Two bills (Nos. 120822 and 120823-A) passed by the Philadelphia City Council and signed into law by the Mayor will make paying delinquent taxes to the City of Philadelphia (City) less "painful" next year.

Current Law

Until the recent passage of these two bills, both of which will become effective January 1, 2014, paying a delinquent tax is very costly due to the imposition of interest and penalties and the allocation method of a partial delinquent payment.

(a) Interest and Penalties

Beginning January 1, 1987, and now ending on December 31, 2013, the Ordinance (Section 19-509) imposes the following interest and penalty on any tax that was not paid when it was due:

(i) Simple interest is imposed on the unpaid tax at the rate of 1 percent per month or fraction thereof (12 percent per year).
(ii) Penalty is imposed on the unpaid tax at specified rates each month that accumulate to a maximum rate of 30 percent at the end of 12 months, thereafter the penalty on the unpaid tax will be imposed at the rate of 1 ½ percent per month or fraction thereof.

(b) Allocation of Partial Delinquent Payment

Where a partial payment of delinquent tax is made by a taxpayer, the Ordinance (Section 19-505) allows the City to prorate such payment between the principal amount of the unpaid tax, and the interest and penalties that had accumulated on the unpaid tax.

For example, a taxpayer paid the amount of unpaid tax balance only and did not pay the amount of the unpaid interest. By doing so, the taxpayer thought the City would consider the payment amount to be in full satisfaction of the tax principal and, accordingly, the interest and penalty would stop accumulating as of the date the payment was made. The taxpayer's assumption was incorrect. Pursuant to the Ordinance cited above, the City would prorate the taxpayer's payment to unpaid tax, interest and penalty. As a result, the taxpayer's future tax bill issued by the City will continue to show unpaid tax (to the extent the payment is not being applied to the tax principal) and interest and penalty will continue to accrue on the unpaid tax balance. To avoid this result, a taxpayer may provide specific written instructions to the City along with his partial payment as to how the partial payment is to be applied. As a general rule, the City will follow the taxpayer's instructions although it might take several follow-up telephone calls and other communications with the City to have the partial payment applied in accordance with the taxpayer's instructions.

New Law as of January 1, 2014

(a) Interest and Penalty

Commencing January 1, 2014, if any tax (other than real estate taxes) is not paid when it is due then, interest and penalty will be imposed on the unpaid tax as follows:

(i) Simple Interest will be imposed during the calendar year at a rate which is the sum of: (i) the Federal Short-Term Rate on January 1st of a particular year; and (ii) five percentage points. The Revenue Commissioner will publish the rate of interest for each calendar year on the Philadelphia Revenue Department's website.
(ii) Penalty will be imposed on the unpaid tax at the rate of 1¼ percent for each month or fraction thereof during which the tax remains unpaid.

For example, assuming the Federal Short Term Rate on January 1, 2014, is 0 percent, the interest rate imposed by the City on unpaid tax for calendar year 2014 would be 5 percent (0 percent plus five percentage points) simple interest. The Revenue Commissioner will determine the interest rate for unpaid tax on the first day of each succeeding year to determine the interest rate for that particular calendar year.

(b) Allocation of Partial Delinquent Payment

Effective January 1, 2014, the City will apply a delinquent payment as follows:

(i) Real Estate Tax – a partial delinquent payment of real estate tax will be applied first against the principal sum of such tax, less any applicable attorney fees for the collection of such tax. If the partial payment is in excess of the tax principal and the attorney fees, such excess will be applied first against accrued interest, and then against any penalty, in that order.
(ii) Other than Real Estate Tax - a partial delinquent payment will be applied first against the unpaid tax principal. If the partial payment is in excess of the unpaid tax principal, such excess will be applied first against accrued interest, then against costs, and then finally against any penalties, in that order.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.