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Techno Tax Cuts

Larry Stone
Full Depreciation: County Tax Assessor Larry Stone has worked out a deal with high-tech companies to consider computers almost worthless after three years.

Photo by Christopher Gardner



Ignoring their own ad campaigns, Silicon Valley's computer giants are telling the tax man that their goods become worthless soon after they come out of the box

By Will Harper

SEX WITHOUT A CONDOM. Eating Chinese food with MSG. Buying a brand-new computer. These are the risks of modern-day life. Here in Silicon Valley, the latter clearly holds the most universal danger. A year ago, a heady techno connoisseur may have unloaded $2,000 on a PC with a 166 megahertz Pentium chip. Now, 166 MHz is passe--a $999 blue-light special.

Computer-makers have found a way to make money twice on this quick-time obsolescence. In addition to the profits generated by upgrades, they have parlayed the drop in the value of their goods into lower taxes.

In the past three years, high-tech companies have successfully lobbied county officials to reduce their property tax bills by at least $6.3 million--the Santa Clara County Manufacturing Group estimates the savings at $7 million in 1995 alone. They have done this by convincing county tax assessor Larry Stone that the computers they advertised as a must-have two years ago--which are still in use at their own facilities--are worth a fraction of what they cost.

The valley's computer giants have worked a deal whereby a personal computer acquired last Christmas is taxed at only two-thirds of its original market value. A two-year-old computer is assessed at 39 percent of its original purchase price. After three years, the machine is--officially--almost worthless.

The county's former tax collector, Al Carlson, had taxed personal computers as if they retained their value for eight years.

The rate at which government depreciates equipment means a lot to the high-tech industry. Companies pay property taxes on not only their land and buildings but what's inside--such as computers. Because computer companies have hundreds of millions of dollars' worth of their own high-tech machinery, observes industry tax consultant Christian Bendixen, they have a very keen financial stake in how local government values their wares.

Terry Ryan, the senior tax manager for Apple Computer, says that the new tax rates are more fair and more realistic.

"Before you really felt like you were being screwed ..."--Ryan pauses and rephrases--"... being grossly over-assessed. Now [the tax rate] more accurately reflects the market."

In 1994, Apple prevailed in what's been called a landmark property tax appeal that foreshadowed the change in the way counties tax companies' computer equipment. Apple persuaded the tax appeals board that personal computers lost almost all their value in just under three years.

Apple won an estimated $2 million tax refund. But that successful appeal didn't change the tax rules for all of Silicon Valley. Other high-tech companies looking for tax refunds still had dozens of appeals pending at the time.

Then, in 1994, former Sunnyvale mayor Larry Stone was elected county assessor.

In his first year in office, Stone changed the rules. Considered more friendly to high tech than his predecessor, the new assessor agreed to "depreciate" computers and mainframes at a faster rate.

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Property taxes ride the real estate roller-coaster up, up and up.

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What's Good for Apple ...

IN HIS OFFICE on the fourth floor of the county building, Stone, a Democrat, sits below numerous photos of himself shaking hands with President Clinton. Once a successful developer, Stone comes across as honest as he is cocksure.

Clearly, he says, he wasn't the most qualified person in the county for his job. But he quickly adds that he was the most qualified candidate who ran for the office.

Having received at least $14,000 in campaign contributions from the industry that later got a reduced rate from his office, Stone admits that even though it's less than 10 percent of his total $183,000 war chest, such contributions do buy access. If he returns from lunch and finds two phone messages, one from a regular taxpayer and another from someone who gave $1,000 to his campaign--he's going to call back the campaign donor first. "I'm just telling the truth," he says. "Most people wouldn't admit that."

Nevertheless, Stone insists that campaign contributions don't lead to any favors when it comes to assessments, though he acknowledges the perceived conflict.

Tax-reform lobbyist Lenny Goldberg, famous for his attempts to undo corporate tax loopholes, jokes that he's heard enough complaints from big business about Stone to think that the assessor must be doing a good job.

To Stone and others in his field, the more favorable tax rates negotiated with high-tech officials are simply more accurate. Rates are based on data from the used-computer market and reflect economic reality, Stone says.

"In the past," says Ed Walthard, a tax consultant with Declaration Services, "the assessor's office never took into consideration economic or functional obsolescence." In other words, if computers were VCRs, the county would tax a Beta machine as if it were VHS.

Net Worthless

BUT EVEN IN the Stone age, not everything is hugs and kisses between tax man and techno giants. Stone and other assessors are suing IBM and the state Board of Equalization over a new regulation that exempts computer operating systems--the software that transforms computer hardware into more than an enclosed box with a circuit board--from property taxes. That could cause Santa Clara County to lose $5 million to $10 million in taxes, according to Stone's office.

And a dispute between assessors and industry over values of midrange computers (valued at $25,000 to $499,999), Stone says, has led 12 Silicon Valley computer manufacturers, including Apple, IBM and Hewlett-Packard, to file appeals asking for a combined $15 million property tax refund for 1996.

In one case, the county assessed IBM equipment in IBM's San Jose offices at $37.7 million, while IBM valued the same equipment at $2.

"Some taxpayers will tell you that the computers they're using are worthless," Stone grouses. "We retort, 'If they're worthless, why are you using them?' "

Apple's Terry Ryan says he himself still uses an ancient Apple SE. He acknowledges that many older computers are still functional, but for tax-purposes, he says, those old-timers can only be judged by their puny market value.

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From the August 7-13, 1997 issue of Metro.

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