Legal Definitions - ad valorem tax

An ad valorem tax is a type of tax whose amount is calculated based on the assessed value of an item, service, or property. The Latin phrase "ad valorem" literally means "according to value." This means that the more valuable the item or property, the higher the tax amount will be.

Here are some examples to illustrate how ad valorem taxes work:

• Real Estate Property Tax: When you own a home or land, local governments often levy property taxes. The amount you pay is not a fixed sum for every property owner; instead, it's determined by the appraised market value of your specific property. If your house is valued at $300,000 and the local property tax rate is 1%, you would pay $3,000 in property tax. If a neighbor's house in the same area is valued at $500,000, they would pay $5,000. This illustrates an ad valorem tax because the tax obligation directly scales with the assessed value of the real estate.

• Sales Tax on Goods: Many jurisdictions impose a sales tax on consumer goods. When you purchase an item, the sales tax is a percentage of the item's price. For instance, if you buy a new television for $1,000 and the sales tax rate is 7%, you will pay $70 in sales tax. If you buy a less expensive item, like a book for $20, the sales tax at the same rate would be $1.40. The tax amount varies directly with the value (price) of the goods purchased, making it an ad valorem tax.

• Import Duties on Luxury Goods: Governments sometimes impose tariffs or duties on imported goods. For certain luxury items, these duties might be calculated as a percentage of the item's declared value upon entry into the country. For example, if a high-end imported watch is valued at $10,000 and subject to a 5% import duty, the importer would pay $500 in duty. A different, less expensive imported watch valued at $1,000 would incur a $50 duty at the same rate. This demonstrates an ad valorem tax because the duty owed is directly proportional to the monetary value of the imported good.