Tax Accounting

What is the Meaning of the Ad Valorem?

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.

It is commonly used in finance and taxation to refer to a tax or assessment that is based on the value of a particular item or property. For example, an ad valorem property tax is a tax that is levied on the assessed value of real estate.

In the context of taxes and assessments, the term “ad valorem” is used to distinguish between taxes that are based on the value of an item or property and taxes that are based on other factors, such as the size or weight of the item. For example, a sales tax is typically a “specific” tax, meaning that the tax rate is the same for all items, regardless of their value. An ad valorem tax, on the other hand, is based on the value of the item being taxed, so the amount of tax owed will vary depending on the value of the item.

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.

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