COVER STORY, MARCH 2007

PROPERTY TAX EXEMPTIONS AND ABATEMENTS
Using exemptions and abatements can help you save.
Glen Fandl

Most states in the U.S. offer some sort of property tax benefit for relocating or expanding businesses. These benefits vary by state and in some cases by jurisdiction, but generally, result in the reduction or elimination of property taxes for a period of time. The terms exemption and abatement are often used interchangeably in the world of property taxes, but generally, exemption entails the reduction or elimination of tax for the life of an asset wherein abatement generally refers to a period of time. Of course, as with property taxes, there are exceptions to every rule.

Typically, the South has lead the charge, and has garnered much of the publicity in offering property tax exemptions and abatements for new or expanding businesses; whereas, the Northeast has lagged significantly behind. However, a company looking to relocate or expand in this area of the country can find numerous opportunities to lower cost by reducing or eliminating property taxes.

Property tax exemptions and abatements for new and expanding businesses fall into three broad categories: 1) statutory exemptions and abatements that are available to all taxpayers; 2) special zones, such as Enterprise Zones or Incentive Zones and 3) Foreign Trade Zones.

Statutory Exemptions and Abatements

These exemptions and abatements, while available to all business taxpayers clearly can provide additional incentives to relocate or expand within a particular community. Many of these incentives exempt personal property assets and include such categories as inventory, machinery and equipment, pollution control equipment and computer software.

Enterprise and Incentive Zones

Many states designate specific zones within distressed communities as Enterprise Zones or Incentive Zones to encourage the development of new business. This is where a taxpayer can negotiate tax abatement. Further, most states also offer local abatement laws for new or expanding businesses

Foreign Trade Zones

There are more than 100 federally designated zones that offer taxpayers various benefits including local property tax savings. The U.S. Department of Commerce Web site, www.ia.ita.doc.gov, provides taxpayers information on the zones.

Once the Shovel is in the ground…

As the saying goes, once the shovel is in the ground, your ability to obtain an abatement is greatly diminished. This rings true in any abatement opportunity in which the taxpayer has the opportunity to negotiate the provisions of the abatement. Most states provide some leeway to the local taxing authorities to negotiate with businesses. For instance, in Rhode Island local towns are permitted to grant a real or personal property tax exemption for up to 20 years.1 More often than not abatement provisions stipulate that the taxpayer meet a certain dollar threshold as well as employment threshold.  

Know Your Levies

Negotiated property tax abatements also generally entail the reduction of certain tax levies and not the entire tax amount. An overall property tax rate is comprised of several jurisdictional tax levies (which you may or may not see on your tax bill) such as the county tax, the city tax, the town or village tax, the school tax or other special district taxes. In New York, the Business Investment Exemption, an exemption for new construction of real property, provides for an exemption of ad valorem levies and special ad valorem levies “except for special ad valorem levies for fire district, fire protection district and fire alarm district purposes.” 2 In Delaware, a county may permit taxpayers an abatement of taxes “… excluding school taxes.” 3 Delaware’s laws mirror many states wherein school taxes are excluded from the exemption. This can be a significant exclusion as school taxes comprise a significant portion of the overall property tax burden. 

Beware the Clawback

Certain states have provisions that if you do not meet the obligations agreed to or stipulated to in the abatement agreement then the taxpayer risks having to pay back the taxes they otherwise would have paid. These provisions are commonly referred to as clawback provisions or rollback provisions. In Pennsylvania, taxpayers that own large land lots may qualify their vacant land to be specially valued at a more beneficial current use value to the owner as compared to market value or actual value. However, “the landowner changing the use of the land inconsistent with this act shall be liable for payment of roll-back taxes.”4 Certain states may also require tax payers not meeting the spirit of the abatement or exemption to pay a penalty in addition to the back taxes.

It’s Not Only Real Estate

While nearly 40 states tax business personal property (e.g. machinery and equipment, furniture and fixtures, computers, etc.) much of the Northeast is spared from this burden with Connecticut, Maine, Rhode Island and Vermont being the exceptions. And in these states there are a number of ways to lessen the burden. Most notably in Connecticut is the Manufacturing Machinery and Equipment exemption, which allows taxpayers a 5-year abatement of personal property taxes for new and newly acquired manufacturing equipment acquired after October 1, 2001.5 In Maine, business taxpayers can take advantage of the Business Equipment Tax Reimbursement (BETR) program for reimbursements of taxes paid on qualified business property. Qualified business property is, for the most part, federally depreciated property other than real estate and furniture and fixtures. This machinery and equipment abatement program provides for a full refund of taxes paid on machinery and equipment for a 12-year period. Both the Connecticut and Maine programs are essentially designed to encourage investment and provide tax relief so as to stay competitive with the surrounding states that do not tax personal property.

Remember the Mantra

The myriad of property tax exemption and abatement laws, rules and regulations creates a complex environment for taxpayers — particularly those looking to relocate or expand. There are a number of agencies, however, that can make the search a little easier. State and local economic development authorities, local chambers of commerce, tax assessors and local energy providers are just a few agencies that can assist taxpayers in this regard. Wherever you decide to relocate or expand, remember the mantra… once the shovel is in the ground, your ability to negotiate an abatement is greatly diminished. 

Glen Fandl is an attorney and an accredited senior appraiser with Grant McCarthy Group LLC in White Plains, New York.


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