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Most hated tax? For small biz, it’s all about inventory

The inventory tax on business property may be one of the most hated taxes in the state. Small businesses protest that large businesses, including retail giant Wal-Mart in some cases, are exempt from the tax. Only a minority of states still have the inventory tax. But municipal and county leaders say eliminating the tax could cause great harm to the cities and counties that depend on the tax for revenues.

The inventory tax has been an issue for small business for a very long time. Take the example given by National Federation of Independent Business (NFIB) state director Ron Aldridge. He has a desk in his law office that his father paid about $10 for in the 1930s. His dad gave him the desk when Aldridge opened his practice.

“I have paid much more on taxes on that desk than it ever cost to originally purchase it,” Aldridge said. “I continue to pay every year a tax on that desk. That desk has probably been taxed since the 1930s. And the same would be true of inventory if it has been in your business all the time.”

Aldridge said the problem has grown worse in recent years because of exemptions given to big businesses for economic development purposes. There are also “freeport warehouse” districts where businesses can store goods without them being subject to the inventory tax.

“Those two things are discriminatory and place a bigger burden on smaller businesses as compared to some of the larger businesses,” Aldridge said. “It is also unfair double taxation on items that are for sale. The items are taxed because they sit there. Then if it sells, you pay sales tax on it. We oppose any tax on inventory because you are going to get a tax on it when we sell it.”

It is estimated that 15 states still have inventory taxes. That can put neighboring states without the tax at an advantage particularly in attracting distribution centers.

“When you look around, there are opportunities nearby for your larger companies to warehouse their inventory in states that don’t have an inventory tax,” Aldridge said. “They can easily ship out and in when inventory is required to be done for tax purposes. They can avoid inventory taxes, whereas the small businesses don’t have that luxury.”

Aldridge said more small businesses have fire in their belly over this annual personal property tax issue (inventory and on business furniture, fixtures and equipment) than most anything.

“Although health insurance cost is the number one most burdensome issue to small businesses, this tax issue is the one gut issue that they are mad about,” he said.

While it might seem there is a compelling case for eliminating the inventory tax, there are also good arguments for keeping the inventory tax, say city and county leaders.

“Local government’s budgetary process relies heavily on anticipated tax revenues,” said Joel Yelverton, assistant executive director of the Mississippi Association of Supervisors. “To exempt business inventory from taxation would prove extremely problematic and, in some jurisdictions, catastrophic.

“This proposal is more than simply a tax exemption, it is a tax shift. The tax loss that would result by exempting business inventory would have to be made up. Rest assured, these taxes would be paid by someone, just someone else (homeowners, agricultural interests, industry, etc.). This proposal could and should be viewed as a tax increase to those taxpayers that would have to make up the difference.”
Yelverton strongly cautions against comparing Mississippi’s local tax code with those of other states as justification for a change in tax policy. That is because you are not “comparing apples to apples.”

“Many other states grant local government the ability to assess a local income tax and/or a local sales tax,” Yelverton said. “Furthermore, other states give local government broad authority (home rule) to levy and collect fees and charges for services provided. To simply compare how other states may or may not tax business inventory does not accurately reflect the relative fairness of such taxes and should never be used as justification to alter the current tax code.”

A recent feature in Money magazine ranked Mississippi as the sixth-best state in the country for small business taxes.
He adds that exemption of business inventory could also have other far-reaching effects that may not be readily apparent.

By taking this assessment “off the books,” a local government’s debt ratio would be negatively impacted. Its access to some financial markets could be curtailed.

There is also opposition to the elimination of the inventory tax because some officials in city and county government are paid based on total value of property.

“If you reduce the value, then what those officials get paid is less,” Aldridge said. “They fight it from that angle. We have to somehow update the structure of what county and city government bases so many things on. People shouldn’t get paid based on the value of the property in the county. They should be paid on the job that is done.”

Aldridge said lowering the valuation of a city or county impacts numerous things, including some salaries.

“In the future, things shouldn’t be based on the valuation,” he said.

He also thinks the present situation is unfair because the tax rates vary from county to county. For example, in Tunica, mileage rates for taxes are low because of the large amount of casino revenues.

“My inventory is the same whether I’m across one county line or the other,” Aldridge said. “It shouldn’t make that much difference.”

While two bills in the House of Representatives are still alive until a February 21 deadline for revenue bills,

Aldridge doesn’t have a great deal of hope that the bill will pass this year because the bills aren’t agreeable to local governments.

“It is probably not going to happen this quickly,” Aldridge said. “The local governments don’t want to lose any money out of their budget, which I understand.”

He was hopeful, however, that action to repeal the inventory tax will have better luck in the 2008 legislative session when Sen. Tommy Robertson, Moss Point, is expected to introduce inventory tax legislation in the Mississippi Senate.

Contact MBJ contributing writer Becky Gillette at bgillette@bellsouth.net.


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