Question: What is an ad valorem tax? Do I pay it? I have heard this term before, but I really don’t understand what it is or how it is assessed.
Answer: The question isn’t really what “is” an ad valorem tax, but “what” may be taxed ad valorem. Ad valorem is a Latin term that means “according to the value,” and for purposes of taxation means “proportionate,” or a “based upon value.” It is a method of calculating how much tax is assessed or levied against a particular thing.
An ad valorem tax varies based upon the item that is levied, whether property, services or products. In Texas, for instance, business personal property may be taxed based upon the total value of the property used within a business. It is a method of taxation that is calculated based upon a percentage of gross stated value.
Whether or not a person pays taxes ad valorem depends upon their own circumstances. Not everyone owns property that may be taxed ad valorem, such as business owners or real property owners. Some things are taxed at the time of the initial transaction, such as a sales tax, while other things are taxed annually, such as a property tax. Ad valorem taxation is important to government for its main source of revenue.
The two main ad valorem taxes are sales tax and property tax. Sales tax is one of the best methods for compliance with the payment of taxes; however, people are so accustomed to paying sales tax that they often forget that they are being taxed. Sales tax creates compliance because it is collected at the time of purchase, is a fixed percentage and may be easily calculated and is collected only one time. Everything from the purchase of hair spray to a garden hose is taxed at the point of sale.
Property taxes are not as easily collected because they are levied annually, based upon the gross value of real and personal property and are billed to the taxpayer who then must pay in the tax. Real property is taxed based upon its description as land or improved land, and Texas offers certain types of exemptions to the payment of real property tax, such as homestead or elderly. Property taxes are often the source of disputes, which impede the collection process. If a property owner disputes the assessed tax, then the tax assessor or authorized person for the tax assessor must hear reasons why the tax was not correctly levied. Real property owners have the burden of demonstrating how the tax assessed was inappropriate, which may include showing values of similar property near the property in dispute. Personal property owners may show what their property actually is, rather than what the tax assessor “assumed” it is by some method of calculation.
Anyone owning property in Texas, whether real or personal, or purchasing a non-grocery item within Texas, will pay taxes ad valorem. Use of the method goes back to the Texas Constitution. Article 8, Taxation and Revenue, Section 1, Equality and Uniformity; Tax in Proportion to Value; Income Tax; Exemption of Certain Tangible Personal Property from Ad Valorem Taxation states: “(a) Taxation shall be equal and uniform. (b) All real property and tangible personal property in this State, unless exempt as required or permitted by this Constitution, whether owned by natural persons or corporations, other than municipal, shall be taxed in proportion to its value, which shall be ascertained as may be provided by law.”
That’s about it. There is no “Ad Valorem Tax” return required or a notice at the end of the year stating, “You owe ad valorem tax.” Most people are already paying taxes ad valorem; they just didn’t realize that they were.
This article is meant for informational purposes only and not as a substitute for sound legal advice. Direct questions to Ask the Lawyer to firstname.lastname@example.org or via the Facebook Page for the Dalhart Texan.