Issue: Tax Reform, Act 1 of 2006

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Act 1 NEWSLETTER
Vol. 1, No. 20, April 27, 2007

IN THIS ISSUE: What are a school district's responsibilities for initiating installment payment plans for property taxes?

SUMMARY: There has been some debate lately about the nature of a school district's responsibilities regarding the installment payment of property taxes under Chapter 15 of Act 1. The debate centers on the wording of Section 1502(a) and (b). Section 1502(a) is a general rule stating that school boars of the second, third or fourth class may adopt a resolution authorizing the collection and payment of property taxes in installments. Section 1502(b) requires school districts in the second, third, and fourth classes to adopt a resolution, which, for calendar year 2007 and each thereafter, authorizes the collection and payment of school real property taxes. This resolution must be adopted by June 30, 2007.

The Section creates several responsibilities for school district as follows

Resolution - The aforementioned resolution must contain wording that accomplishes the following:

• Permits taxpayers with approved homestead or farmstead property to be eligible to pay school property taxes in installments;

• Describes the process by which a taxpayer can pay his or her property taxes in installments. The process must indicate that 1) The payment of the first installment by a taxpayer before it becomes delinquent shall act as evidence that the taxpayer intends to pay his or her property taxes in installment and 2) Where a taxpayer fails to evidence an intention to pay school property taxes in installments, the taxes become due and payable as provided by law.

• Lists the number of installments that an eligible taxpayer shall be required to pay can be no more than monthly and no less than three times during the months prior to the date established by the county in which the school district is located for the turnover of delinquent taxes under the Real Estate Tax Sale Law

• Lists the dates on which installment payments of school property taxes are due or delinquent. Boards may set up installment payment dates after December 31 and prior to the date established by the county for the turnover of delinquent taxes. Unpaid installments cannot be considered delinquent if paid on or before the respective installment dates. A penalty of 10% must be added to delinquent installment payments. A taxpayer who is delinquent by more than ten days on more than two installment payments is ineligible for the installment payment option in the following school fiscal year

Annual adoption of resolution - School boards must annually set forth information regarding the payment of school real property taxes in installments and the dates on which such payments are due or delinquent on the tax notice sent to a homestead or farmstead property owner.

Collection of Installments - A school district can collect the installment payments by contracting with a tax bureau independent of the school district and a tax bureau may contract with more than one tax collector. The tax collector must be paid the same rate of commission or compensation for installment payments as he/she is for the collection of taxes generally. The tax collector retains responsibility and accountability for all installment payments collected and the final accounts and records, returns and payments and duplicates must be audited annually in the year in which the installments are collected in like manner and in accordance with tax collection law.

School boards may also authorize the collection of installments through electronic fund transfers through the Federal Reserve Bank's Automated Clearing House or by a credit card payment, which would be made through the school district's depository bank or another bank designated by the school board. Boards must also designate the type of credit cards that may be used for installment payments.

Assignment of installment claims - A school district can assign some or all of its installment claims, either absolutely or as collateral security, for an amount to be determined by the district and under such terms and conditions upon which the district and the assignee agree. Such agreements must be in writing and must be approved by school board resolution. An installment claim can be assigned regardless of whether any single installment has become delinquent. Section 1504(a) and (b) of the act contains other provisions concerning the treatment of assigned installment claims that should be examined by your solicitor before entering into any such agreement.

Increases in compensation of tax collector - Within 15 days of a board's adoption of a resolution authorizing the installment payment option, a tax collector may, by sending a certified letter, request that the school district consider increasing his/her compensation to account for any increased administrative costs incurred. Likewise, a school district, within the same time frame, can send a certified letter to the tax collector informing that his/her compensation may be adjusted for installments until 1/31/09. The school district must consider the request within 45 days of receiving or sending the letter.

ANALYSIS : The debate surrounding the nature of school boards' responsibilities under these provisions is caused by the seemingly contradictory language in sections 1502(a) and (b). PSBA's interpretation is that the "may" provision in Section 1502(a) allows boards to adopt a resolution that is more far reaching than what is required in the rest of the chapter. The language in Section 1502 (b) clearly requires boards to adopt a resolution to accomplish at least what is laid out in the chapter.

The resolution that school boards are required to adopt seems straightforward enough. The payment of the first installment evidences an intention to pay the remainder of the property tax bill in installments. If no payment of the first installment is made, the property tax becomes due and payable on the normal schedule.

Act 1 suggests that the number of installments is between three or six, assuming that the county has a January 15 date for the turnover of delinquent taxes. However, the number can be as high as 12 if the board agrees to a year-round schedule. Keep in mind, however, that such a schedule could have a detrimental effect on cash flow.

School boards will likely have to adopt a new installment resolution every year because the due dates for the payments will change annually. That will give boards an opportunity to make any changes to the timing and /or collection of installments as they see fit.

Assignment of installment claims is a tool that districts can use to help with cash flow. Keep in mind that not all installment claims need to be assigned. School boards should only enter into these agreements with the blessing of their solicitor.

Section 1505, which provides for considering an increase in compensation, raises several questions, legal and not. These provisions will be a topic for a future Act 1 newsletter.

Additional information on the installment payment section of Act 1 can be found in the April 27 edition of the School Leader News .