Volume 11 - Opinions of Counsel SBRPS No. 75

Opinions of Counsel index

Assessment review (tax certiorari proceedings) (refund - calculation of interest) - Real Property Tax Law, § 726; Tax Law, § 697(j):

The rate of interest on refunds in real property tax certiorari proceedings is the “overpayment rate” as set annually by the Commissioner of Taxation and Finance pursuant to section 697(j) of the Tax Law. It is to be applied from the date of the payment of the tax to be refunded to the date of entry of the final order, and then from the date of an application for audit and payment of such refund to the appropriate fiscal officer or body to the date of payment of such refund. The interest to be paid is simple interest, not compound interest.

We have been asked to explain how to compute interest due on refunds in real property tax certiorari proceedings. Subdivision 2 of section 726 of the Real Property Tax Law (as amended by L.1993, c.395, effective January 1, 1994 and applicable to proceedings commenced on or after that date), provides, in part, that “[s]uch rate of interest shall be the overpayment rate set by the commissioner of taxation and finance pursuant to [Tax Law, § 697(j)] and such interest rate shall not be greater than nine percent per annum.”

Since 1994, the Department of Taxation and Finance has annually advised us of the following applicable rates of interest:

        Editor’s note: For interest rates for years subsequent to 2005, see Current Interest Rates.

         Prior to the January 1, 1994 effective date of the 1993 amendment, the rate of interest on tax refunds was not prescribed in section 726(2), but was in accordance with the provisions of section 3-a(1) of the General Municipal Law (Colonie Hill, Ltd. v. Boncore, 87 A.D.2d 581, 448 N.Y.S.2d 205 (2d Dept., 1982), app.den., 57 N.Y.2d 608, 442 N.E.2d 448, 456 N.Y.S.2d 1025 (1982); Op.State.Compt. 69-23; id. 80-435). ^{1}

Effective October 1, 2003, Chapter 62, Part M3, of the Laws of 2003, further amended Tax Law, section 697(j), to eliminate the minimum rate of interest (commonly called the “floor”) of six percent for overpayment of taxes. As a result of this change and prevailing lower interest rates, the annual interest rates for the calendar years after 2003 have been lower than six percent.

Calculation of interest

With respect to the applicable time periods for which interest is to be computed on tax refunds, it is our opinion that section 726(2) of the RPTL requires interest be calculated from the date of the payment of the tax to be refunded to the date of entry of the final order, and then from the date of an application for audit and payment of such refund to the appropriate fiscal officer or body to the date of payment of such refund (see also, Op.State Compt. 69-116). We note that service upon the appropriate fiscal officer of a certified copy of the final order directing payment of a refund has been held to constitute an application for audit and payment (860 West Tower, Inc. v. Levy, 53 N.Y.2d 450, 425 N.E.2d 839, 442 N.Y.S.2d 451 (1981); see also, Technicon Instruments Corp. v. Town of Greenburgh, 173 A.D.2d 833, 570 N.Y.S.2d 658 (2d Dept., 1991); lv. to app. dism., 79 N.Y.2d 914, 590 N.E.2d 251, 581 N.Y.S.2d 666 [holding that transmission to the assessors and others, or their attorneys, of a copy of the order is an application for audit and payment sufficient to start running of interest]).

Regarding the method of application of interest rates to the periods that a refund is owed, we are not aware of any judicial decisions adjudicating the actual method of computation of interest under the 1993 amendment mandating the use of a variable rate of interest. For the sake of fairness to both the payor (i.e., the tax authority) and the payee (i.e., the taxpayer), we believe that a reasonable interpretation of the statutory language requires that the respective rate of interest be applied to the refund amount for the corresponding time period.

An example may better illustrate the concept. If the date of overpayment of taxes is September 15, 2002, the date of entry of the final order is October 31, 2004, the date of application for audit and payment is January 3, 2005, and the date of actual payment of the refund is January 17, 2005, the amount of interest would be calculated as follows: six percent per annum would apply for the period from September 15, 2002 to December 31, 2003 [6% having been determined to be the rate for both 2002 and 2003], three percent per annum [the 2004 rate] for the period from January 1, 2004 to October 31, 2004 [date of entry of order], and then four percent per annum [the 2005 rate] from January 3, 2005 [date of application] to January 17, 2005 [date of payment].

Simple or compound interest

With respect to the question of whether interest should be computed on a “simple” or “compound” basis, the 1993 amendment to section 726 does not change any previous holdings by the courts. As a general proposition, compound interest is not favored by the courts in New York State, and, in the absence of statutory authority, such interest is not recoverable (see discussion in 72 NY Jur2d, Interest and Usury, § 12). Since neither section 726 of RPTL nor section 3-a of General Municipal Law specifically authorizes the use of compound interest, it is our opinion that interest on tax refunds should be computed on a simple rather than a compound basis.

September 30, 2005

^{1}  The rate prescribed in section 3-a(1) of the General Municipal Law is “not [to] exceed nine percent per annum.”  Prior to its amendment by L. 1982, c. 681, the limit was not to exceed three percent.