IN GENERAL, personal property tax valuations are likely two
to five times too high for equipment. For oilfield equipment,
personal property tax valuations are typically four to 10 times
the correct value, due to systemic valuation errors by appraisal
districts. This excess valuation by tax assessors is causing
owners of oilfield equipment to pay more than $3 billion of
excess property taxes annually. The exception would be if
oilfield equipment is rendered based on market value instead
APPRAISAL DISTRICT ERRORS IN VALUING BUSINESS
Personal property taxes are based on the market value of tangible personal property. Historically, personal property valuation
by appraisal districts is based on receiving a list of assets purchased by year and using straight-line depreciation schedules
to value the assets.
There are four major errors in the methodology used by
appraisal districts in valuing business personal property, including oilfield equipment:
1. Straight-line deprecation is not consistent with the market
value of used equipment.
2. Straight-line depreciation only considers physical deterioration (and not functional or external obsolescence).
3. Appraisal districts encourage property owners to include
the costs of freight, setup costs and specialized buildings.
4. Appraisal districts make no effort to separate tangible and
intangible personal property. Tangible business personal
property is subject to property taxes. However, intangible
personal property is not subject to property taxes with few
exceptions. No state is known to tax the intangible personal
property component of equipment.
The carnage caused by oil prices plummeting from over $100
per barrel in mid-2014 to under $50 in mid-June 2017 is well
understood by the industry. Table 1 is an excerpt of recent
history, showing statistics from the S&P Oil & Gas Equipment
& Services Select Industry Index, as well as actual and projected
revenues from two related businesses—National Oilwell Varco
TOTAL ANNUAL PROPERTY TAXES FOR OILFIELD
Total valuation of business personal property is estimated at
$3.5 trillion in the US. Business personal property valuations
for oilfield equipment manufacturers is estimated at about
$200 billion or about 5.7% of the US total. This estimate is based
on considering extrapolating the personal property assets of
large oilfield service firms and the portion of GDP for oilfield
equipment and service providers. Based on a 2% tax rate, annual
business personal property taxes for oilfield equipment pro-
viders total $4 billion. However, accurately valuing oilfield
equipment personal property would likely result in taxes of
$400 million to $1 billion. The primary factors causing excess
property taxes for oilfield business personal property are:
1. not considering external obsolescence;
2. using inaccurate straight-line depreciation tables;
3. not separating tangible and intangible personal property;
4. including the costs of freight, setup costs and specialized
buildings in property tax renditions.
Freight, setup costs and specialized buildings are typically
considered in developing depreciation schedules for IRS tax
reporting. However, they are not tangible personal property
and should not be included in renditions for business personal
COMPONENTS OF VALUE FOR OILFIELD EQUIPMENT
Personal property, including oilfield equipment, is typically
valued based on depreciation tables. Using depreciation tables
to value personal property is reasonable if the tables are based
on market value. There are three major components to consider
in valuing oilfield equipment:
• Initial cost should include only tangible personal property.
• Initial cost should not include freight, setup costs and specialized buildings to house equipment.
• All types of deprecation, including physical, external and
functional should be considered.
TANGIBLE VERSUS INTANGIBLE PERSONAL PROPERTY
Only tangible personal property is subject to property taxes in
the US, with limited exceptions. The primary exception is at
least one state taxes the market value of stocks, bonds and
mutual shares which are intangible personal property. However,
no state is believed to tax the intangible component of personal
TANGIBLE PERSONAL PROPERTY
Tangible personal property can be seen, moved, touched and
felt. Examples of tangible personal property include chairs,
desks, equipment and inventory. Inventory and work-in-progress
are two types of tangible personal property less likely to be
Oilfield business personal property
ARE YOU OVER-TAXED BY 400% TO 1,000%?
PATRICK O’CONNOR, O’CONNOR AND ASSOCIATES LP, HOUSTON