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Volume 10 - Opinions of Counsel SBRPS No. 87

Opinions of Counsel index

Industrial development agencies exemption (in lieu of tax payments) (refund following pro rata taxation); Exemptions, generally (transfer to non-exempt owner) (credit for in lieu of tax payments); Equalization rates (State rates - generally) (physical change - change in exempt status) - General Municipal Law, § 874; Real Property Tax Law, §§ 412-a, 520; 9 NYCRR 185-1(a)(188):

When tax exempt property of an industrial development agency is transferred to a taxable entity, the property is subject to pro rata taxation (per RPTL, § 520). Partial payments in lieu of taxes [PILOT] may be refunded after pro rata taxes are levied for a portion of the fiscal year(s) for which a PILOT was paid only as provided in the PILOT agreement.

Where formerly exempt property is reassessed upon sale (per RPTL, § 520), any change in value is deemed a physical change and will be treated as such for equalization rate purposes.

Our opinion has been sought concerning the real property tax ramifications of the pending sale of a facility which is currently tax exempt as being “under the jurisdiction, supervision or control” of a county industrial development agency [IDA] (Real Property Tax Law, § 412-a; General Municipal Law, § 874). This IDA makes payments in lieu of taxes [PILOT] to local governments. Upon transfer, the assessor intends to reassess the property (in accordance with RPTL, § 520), but the assessor has indicated that his anticipated valuation methodology will likely result in a taxable assessment lower than the current PILOT value basis. He asks what effect the sale will have on equalization rates and how to administer the removal of the exemption.

As to equalization, the State Board’s rules (9 NYCRR 185-1.1(a)(188)) define physical or quantity change to be, inter alia, “an increase in assessed value from the prior roll to the current roll resulting from . . . property which has become locally assessed property.” 9 NYCRR 185-1.1(a)(132) excludes from the definition of locally assessed property “wholly exempt properties.” Thus, since the IDA property was wholly exempt on the 1999 assessment roll, its change to taxable on the 2000 roll, and any change in value, is a physical change and will be treated as such in any equalization study or the calculation of any equalization product.

As to the removal of the exemption, both the law and the PILOT agreement must be considered.

Section 520 of the RPTL provides that whenever property receiving a total or partial exemption is transferred to an owner not entitled to receive such exemption, the property becomes immediately liable to taxation both for the unexpired portions of the fiscal years during which the transfer occurs and for succeeding fiscal years. In 10 Op.Counsel SBRPS No. 21 we discussed the assessor’s duty to reassess such property “at its value as of the date of transfer” (RPTL, § 520(2)) and of the owner’s right to administrative and judicial review of such assessment. Consequently, the assessor should apply the valuation methodology he deems most appropriate in valuing the property as of its date of transfer. (Of course, it is axiomatic that an assessor should always utilize appropriate methodology in annually assessing all property, including exempt property.) It is this value (subject to its possible reduction through the assessment review process) which will be used when the property is subjected to pro rata taxation.

Section 520 does not address the possibility of a PILOT (compare, e.g., RPTL, § 545(6)(a)), and, indeed, the IDA exemption laws themselves did not even mention such payments until 1992 (c.772). Yet, PILOT agreements have long been common where IDA ownership or control occurs. In a 1974 opinion, we stated:

There is no constitutional or statutory law prohibiting an industrial development agency from requiring a lessee to make in lieu of tax payments. . . . Such payments are not entered on the tax roll nor collected by the tax collector. The payments are collected in the same manner as are other payments due the town under contract (3 Op.Counsel SBEA No. 86).

In State Comptroller’s Opinion No. 87-61, that official concluded that section 520 “contains no authorization for the crediting of prior payments of any nature in reduction of taxes; nor can such authority be found in any other statute.” In the absence of such authority, the Comptroller therefore concluded, “no credit for payments in lieu of taxes may be given against taxes levied pursuant to section 520. . . .” The Comptroller then continued, “Of course, the agreement requiring the [PILOT] could provide that any amounts payable under that agreement shall be reduced by the amount of any taxes which are required to be paid under Real Property Tax Law, § 520.”

As the Comptroller also noted in the same opinion, “Payments in lieu of taxes are purely contractual payments.” As such, they are enforceable only as provided in the contract which established them. That contract cannot legally affect subsequent taxation of the property if and when the property becomes taxable. {1}  When section 520 is triggered by a conveyance of the property, the now-taxable property is subjected to pro rata taxation (and to tax enforcement procedures if those taxes go unpaid). Since section 520 includes no provision for crediting the moneys previously paid under the PILOT agreement to the municipality (compare RPTL, § 626 which provides a deduction against taxes for certain payments made by special franchise owners), if a PILOT has been paid for a portion of a fiscal year for which a pro rata tax is subsequently billed, any (presumably partial) refund of the PILOT may be made only as contracted for in the PILOT agreement. {2}

When a pro rata tax is computed and extended as provided in section 520(3) of the RPTL, the amount of taxes levied pursuant to that subdivision “shall be deducted from the aggregate amount of taxes to be levied for the fiscal year immediately succeeding the fiscal year during which the transfer occurred.” Through this process, the taxpayers, who previously paid taxes at a higher tax rate due to the shift in the tax burden from the property when it was exempt, experience a lower tax rate. We recognize that those savings may be reduced if tax revenues must be increased to finance the contractual refund.

July 7, 1999
Revised September 28, 1999

{1}  Indeed, if the municipality were itself a signatory to the contract, it could not contract away its power of taxation (N.Y. Const. Art. 16, § 1).

{2}  In the absence of such a provision, duplicative payments may result, so it obviously behooves the drafters of the PILOT agreement to consider the effect of latent taxation of the property.