State government and basic math

guest commentary by David Potts
David Potts is a certified public accountant with more than 25 years experience. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

Feel free to e-mail topic suggestions or questions to davidpotts@potts-cpa.com

I’ve been fighting and arguing with a certain business assessor in the Sebastian County Tax Assessor Office for at least two years, probably more. I am right and she is wrong.

Our fight is over the correct way to value inventory on the Commercial Personal Property Assessment Form, a form that each business should have received in the mail within the last week or two. (Just for clarification, I’m not having this duel directly with Becky Yandell, the Sebastian County Tax Assessor, but one of her employees.)

It seems every year I have a client who gets a call from the Assessor’s office because they didn’t report an inventory value for assessment, or the value reported was one that this business assessor feels might be understated. Our arguments are over the method that she tells my client to use to calculate inventory.

My opposition tells these clients to divide their cost of goods sold by 12, and that is the amount they must report on their assessment form as inventory. Except in rare circumstances, this value will not be correct. So for a couple of years, I’ve informed, discussed, shook my fist in the air, jumped up and down, and yelled at this business assessor as I explained why she was absolutely without doubt wrong.

Arkansas Law governing property tax states, “All property in this state shall be assessed by the authorized authorities according to its value on January 1. However, stocks of merchants and manufacturers shall be assessed at the value of the average stock in possession or under control during the year immediately preceding January 1 of the year in which assessment is required.”

The value of a business’ inventory can be counted at any point in time. Cost of goods sold is a running total of the cost of items sold by the business during a defined time period. These are two different concepts.

Here is a simplistic illustration of the difference between inventory and cost of goods sold. On Jan. 1, I only had one item in inventory that cost $12,000. I had a bad year and only sold this one during the whole year, on Dec. 31. The value of my “stock” or inventory was $12,000 every day of the year. Therefore, my “average stock in possession” for the year would be $12,000. Since I sold my only item on Dec. 31, my cost of goods sold for the year would be $12,000. If I used the formula of dividing my cost of goods sold by 12, I would only have to assess the value of my inventory at $1,000. It just doesn’t work. I’m right. I win. Or do I?

Worn out and tired of fighting this business assessor, I made an appointment to meet with Assessor Becky Yandell so I could prove I was right.

Yandell was kind, patient, and cordial as I made my case. She agreed I was right, then she introduced me to the Arkansas Assessment Coordination Department.

If you have never heard of the Arkansas Assessment Coordination Department, I scraped this description of the department and their mission statement off their website.

  Our mission is to ensure fair and equitable valuation of property for ad valorem tax purposes.

  The Assessment Coordination Department (ACD) is granted full power and authority in the administration of the tax laws of Arkansas to exercise general and complete supervision over: the valuation, assessment and equalization of all property for ad valorem tax purposes, (except utility property); the collection of those taxes and the assessors, equalization boards, tax collectors and other officers charged with those duties in all seventy-five counties, to insure that all assessments on property in Arkansas shall be in relative proportion to the just and true value thereof, in substantial compliance with the law. In the exercise of its powers, the Department is directed to confer with, advise, and direct the foregoing entities with respect to their duties. While property taxes are locally assessed, administered, collected and dispensed by each county, the equity of the assessments within the county and between counties is of state-wide importance.

Becky explained to me that the ACD instructs all assessors, when inventory is not assessed on a business’s Commercials Personal Property Assessment form, to ask the business owner what their cost of goods sold totaled for the prior year and divide by 12, then assess that amount as inventory. And I’m telling you the ACD is 100% wrong and needs a lesson in basic accounting. When you divide your cost of goods sold by 12 you get average cost of goods sold, not average inventory.

Based on the ACD’s website, they understand what Arkansas law says about the value of inventory. In their own FAQ’s they state inventory should be assessed “… by calculating the average value of the property in his possession during the year immediately preceding January 1 of the assessment year.”

They just can’t do the math. They don’t understand basic accounting principles.

Which brings me to this: If by chance my unbending business assessor reads this article, I apologize for all the frustration I have caused you over the past couple of years.

Now that I know you are only doing your job, let me compliment you. You do your job very well and if you ever need a reference, you can always use my name. I’m still right though, but then so are you. The ACD is wrong.

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Here is the bottom line. Using the ACD guideline to assess inventory, businesses with inventory where the inventory turns less than 12 times each year can get a bargain when they assess inventory.

So if it is in your nature to cheat and disregard the law, just take your cost of goods sold, divide by 12, then report this value as your inventory. The Arkansas Assessment Coordination Department will mistakenly support your position. If you have a conscience or worry about spending eternity in hell, just report your average inventory correctly. Life is simple when you choose to do the right thing.

If you would like to hear my full interview with Becky Yandell, Sebastian County Tax Assessor, you can hear it by listening to Pottscast, my podcast.

Other topics discussed were why the cost of property doesn’t always equal its market value, how to appeal if you feel the value of your property is incorrectly valued, and a general discussion on how your property tax money is spent.

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