possible inventory valuation dates, the Court recognized "the fact that inventory owners have two alternative dates on which their property may be valued can temper the disparity caused by a single appraisal date." Though with two possible dates some owners may benefit more than others from changing valuation dates, the Court held that two dates "is no more unequal than applying a single date." In fact, according to the Court, "the use of more than one appraisal date provides greater equality and uniformity."

While every owner of inventory can select the September 1 valuation date, each business owner must make his own determination as to whether he would receive any additional benefit from the alternative valuation date.

For example, a gift shop might have less inventory on hand as of January 1 because of year-end and holiday sales. In such an instance, the January 1 valuation date might be more beneficial than September 1 valuation date.

Conversely, a store with a large stock of back-to-school items might find its inventory largely depleted as of September 1, which is after students have normally returned to class. In that case, the September 1 valuation date could be better.

Each business owner with inventory must make their own decision as to which of the two valuation dates would provide the greater tax savings. If possible, a study of inventory in stock as of September 1 and January 1 of prior years could provide some guidance in selecting an inventory valuation date.

However, there are also other possibilities for benefiting from a September 1 valuation date.

Theoretically, a new business planned to be opened in the last quarter of the year could select the September 1 valuation date. As inventory on hand as of September 1 might be extremely small or even nonexistent, the property owner might delay major payment on inventory items for a year.

While an appraisal district might complain if a business not yet opened selects a September 1 valuation date, one of the cases determined by the Texas Supreme Court in 1996 concerned a similar situation. In that case, the property owner filed the application in 1991 and the election took effect in 1992. However, five of the six store sites of the property owner were not opened until after September 1. The appraisal district rejected the application for the five new stores without September 1 inventory. However, the Supreme Court said that the September 1 date must be accepted.

In analyzing the specific situation, the Court noted that "any fixed tax date can result in increased value escaping taxation." As an example, the Court noted that, if the property owner did not stock its new stores with inventory until January 15, the inventory would not be taxable using a January 1 valuation date. The use of the alternative September 1 date, with inventory not being stocked until later, would not result in any greater disparity.

Another possibility would be an anticipated increase in the residential real estate development market.

Section 23.12 does not merely concern personal property inventory. It also includes as inventory residential real property never occupied as a residence and held for sale in the ordinary course of business. In other words, residential development owners with an inventory of lots are allowed to have their lots valued as inventory.

The September 1 valuation date election applies to all inventory except the special appraisal items mentioned earlier. Therefore, a developer with an inventory of residential lots who anticipates an increase in lot values between September 1 and January 1 might elect the earlier valuation date to offset the increased valuation.

However, if the developer guesses wrong and there is actually a real estate downturn, then the property owner might face a higher taxable value than he would using the standard January 1 date.

This is also true, of course, of personal property inventory. If the business owner has greater inventory or inventory with greater value on September 1 than January 1, then he might impose a greater tax burden on himself by selecting the earlier valuation date.

Once a property owner elects the September 1 valuation date, that date is used for all inventory valuations until the election is revoked in writing. The revocation is not effective until the tax year that begins after the next September 1 following the filing of the revocation. Therefore, while an election to be effective in the following year must essentially be filed by the end of July, a revocation may be filed by the end of August.

This does provide some potential for a property owner who has elected September 1 valuation to evaluate his inventory immediately prior to the September 1 valuation date. If the inventory in stock appears to be too high, the property owner can revoke his election. He could then refile the following year, electing anew the September 1 date.

In fact, there is nothing in the statute that would prevent a property owner from filing an election in July and then revoking it in August of the same year.

The deadline for requesting the September 1 valuation date for 2005 is August 2, according to the tax calendar published by the State Comptroller. However, the applicable statute (Section 23.12(f) of the Tax Code) does not actually provide for a deadline date. Instead, the statute provides that the election of September 1 valuation does not take effect until the tax year beginning after the next August 1 following the filing of the application. In other words, if a property owner does not file the application until August 9 (for example), then the election would not take place until the 2006 tax year, which would be the first tax year after the next August 1 (2005) following the application's filing.

Though the Comptroller has indicated an August 2 filing deadline to receive the election for 2005, a property owner would be safer filing his application on July 30 or before. The Comptroller's deadline is undoubtedly based on an implied deadline of July 31 (i.e., before August 1) and the application of Section 1.06 of the Tax Code which extends deadlines to the next business day when a deadline falls on a weekend or holiday date. July 31 falls on Saturday this year, and a July 31 deadline would be pushed to Monday, August 2.

However, the August 2 date is based on the Comptroller's interpretation of the statutes. There is no guarantee that every appraisal district (or a court, if that became necessary) would accept and follow the same interpretation.

If you have any questions about the contents of this article, please contact the GPD Property Tax Section at propertytax@gpd.com.