This post was guest-written by the International Property Tax Institute (IPTI). It explores common challenges property tax teams face when managing various non-ad valorem taxes and charges, and tips for contesting assessments.

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There’s a concern shared by many corporations with extensive real estate portfolios spread across many states and/or countries: the extent to which they are liable for payment of various property-related charges over and above their annual property tax liabilities.

To be clear, we are not dealing with normal business taxes, i.e., taxes based on sales, turnover, profits, etc. We're also not dealing with personal property taxes. Rather, we are concerned with property-related taxes and charges arising from the use, occupation, and/or ownership of non-residential properties.  

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Why non-ad valorem tax is a challenge for property tax managers

It is challenging for the manager of a property tax team to keep on top of all the various non-ad valorem taxes and charges that can legitimately be levied on a corporation’s properties. The more properties in the portfolio, the greater the challenge.    

Property tax bills may contain items that may be fixed or variable charges. Sometimes, these charges are unrelated to the assessed value of the property concerned. In some cases, these unrelated charges may amount to many thousands of dollars or even higher sums.  

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Special Assessments: Taxes Over and Above General Property Tax

The concern arises in connection with what is often called “special assessments.” These may be levied for a variety of purposes, as indicated by the following examples:

• Air pollution control charges
• Bond payments
• Climate change levies
• Neighborhood enterprise zones
• Obsolete property zones
• Mosquito control district charges
• Rehabilitation zones
• Sewer extension fees
• Stormwater drainage charges
• Streetlighting fees
• Water pollution control fees
• Weed control levies

Special assessments are additional to the general property tax. They are normally focused on a particular type or group of properties and designed for a particular purpose to be paid for by only the beneficiaries.

Special assessments became popular in North America because they are relatively easy to implement, perceived to be equitable, and regarded as efficient.

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Challenging Special Assessments

Challenging special assessments involve a variety of considerations, including the following:

• Legal authority: there must be specific statutory authority for the jurisdiction to charge the fee or special assessment.
• Nexus to the taxpayer: in order to be charged, the assessment should provide some direct benefit to the user.
• Reasonable cost: the assessment must reflect the cost of the project to which it is related. That cost should be reasonable having regard to its nature and purpose.
• Appropriate accounting: while general property tax can be used for any purpose of the municipal government, the proceeds of the special assessment must be used only for the purpose for which it was levied.

It is important for the property tax manager to understand what the payment is for, how it has been calculted, whether it is contestable, and when it is required to be paid. All this information needs to be collected, collated, and stored in a form that enables it to be easily managed.  

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Managing data for special assessments and non-ad valorem tax

Information concerning the proposed imposition of a special assessment must be passed from the department that receives it to the property tax team. That is the only way through which consideration can be given to whether the proposed tax or charge should be contested.

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Should you contest your non-ad valorem tax assessment?

In this connection, there are both legal and policy considerations. While there may be a legal right to object to creating a particular special assessment, there may be policy and/or reputational reasons for the corporation not to object.  

However, even where a corporation chooses not to object to the proposed special assessment, there may be an opportunity to suggest revisions to the proposed scheme to mitigate its impact on the corporation.

There are some cases where the additional payment requested may be voluntary. This creates its own set of issues, including:  

• What is the payment for?
• What is it based on?  
• What benefits do we receive?  
• What is the downside of not paying it?

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TIFs, BIDs, and Service Charges

Many corporations hold properties located in an area that is designated as subject to a “Tax Increment Financing” (TIF) scheme. This is usually a public financing method that is used to support redevelopment, infrastructure, or other community improvement projects. While TIFs are important, they do not usually involve non ad valorem charges, so are not further considered here.

Similar to TIFs are “Business Improvement Districts” (BIDs) which may attract an additional annual payment for properties located within a BID. Such payments may or may not be related to the assessed value of a property located within the relevant locality; some have both a flat charge and a value-related element. Again, we are not giving further consideration to BIDs in this note.

A potentially significant additional non-ad valorem, property-related payment is a service charge. The subject of service charges is too large to be considered in detail in this brief note, but whether it is levying them, paying them, allocating/apportioning them, or any combination of those activities, it is vital that property tax managers keep accurate and up to date records of all service charges and ensure they are levied/paid at the right time.

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Non-Ad Valorem Tax Related to Utilities and Local Services

One of the most frequent additional non-ad valorem charges may relate to utilities or other local services, which are paid for via property tax bills, but are not directly related to the assessed value of the property concerned. These could include any of the main services, e.g., electricity, gas, water, drainage, sewage, etc. Bills will usually be based on metered supplies, but not in all cases. If these items are to be managed by the property tax team, full details of how they are calculated, when they are due, and when they are paid must be obtained.  

It will be important to identify situations where either the whole, or part, of a utility bill can be passed through to another party, e.g., a leaseholder, in accordance with the terms of the lease. However, even in these cases, the property tax manager will need to be clear about who retains legal liability for the payment and ensure charges are paid on time.  

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Garbage Collection and Disposal Charges

Garbage collection and disposal may be the subject of a separate charge which may or may not be included with the property tax bill. Payments may be based on the amount of garbage collected, the collection frequency, etc., and may consist of fixed and variable sums. Assuming this type of property-related charge falls to be managed by the property tax team, it is important to obtain all relevant information about the basis of the charge to ensure it is being properly levied and is paid on time.      

In some cases, these non-ad valorem taxes and charges may be sent separately from the normal annual property tax bill, in which case they need to be linked to the main bill so they can be checked, tracked, and paid using the same software system that is utilized for the annual property tax bill.

Another issue that may arise is that the non-ad valorem tax or charge may be issued by a separate body to the main property tax bill. In many cases, these additional charges are added to the main property tax bill as a form of “precept,” which the taxing authority is obliged to pass on to the precepting body. But this may not always be the case.

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Education Taxes on Property Tax Bills

Education taxes are usually included as a separate item on a property tax bill. More often than not, these are an ad valorem charge, but there may be some additional education-related items that are not based on an ad valorem approach.

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Summary: Considerations for Non-Ad Valorem Taxes and Charges

With all non-ad valorem taxes and charges, there are some critical issues to consider; they include:

• What is it for?
• Is it legally enforceable?
• Is the corporation liable?
• Is it contestable?
• Can the bill, or part of it, be passed on to others?
• When must it be paid?

The number, range, and potential complexity of these non-ad valorem taxes and charges, particularly for corporations with substantial property holdings, reinforce the requirement for the property tax manager to hold the relevant data in appropriate software that can be used for reviewing, analyzing, reporting and paying the sums due.

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About IPTI

The International Property Tax Institute (IPTI) is widely recognized as the world’s leading organization on property tax policy and practice.

IPTI’s mission is to provide impartial, objective expert advice in the area of property tax systems and promote the concept that these systems should be fair and equitable and meet the needs of all stakeholders, i.e., governments, taxpayers, practitioners, and academics. In addition, IPTI seeks to ensure that property tax systems contribute to the provision of high-quality services for the benefit of communities.