Ad valorem is a Latin phrase that translates to “according to the value.” The essential characteristic of ad valorem tax is that it is proportional to the value of the underlying asset, unlike specific tax, where the tax amount remains constant, irrespective of the underlying asset’s value. Ad valorem tax is commonly used in the taxation of real property.
Ad valorem taxes are typically calculated on an annual basis, such as local property tax (e.g. State of Georgia’s annual ad valorem tax on mobile homes), unlike transactional taxes which are also proportional in nature but are charged at the time of the transaction, such as sales tax (although many jurisdictions consider transactional tax as a type of ad valorem tax).
In court proceedings involving ad valorem tax, courts usually appoint a tax assessor to determine the value of the asset. This assessed value is then used to calculate the proportional tax amount. Ad valorem tax usually represents a percentage of the fair market value of the underlying asset. For example, in Cameron Parish Police Jury v. All Taxpayers, the Court of Appeal of Louisiana held that the ad valorem property taxes must be calculated on the fair market value of the property as stated in Title 47 of Louisiana Revised Statutes. The calculation of ad valorem taxes on a pre-decided fixed amount and not the fair market value violated the State’s laws.
Most ad valorem tax laws specify the upper percentage or amount limit of tax a county, state, or other relevant administrative division can charge and make allowances for inflation, increase in population, etc. The laws typically also establish procedures for changing the tax percentage.
[Last updated in May of 2020 by the Wex Definitions Team]