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The legal term ad valorem comes from the Latin word meaning "according to value." An ad valorem tax is a tax on a piece of real estate, personal property, or a specific item. It is expressed as a percentage of the sales price or value. Some ad valorem taxes, such as sales taxes, are collected in conjunction with a transaction. Other ad valorem taxes, such as property taxes, are collected on a recurring basis as a percentage of the value of a piece of real estate.
In real estate, the ad valorem tax is commonly referred to as property tax. The government body imposing the tax sets the tax rate, although the rate is sometimes set by a public vote or other public input. Real estate is assessed, or assigned a fair market value, before it is taxed.
Land and improvements to the land are typically subject to property tax. Most localities have a method to determine the value of property as well as an appeal process if the property owner believes the value is unfair. The taxes are figured on an annual basis, but may be collected in several installments.
Personal property may also be subject to an ad valorem tax. This type of yearly tax most often impacts motor vehicles. Since motor vehicles depreciate, the amount of tax paid will decrease each year as long as the tax rate does not change. Value of motor vehicles is usually determined using recognized price guides or a table of values specified in the applicable ad valorem tax code. This personal property tax is usually paid once a year.
Sales tax is charged on the purchase of certain goods and services. The percentage of sales tax, as well as what gets taxed, is determined by the government body charging the tax. For sales tax the value, or price, of the item is determined by the retailer, and the tax is paid on every purchase. Frequently the rate of sales tax differs based on the product or service being taxed. Some localities exempt food from taxes, while other localities exempt clothing.
Collected taxes are used to maintain the taxing body and serve the residents of the community. In general, the tax amount is calculated by multiplying the value of the item times the tax rate. All ad valorem taxes are flat, or regressive, taxes. The tax is not based on the income of the person paying the tax, but on the value of the property, item, or service being taxed. A regressive tax takes a larger percentage of income from low income earners.