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Many companies are paying
personal property tax on computer servers and software that are
no longer fully utilized. From a property tax standpoint,
continuing to support ghost computer assets is like burning
money.
On a recent audit of a
major client, POER was able to reduce the audited discovery by
50% by engaging the company to identify, quantify and ascertain
the source and present use (or lack of use) of $10 million in
software assets.
The
Hardware Problem
With rapidly changing
technology, it’s often easier for companies to buy new computer
equipment than it is to update what they have. That’s why there
are old servers unplugged and sitting in closets at major
corporations nationwide. In most instances, if computer assets
are on your books, they will be taxed even if the equipment is
no longer in use.
Another problem arises when
computer equipment is listed on the books with no explanation of
its specific use. This is common when IT equipment comes from a
variety of sources and there is no asset management process in
place. Computerworld Magazine reports 8-10% of all servers in
large corporations may have no identifiable function.
Obsolete and underutilized
servers can be a drain on your bottom line, due to:
The
Software Problem
Businesses with multi-state
operations can find it confusing to adhere to personal property
tax laws regarding computer software. That’s because policies
and practices differ dramatically from state-to-state.
Many states consider at
least some types of computer software tax exempt. Some tax only
“out of the box” or “canned” software like Office Professional
and do not tax “customized” application software with
specialized programs useable only by the company for which they
are created.
Other states tax operating
software that is embedded in the computer and consists of
programs which make the computer operational. A few states
attempt to tax all software, regardless of type, and some even
differentiate if the software is created by outside vendors or
inside staff. So it is across the board.
Companies unknowingly
overpay property taxes when they purchase and report software
and hardware assets together. Software costs should always be
broken out on invoices, capitalized separately when feasible and
further identified as out of the box or customized.
Ghost software that remains
on the books indefinitely is also a major problem. Examples
include earlier versions of existing software or software
created for functions or processes that are no longer in use. An
additional issue arises because software is not really
“purchased” - the license to use it is.
The Tax
Value Problem
By allowing outdated or
underused computer assets to reside in your fixed asset
database, you are very likely to report them on a property tax
return and thereby incur unnecessary tax.
Tax jurisdictions determine
the value of computers and other personal property by applying
valuation factors to the asset’s historical cost. There is no
zero floor depreciation in the states that impose personal
property tax.
Property taxes carry a
residual value as high as 30% of original cost. Some effective
tax rates are in the range of 3-4%.
The
Solution
Therefore, identifying
ghost computer assets and removing them from your books and
records is an effective strategy to lower your overall property
tax liability. This will ensure more accurate tax returns and
withstand the test of a rigorous audit even in the most
demanding states.
In next month’s issue of
the e-POER Report, we will discuss at length what you need to do to
assure you are not paying property tax on ghost assets. |
