Recently, the Appellate Division of the Superior Court of New Jersey affirmed a Tax Court decision which enforced a settlement and determined the amount of interest to be paid on the refund after a successful tax appeal. Faber Brother, Inc. v. Borough of Paramus, a Municipal Corporation of the State of New Jersey, docket no. A-016828-2001 (May 28, 2014). This blog will focus on the portion of the decision that discusses the interest component of the refund.

A property owner filed a tax appeal and ultimately settled with the municipality for reduced assessments for tax years 2009, 2010 and 2011. The tax refund totaled $571,645.12. The issue in dispute was how to determine the interest on the refund.

The statute in question is N.J.S.A. 54:3-27.2 which requires a municipality to pay interest at the rate of 5% per annum on any excess taxes paid. The interest is to accrue from the date of payment. The controversy arose over the meaning of “date of payment”.

The property owner argued that since property taxes are paid quarterly, interest should be paid on any portion of the quarterly tax payment exceeding the amount of taxes that should have been paid for a particular quarter. For example, if a property owner paid $10,000 of taxes for the first quarter taxes ($40,000 per year) and the pro-rated reduction in the tax assessment results in a $5,000 tax obligation each quarter ($20,000 per year), the property owner argued interest should be paid on $5,000 commencing February 1 of that particular year, when the first quarter taxes were paid since he overpaid the first quarter by $5,000.

To the contrary, the municipality argued that the date of payment refers to those payments made after the taxpayer pays the total amount of taxes due for the entire year. For example, if the total taxes for a year were $40,000, and the reduction in the tax assessment resulted in a tax obligation of $20,000, the tax savings would be $20,000. However, since the original assessment of $40,000 is paid over four quarters (due February 1, May 1, August 1 and November 1), the taxpayer would not have “overpaid” taxes until the second quarter when he or she paid $20,000 for the particular tax year.

The Tax Court found for the municipality and held that interest on any over-payment runs from the point at which “tax payments exceed a taxpayer’s total liability for the year.” The Court found that a taxpayer “cannot overpay any property taxes until the tax liability for the year has been satisfied.”

In calculating interest, the parties will need to calculate the new tax liability based upon the reduced assessment. That amount must be compared to the taxes actually paid to determine at what point in the year the property owner satisfied its total tax obligation for the year. From that date forward, the property owner is entitled to interest.