What is an Ad Valorem Tax?

Definition: An ad valorem tax is a tax calculated based on the value of a transaction or item. This term refers to all taxes whose amount is the result of a percentage applied to the value, instead of other kind of possible basis such as quantity or weight.

What Does Ad Valorem Tax Mean?

Ad valorem is a phrase that comes from the Latin and means “according to value”. Ad valorem is the most common type of tax since Import Duty Taxes, Value Added Taxes, Income Taxes, and Property Taxes are generally ad valorem taxes. Other kind of taxes could be based on a measure of weight or size, or simply units. An ad valorem tax allows to easily adjusting the amount to be paid in any given occasion.

For example, if this tax is applied to the value of a property every year, the tax burden will increase in proportion to the property value. If the tax is rather based on the property area, some poor owners holding large properties in rural, low-priced provinces could be charged with high taxes. In contrast, rich families owing small but expensive houses in cities could be charged with small amounts.

In this regard, ad valorem taxes are commonly the best way to avoid discrimination against the less affluent taxpayers.

Example

Frank Ramson is the owner of Modern Living, a young, small firm that offers architectural and furniture designs. The company had an outstanding year with several large projects. Thanks to impressive company income, Frank decided to raise wages in a significant extent, including his own salary.

Frank then wanted to purchase an expensive new car but he was surprised when he knew that the sales tax was almost US$8,000. He thought that it was unfair. However, his accountant explained that the amount is simply a percentage of the automobile value because it is an ad valorem tax. A less expensive car would have a sales tax lower than US$5,000.