In this quick guide, we discuss inventory tax in Texas, providing an overview of the implications, different types of inventory taxes, and how you can mitigate the effects of this tax on your business.
What is the Texas inventory tax?
Inventory tax is a type of property tax levied on a business's inventory. Unlike sales or income tax, this tax is calculated annually and is based on the inventory the business holds on the 1st of January each year. Inventory is classified as:
Raw materials
Work-in-progress items
Finished goods ready for sale
Motor vehicle dealer’s business property
The tax is governed by the Texas Property Tax Code, which outlines key rules for assessing and remitting unit property taxes. The country appraisal district will determine the final percentage when the inventory tax statement is filed at the county tax office.
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Do you suspect you’re paying too much inventory tax? Hall Accounting Company can review your historical records to uncover areas where you've been bleeding money and help you streamline your inventory processes, saving you money. Let’s talk. ________________________________________________________________
Who pays inventory tax in Texas?
In Texas businesses that keep an inventory and will have inventory stored in their warehouses, stores, or vehicle dealerships will pay inventory tax. The hardest hit industries are:
Industry | Inventory Held | Impact on Inventory Tax |
Retailers | Seasonal stock or excess stock | Increased seasonal stock and excess inventory can lead to higher inventory values on Jan. 1, affecting the tax rate businesses will pay. |
Manufacturers | Finished goods Raw materials Partially completed items | Manufacturers face higher tax liability just for keeping raw materials and partially completed items. Therefore, taxes are paid before sales are made, which can be detrimental to the business. |
Wholesalers | Goods stored and awaiting distribution | Delays in shipping and overstocking can inadvertently cause a higher tax burden, as a greater quantity of goods remain in storage on Jan.1. |
Vehicle dealers | Unsold vehicles | Poor sales during the year can cause dealers to pay higher vehicle inventory tax. |
Special requirements for dealers
In Texas, the law requires a motor dealer’s inventory to be appraised based on the total sales of motor vehicles in the prior year. A dealer must file a declaration of total sales price with their county appraisal district. A dealer must also file a monthly form with the county tax assessor-collector to report motor vehicle inventory from the prior month and prepay the taxes. This payment along with the inventory tax statement must be submitted to the county tax office.
Any dealer that fails to file the tax statement indicating inventory sold for the previous month will pay a 5% penalty on the amount due.
This tax is deemed the dealer’s business personal property and is not the same as sales tax which is paid by the purchaser on the vehicle.
How is inventory tax calculated?
Inventory tax is calculated by multiplying the assessed value with the tax rate of the county where the inventory is kept. In Texas, this rate is between 0.37 - 2.58%. Three main methods are used:
Cost of goods sold: Based on the purchase value of the raw materials or products you purchased,
Lower cost or market value: Comparing the price you paid for the product against its market value at the valuation date.
Retail: Calculated as a selling price, minus the mark-up percentage.
The most common method is the cost of goods sold, using the formula:
(beginning inventory + purchases) - cost of goods sold (COGS) = ending inventory value
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Worried that your business might be using the incorrect calculations for your inventory tax? You can benefit from the services of an accountant, who can conduct an in-depth analysis of past submissions and recommend ways to streamline your inventory management process.
Schedule a call with Hall Accounting Company
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Strategies for managing inventory tax
The need for the proper management of inventory becomes apparent when considering the effects that excess stock, delayed shipments, and unnecessary raw materials can have on the amount of inventory tax paid by a business.
The first thing to be aware of is the exemption that applies to Freeport and good-in-transit cases.
Exemptions for goods in storage and in transit
The state of Texas does offer some relief from inventory tax in the form of exemptions. The exemptions currently in place are as follows:
Freeport exemption: Goods detained in Texas for 175 days or less with the intention of shipping the products to another location. This also applies to goods in transit that are moved within the same time period. [1]
Goods-in-Transit exemption: This applies to goods that are stored temporarily before being moved to another location in less than 175 days. In both the Freeport and good-in-transit scenario, the business should not have any ownership of the storage facility. [1]
The next step is to reduce the inventory tax you pay on January 1 each year by ensuring you carefully track and manage your inventory process. Overstocking, unfulfilled orders, and delays in shipping will lead to higher taxes. You can do this by:
Implement ‘just-in-time’ inventory strategies.
Delay large inventory purchases until after January 1.
Use inventory management software to accurately track the entire process.
File your inventory tax submission on time to avoid penalties.
Hall Accounting Company: Your partner in tax strategy
If you’re unsure where you’re losing money in your inventory process, you will benefit from accounting and taxation services like those offered by Hall Accounting Company. Located in Texas, they understand what efficient inventory management should look like and help you set this up. They also understand local challenges and the state tax laws and will ensure you benefit from all exemptions.
Implementing the right inventory management software is key to reducing your inventory tax bill. It can also drastically reduce errors and improve tracking. Hall Accounting Company not only helps you choose the best software but also assists with implementation to ensure seamless integration into your workflow.
Get back to doing what you love, and let us handle your business's accounting and taxation processes. Give us a call or use our handy accounting and taxation calculator to get a quote.
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