Defining inventory tax
Inventory tax is a type of property tax that applies to the value of goods held for sale by a business. Inventory tax can vary depending on the location cargo is placed, type and quantity of inventory, and the valuation method used by the business or state.
Inventory tax examples:
- Your business is registered in Missouri (no inventory tax), you hold inventory for warehousing and distribution at a public warehouse in Maryland (has inventory tax) and your shipments arrive at the port of Baltimore from overseas.
- Your business is registered in Kentucky (has inventory tax), you hold inventory for warehousing and distribution at a public warehouse in Maryland (has inventory tax) and your shipments arrive at the port of Baltimore from overseas.
- Your business is registered in Missouri (no inventory tax) but sells through Amazon FBA. If any of your product is stored and fulfilled through an Amazon Fulfillment Center in states with inventory tax, it’s likely you will get a tax bill from the state.
- Your business is registered in Missouri (no inventory tax) and you work with a 3PL (third-party logistics provider) that manages inventory on behalf of your business and stores product in warehouses in states that both do, and do not, have inventory tax burden.
How is inventory tax calculated?
Inventory tax is calculated by multiplying the assessed value of the inventory by the tax rate of the county where the inventory is located. The assessed value of the inventory may be based on the either its cost to manufacture or its market value.
Inventory tax calculation example
In this example, let’s consider a company called Jared’s Chocolate Company, which sells chocolate and fudge products. They need to calculate the value of their inventory for inventory tax purposes.
Step 1: Determine the Cost of Goods Sold (COGS)
Jared’s chocolate sold 150,000 products at $50, totaling $7,500,000 for Cost of Goods Sold (COGS).
Step 2: Calculate your ending inventory
What is ending inventory?
The value of goods at the end of an accounting period. It can be calculated by adding together beginning inventory and net purchases and subtracting from Cost of Goods Sold (COGS).
Ending Inventory = Beginning Inventory + Net Purchases – Cost of Goods Sold
The best way to calculate your ending inventory is by completing a full physical inventory audit. This will ensure you are reporting accurate numbers to the IRS and can uncover potential issues, such as inventory shrinkage from shoplifting, theft, or fraud.
For this example, Jared’s Chocolate Company’s Ending Inventory is $5,000,000.
Step 3: Calculate inventory tax
Jared’s Chocolate Company stores its inventory in Texas (has inventory tax) in Crockett County, which has an inventory tax of 0.37 percent. For this fiscal year, Jared’s Chocolate Company would owe Crockett County a total of $18,500.
States that have inventory tax
|State||State or local Level||Assessment date||Return date||High-Low tax rates|
|Alaska||Local||January 1st||Date varies by taxing districts||0.35-1.47%|
|Arkansas||State||January 1st||July 31st||0.34-0.91%|
|Kentucky||State||January 1st||May 15th||0.49-1.36%|
|Louisiana||State||January 1st||April 1st||0.23-0.89%|
|Mississippi||State||January 1st||April 1st||0.48-1.45%|
|Oklahoma||State||January 1st||January 1st||0.42-1.22%|
|Tennessee||State||January 1st||March 1st||0.37-1.37%|
|Texas||Local||January 1st||April 15th||0.37-2.58%|
|Vermont||Local||April 1st||April 20th||1.86-2.13%|
|Virginia||State and Local||April 1st||April 20th||0.40-1.33%|
|West Virginia||State and Local||July 1st||September 1st||0.31-0.77%|
5 tips to reduce inventory tax
- Liquidate slow-moving inventory
- Run a SKU rationalization analysis to identify your slowest moving products and deploy sales strategies such as promotions, secondary market sale, or donating to reduce inventory on hand.
- Store inventory in a state that does not have an inventory tax burden
- Sell through inventory before the assessment date of your state where inventory resides
- Improve demand forecasting to avoid overspending on inventory
- Review and explore the Freeport Exemption in states that tax inventory as it may provide relief in some instances
- A Freeport Exemption is a constitutional amendment that exempts certain products from property taxes. For more information on Freeport Exemptions, check out this article.
Inventory tax FAQs
Is there federal inventory tax?
Inventory tax is determined on a state level. There are currently 11 states that collect it: Arkansas, Alaska, Kentucky, Louisiana, Maryland, Mississippi, Oklahoma, Texas, Vermont, Virginia, and West Virginia. It’s important to review each state’s property tax policies before deciding where to place your inventory.
What’s the purpose of inventory tax?
The purpose of inventory tax is to fund local governments. Each state has differences on both policy and where the funds go to.
Do I need to report my inventory?
Yes, you need to report inventory. There are three acceptable ways to calculate it: manufacture cost of product, market value of goods, or the lower of cost or market value.
Can I expense my inventory?
Inventory is considered as an asset, not an expense. There are 11 states in the U.S. that impose inventory tax and all have different policies.
How do I track inventory tax?
Each state calculates inventory tax in a different manner. Here are three easy steps to track inventory tax:
- Find the amount of unsold inventory
- Determine its value (cost, retail, or market value)
- Calculate based on local or state policies
What is a Freeport Exemption?
A Freeport Exemption is a constitutional amendment that exempts certain products from property taxes. For more information on Freeport Exemptions, check out this article.
Do some states have inventory tax and Freeport Exemptions?
Yes, some states do have Freeport Exemptions based on inventory type and amount. To get the most accurate information, contact the local accessor where you store your inventory.
Gain peace of mind with WarehouseQuote
It can be difficult to understand all the nuances regarding inventory tax. Partner with WarehouseQuote to gain peace of mind when selecting the optimal location to store inventory with our suite of supply chain consulting and advisory services.