Ad valorem is a tax or a duty levied by the state, local, or municipal government on the assessed value of the asset or property.
What does “ad valorem” mean?
Ad valorem is a Latin phrase meaning “according to value.” In essence, it is used to describe a tax levied based on the value of the item being taxed.
Thus, under ad valorem tax, value rather than volume of the asset or property forms the basis of the taxation. Usually, state and local governments use an ad valorem tax system to levy property taxes based on the determined value of the real estate property. Still, other taxes like VAT (Value Added Tax) and import duties levied by the government have also come under the purview of ad valorem tax.
It is possible to levy an ad valorem tax on a transaction or as an annual tax like property tax or VAT. In some instances, an ad valorem tax may even be imposed in exceptional circumstances like inheritance tax, stamp duty, and other taxes. Even though ad valorem taxes result in a smaller amount of tax collection for a higher volume of lower-value goods, it is still considered to be a significant source of revenue for the government, despite the fact that it is not the primary source of revenue.
Under the ad valorem tax, the public tax assessor first assesses the current market value of the assets or property. Then such an assessed value of the asset or the property is used as the basis to compute the annual tax liability of the assessee to the government or the municipality.
Apart from the municipality or the local government, ad valorem tax is also used by some other bodies or entities like counties, school districts or a specially created tax district. Sometimes assesses are subject to ad valorem tax by multiple tax entities, like municipalities and special tax districts.