As a tax historian, I’ve spent countless hours delving into the intricacies of tax laws and their implications. One such law that often goes unnoticed is the taxation of tangible personal property (TPP) – a burden that falls heavily on businesses, particularly small ones. In most states, businesses are taxed not only on their real property (land and structures) but also on their machinery, equipment, fixtures, and supplies, classified as TPP. For many small businesses, the amount owed is negligible, but the compliance costs can be considerable.
Fourteen states broadly exempt TPP from taxation, while another ten impose taxes on TPP but offer de minimis exemptions to avoid unduly burdening businesses with only a small amount of potentially taxable property. States like Arizona, Colorado, Idaho, Indiana, Michigan, Montana, and Rhode Island have TPP tax de minimis exemptions of $50,000 or more. In contrast, Florida, Georgia, Kentucky, and Utah have lower exemptions.
Unlike real property taxes, TPP taxes are taxpayer active, meaning that the taxpayer bears the responsibility of determining their tax liability, rather than receiving a tax bill from the government. Each business must itemize all personal property, with acquisition price and date, and depreciate it according to the appropriate schedule, to determine their taxable base. This can be a lot of work—often wildly disproportionate to the amount actually owed.
Exempting the personal property of small businesses is a highly economical way of reducing taxpayer compliance burdens. Idaho recently exempted 90 percent of all businesses at a cost of about 1.1 percent of property tax collections. Indiana exempted at least 70 percent of businesses for less than 0.5 percent of property tax collections. The District of Columbia exempted 97 percent of businesses from TPP taxes by forgoing less than 1 percent of its property tax revenue. And Colorado recently raised its threshold from $7,900 to $50,000—exempting the majority of businesses—at a cost of less than one-sixth of one percent (0.15 percent) of property tax revenue.
However, businesses only get the true benefit of the exemption if they are not required to file. If they must still itemize and depreciate all property, the compliance cost benefits are eliminated. The time and resources spent itemizing office chairs and adding up the cost of paper towels is a deadweight loss that hurts businesses without helping local governments, and the revenue generated from this exercise is too trivial to justify its imposition on businesses with minimal tax liability.
As we continue to explore the complexities of tax evasion and its consequences, it’s crucial to remember that not all tax burdens are created equal. The case for de minimis exemptions is strong, and it’s time for more states to consider this approach to alleviate the burden on small businesses. For an extended analysis of the case for de minimis exemptions, click here.