Real Estate Tax Installment Payments Solutions

Clarence C. Kegel, Jr. Esquire Kegel Kelin Almy & Grimm LLP Brent Kessler, PRSBA Business Manager, Central York SD WEBCAST PARTICIPANTS: Listen to audio over your computer speakers. (If you prefer to listen by phone, you may dial-in using the numbers provided in your invitation . Phone lines will be available 10 minutes prior to the event start.)

Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits

Handouts

• PowerPoint • REAL ESTATE TAX INSTALLMENT PAYMENTS: Act 25 Small Business Requirements KKAG Legal Overview  Exhibit A – Act 1 as Amended by Act 25  Exhibit B – Real Estate Tax Universal Installment Payment Plan Resolution  Exhibit C – Real Estate Tax Limited Installment Payment Plan Resolution  Exhibit D – Small Business Owner Application for Real Estate Tax Installment Payments

Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits

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Overarching Question

• Should your district:  Develop a plan to implement small business installment payment mandate;

or

 Allow installment payment by all taxpayers?

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Real Estate Tax Installment Mandates

• Pre-2007 – No mandate – allowing installment payments completely optional • Act 1 of 2006 – Starting 2007-08 – installment payment option mandated for homestead/farmstead owners • Act 25 of 2011 – Extended mandate to owners of small businesses – adopted 6/30/11 – effective for 2012-13 school year – see

Exhibit A-2 Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits

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What Action is Required?

• If already allow installment payments by all taxpayers –

no action

• If installment payments now limited to homestead/ farmstead owners: 

Global question

– decide whether to extend option just to small business owners – or extend option to all taxpayers  If extend only to small business owners – decide on details of program  In any event, school board adopt new

Real Estate Tax Installment Payment Plan

 Revise tax bill forms; printed instructions; and software – and communicate with RE tax collector

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What Deadline for Action?

• June 30, 2012 – statutory deadline for new plan adoption • Practical deadline – much earlier if limit extension of option to small business owners – because of necessary advance planning

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General Installment Payment Rules

• Applicable to taxpayers to whom option extended • Final installment required to be made by county turnover date – for example, Dec. 31 or Jan. 15 • Must allow at least 3 installments – may not require more than monthly installments • 10% penalty may be added only if installment payment delinquent • School board resolution required to establish installment payment rules (initial resolution may apply to subsequent years) • Basic rules established by Act 1 – 53 P.S. § 6926.1502(c)(2) – see

Exhibit A-2 Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits

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Typical Installment Payment Terms

• 3 equal installments • August 31, October 31, and December 31 • Compared to payment in full dates:  August 31 – 2% discount  October 31 – base amount without penalty  After October 31 – 10% penalty

Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits

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Legislative Process

• Another “June 30 statute” • Legislative process = making sausage • Act 25 language highly ambiguous • No discussion in General Assembly – to explain intent • Concept great !

• Devil in the details….

• Now……

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Act 25 Language

• School districts mandated to “permit taxpayers that own small businesses to be eligible to pay school real property taxes in installments.” 53 P.S. § 6926.1502(c.1) – see

Exhibit A-3

• “Small business” means “a business that is located in this Commonwealth and has no more than 50 employees.” 53 P.S. § 6926.1502(e) – see

Exhibit A-3 Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits

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4 Basic Act 25 Requirements

• The RE taxpayer must be the “

owner

” of the RE • The taxpayer must be the “

owner

” of a “

business

” • The business must be a

“small business”

i.e., have “

no more than 50 employees

” – • The business must be “

located in Pennsylvania

” • Simple ……. right?

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Now For The Unanswered Questions

• SDs must develop guidelines to fill in gaps • Next part of presentation • Consult solicitor!

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Does Act 25 Specify a Date on Which the Taxpayer Must Meet the Small Business Eligibility Requirements?

• No – silent • Options:  Require application and use application deadline – for example, March 1, July 1, or August 31 (first installment due date)  No application required – use August 31 (first installment due date)

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What Does Owner Mean?

• Easy case – same person owns 100% of RE and 100% of SB –

yes

Individual Owner

RE Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits SB

• But facts often not so clear cut !

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Other Scenarios

• Statute silent • Individual owns RE; same individual owns LLC or other entity that leases RE and owns SB –

probably OK

Individual Owner

RE

Lease

LLC SB Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits

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Other Scenarios

• LLC or other entity owns RE and SB –

probably OK

(statute does not state that taxpayer must be an individual) 10 Individual Owners

LLC RE SB Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits

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Other Scenarios

• Entity that owns RE and SB is mega-corporation subsidiary – probably

not OK

Mega-corporation Owner

LLC RE LLC SB Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits

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Other Scenarios

• Different % ownership of RE and SB – need to devise rules Possible Ownership Ranges

RE SB

1% 51% 100% 1% 51% 100% Individual A Individual B owns 1% owns 100% Lease

RE LLC

• 1% not enough ! ?

SB

• Could require 100% - but taxpayer might challenge

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Other Scenarios

• Perhaps minimum 50% or 51% common ownership?

• Perhaps allow required minimum ownership % be met by more than one individual – e.g., two people together own 51% of each Individuals A/B own 51% Individuals C/D own 49% Individuals A/B own 51% Individuals E/F own 49%

RE

Lease

LLC SB

• What if husband owns RE/wife owns SB?

• Many possible scenarios – impossible to address all !

Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits

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Commercial Real Estate or Apartments?

• Individual owns commercial RE $10 million FMV – individual has no employees Individual Owner/no employees

RE = Shopping Mall

• Is the ownership and leasing of RE a “business”? If so, it qualifies because individual who owns this business has 50 or fewer employees.

• Statute silent –

can interpret either way

• Legislative intent – probably

not

intended to apply, but no legislative history to support this conclusion • Risk that court might rule mandate applies • Ownership and leasing of apartments?

• See

KKAG Legal Overview

– page 9 as to options

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What Does More Than 50 Employees Mean?

• Do part-time employees count? –

yes

• What if RE leased to 2 separate SBs with aggregate employees above 50? Statute silent – but mandate probably does

not

apply

Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits

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What If Workers Are Independent Contractors, Not Employees?

• Don’t count unless abuse / mischaracterization • Can adopt guidelines / but hard to enforce

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Do Workers Outside Pennsylvania Count?

• Statute silent • KKAG believes

yes – should count

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Now We Have Set The Rules – What Options for Qualification Process?

• Self-certification – state rules in tax instructions; then taxpayer simply claims eligibility when pays first installment (subject to possible audit or challenge) – most simple and flexible  If shopping mall owned by REIT claims – reject….. except for obvious cases, rely on good faith • Application and approval by specified date prior to first installment – see

Exhibit D

• Application and approval contemporaneous with first installment

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Must SD Create Detailed Eligibility Rules in Advance?

• • No – could rely on statement of general Act 25 rules – and good faith, self-certification • However – taxpayers will have unanswered questions on eligibility – and SD will be limited in ability to audit or challenge

Another alternative

– conclude administration too cumbersome and “juice not worth the squeeze” – allow universal installment payment by all taxpayers

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Here Are The Steps

• Consult solicitor • Decisions on global question/eligibility rules/ qualification process • Real Estate Tax Installment Payment Plan – school board adopt – see

Exhibits B and C

• Application form – see

Exhibit D

• Prepare Eligibility Rules (no sample) • Prepare FAQs for taxpayers (no sample) • Revise tax bill forms, related instructions, and software – communicate with tax collector

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Business Office Responsibility

• County will not handle application process/provide list of eligible taxpayers – contrary to homestead/farmstead process, business office will perform these tasks • SD will need to give tax collector list of eligible taxpayers (unless self-certification) • Possible extra tax collector fees – due to more installment payments

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Global Question/ Practical Considerations

• Develop small business process – or open to all?

• Impacts of opening to all:  Gain or lose revenue?

 Cash flow impact?

 Tax collector fees?

 Business office resources?

 Potential taxpayer challenge of small business eligibility rules – practical and legal ramifications

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Kegel Kelin Almy & Grimm LLP

Kegel Kelin Almy & Grimm LLP is a regional law firm with offices in Lancaster, Pennsylvania. KKAG is solicitor and general counsel to 17 school districts and joint school systems – and bond counsel, finance counsel, or special counsel to many others in Central and Eastern Pennsylvania.

and municipal taxes.

KKAG is also solicitor and general counsel to 6 Tax Collection Committees.

KKAG is recognized for expertise on school district In addition, KKAG frequently serves Pennsylvania school districts for unusual and challenging problems, projects, or litigation.

KEGEL KELIN ALMY & GRIMM LLP 24 North Lime Street Lancaster, PA 17602 TEL 717-392-1100 FAX 717-392-4385 www.kkaglaw.com

Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits

Practical Applications

Brent Kessler, PRSBA Business Manager Central York SD

Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits

Universal Installments

• The “other” option – Why consider all parcels eligible for installments • Financial Analysis • Practical Application

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Financial Analysis

• Installment Payment Calculator – Spreadsheet examples and explanation • Cash flow impact/discussion

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Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits

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Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits

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Practical Application

• Universal installments – Some schools already there – Numbers and experience • Business Office impact • Regional Chapter discussion • Why not?

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Time for Questions!

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Thank you for your participation!

CONFERENCE ATTENDEES: If you are requesting CPE credit, return the CPE form to the moderator before leaving the room WEBCAST PARTICIPANTS: Attendance Forms are required to receive either PASBO CEU or CPE credit. Webcast sites are asked to collect Attendance Forms from each participants and return to the PASBO office by March 16 .

Pennsylvania Association of School Business Officials 2012 Annual Conference & Exhibits