Separating Intangible Values from Personal Property

The final benefit which is not intuitive is the implicit business enterprise value of purchasing equipment from an on-going business that can provide parts and service and fulfill the warranty.

Software is also considered intangible in most states, including Texas. To my knowledge, personal property taxes are not applied to software used in a business. However, software held for sale can be considered inventory. Sales taxes often do apply to software, but property taxes do not. The difficulty of separating software from the value of personal property is more difficult than the issue of separating the value of a warranty or a service contract. Consider the following examples of separating the value of software from the value of an item:

• Apple phone
• Scanning machine used at an airport to detect medal or the 3-D scanning booths used by the Transportation Security Administration (TSA)
• Computerized machining equipment to generate parts
• Automobile with software
• Motorcycle with software
• Any train, plane or mode of transportation other than a bicycle.

Four Clear Examples of Intangible Property

Let’s consider the following as truths of property tax intangibles:

1. The value of any of the above items, including a warranty, is higher than the value of one without a warranty, all other factors equal.

2. The value of any of these items will be higher with software than without any software included at purchase (assuming the software functions and is intended for the item).

3. The portions of the purchase price which are difficult to separate are: 1) research and development and 2) use of proprietary products.

4. The value of purchasing a product manufactured by an existing company, compared to one that is no longer operating, will be higher.

What is subject to meaningful dispute is the portion of the value that derives from an operating company versus the costs to manufacture plus a reasonable profit margin.

The following falls into the category of “subject to reasonable dispute”:

5. XYZ premium brand sells a machine at $5 million while “We Are #2” sells for $4 million. It can be argued that the “premium” paid for XYZ is intangible personal property rather than tangible personal property if “We Are #2” purports to have the same or superior benefits relative to XYZ.

This brief discussion on the differences between intangible and tangible personal property may seem to raise more questions than it answers. However, the relative issues are straightforward for those willing to be open-minded and to consider the facts.

Why Are We Taxing Intangible Personal Property?

The world today is much different than in the 1700s and 1800s when most state constitutions were codified. Intangible personal property was only a vague concept in the 1700s and 1800s, at least with regard to personal property and personal property taxes. The issues related to segregating the value of tangible personal property from intangible personal property were not a factor.

Changes in Personal Property Since 1800

However, 2017 is quite different from 1800 regarding the portion of personal property that is tangible versus intangible personal property. There was much value to axes, cotton gins, ice boxes, reapers, mowing machines, steam tractors, deep well drilling, spring-tooth harrow for seedbed preparation, horse-drawn combines, refrigerated freight cars and other farm implements in the 1800s. Then the late 1800s saw radical changes such as tractors with gasoline engines. Twentieth century included commercial fertilizer (1910) and additional implements for tractors to mechanize farming. This effort was so successful that the portion of the U.S. population involved in farming declined from seventy-two percent in 1820 to sixty-four percent in 1860 to thirty percent in 1920 to 0.7% in 2015.

Contrast the change in tangible production techniques with changes in computers, software, data and technology in the past five to ten years. Moore’s Law, named after Gordon Moore in 1965, predicted the productivity of computer chips would double every two years. The same types of changes are taking place in data and software, where what was cutting edge two years ago is out-of-date today. Moore’s hypothesis has been proven true.

Big Data Will Cause More Change

Big data is causing another revolution in productivity and valuation. Data is intangible personal property and is not taxable. However, utilizing big data is an increasing component of value-added business processes and manufactured goods.

Despite the change of pace in technology, the approach to valuing personal property has not changed materially since state constitutions were implemented in the 1700s and 1800s. Appraisal district personal property valuation tables resemble physical-life schedules more than economic value or market value. Further, the approach has changed little in the past thirty-five years, even as computers and software have become ubiquitous. The result is owners of personal property, whether used for business or personal use, are over-taxed.