Special District Taxes in NY: What Is Benefited?

Mark D. Lansing

New York Law Journal

January 12, 2010

Real Property Tax Law (RPTL) and Town Law permit municipalities to create special districts. Special districts include ambulance, fire, sewer, garbage, lighting, highway and others.¹ Many special districts benefit all residents (e.g., highways, ambulance service, fire services). However, other special districts only provide a direct benefit to specific parcels of real property (e.g., garbage, sewer). When real property is not benefited by the special district's services, it cannot be assessed for that special district's tax.²

This article reviews challenging a special district assessment, the meaning of "benefited," the different standards applied to utility and railroad properties, and the appropriate application of recent case law addressing special district assessments. Are you paying for a service that you are not receiving?

Challenging the Assessment

To challenge a special district assessment, the taxpayer commences a plenary action in the Supreme Court of the county in which the real property is located. See Civil Practice Law and Rules Article 78 and/or Section 3001 (declaratory judgment action). A plenary action asserts that the municipality lacks statutory authority to designate the taxpayer's real property as being benefited by the special district.³ The taxpayer does not have to meet the statutory conditions precedent of or follow the procedures set forth in the Real Property Tax Law.⁴ Niagara Mohawk Power Corp. v. City School Dist., 59 N.Y.2d 262, 269 (1983). The taxpayer does not contest the town's right to create or maintain the challenged special district, but solely whether their real property is benefited by the services that the special district provides.

The period of limitations to commence this plenary action is four months from the date of the final determination by the taxing authority that the real property is benefited for that tax year.⁵ The running of the four-month period may arise from the filing date of the final assessment rolls of the town or receipt of the special district's tax bill. The preferable and more conservative time period is based on the filing of the final assessment rolls.⁶

In addressing a special district challenge, a court must first address the nature of the district—i.e., whether its tax or special assessment constitutes a "special ad valorem levy" or a general tax.⁷ The distinction between a general tax and a special levy or special ad valorem levy has had a long history in New York law. Special levies reflect taxes that finance a service providing a specific benefit to a particular property, or group of properties.⁸ The Real Property Tax Law §102(14) codified this distinction in its definition of "special ad valorem levy" as:

…a charge imposed upon benefitted real property in the same manner and at the same time as taxes for municipal purposes to defray the cost, including operation and maintenance, of a special district improvement or service, but not including any charge imposed by or on behalf of a city of village.

In Tuckahoe Housing Authority v. City of Eastchester, 208 A.D.2d 521, 522 (2d Dept. 1994), the court observed:

The Legislature has expressly excluded such levies and special assessments from the definition of tax under the RPTL (see RPTL 102[20]).

Once the special district tax is shown to be a special ad valorem tax, the only remaining inquiry is whether the real property is benefited. The necessity for the property to receive a benefit was concisely stated by the Court of Appeals as follows: "[b]ecause plaintiffs do not receive the pertinent benefit, no basis exists in these circumstances for the imposition of this ad valorem garbage collection levy." Applebaum v. Town of Oyster Bay, supra, 81 N.Y.2d at 736.⁹

Two Lines of Inquiry

The necessity that the property be benefited requires an understanding of the term "benefited." The Court of Appeals has defined benefited parcels as follows:

In determining whether a property is benefited—i.e., whether it is capable of receiving the municipal service funded by the special ad valorem levy—we look to the innate features and legally permissible uses of the property, not the particularities of its owners or occupants or the state of the property at a fixed point in time. Asa class of property, telephone poles can never produce or require municipal garbage collection. For the purposes of a special ad valorem levy to finance garbage collection, they therefore are not benefited.

Id, 4 N.Y.3d at 394. In applying this definition of benefit, the Court of Appeals established, in essence, two classes of special district real property and the standard to be applied for each class. The two classes are: (1) undeveloped or developed land that can or could use the service (presently or in the future) due to the land's innate character; and (2) utility and railroad property, whose innate characteristics determine whether they are capable of receiving a direct benefit from the special district services.¹⁰

Non-utility Vacant or Developed Land. Vacant land situated in a sewer or garbage district cannot avoid their special district levy merely because the land presently cannot use the service.¹¹ The land's value is enhanced by the presence of either district (in particular, if its development would likely result in installing a sewer lateral or be subject to garbage pick-up). Similarly, neither vacant nor developed land can avoid the special district assessment merely because another option is available to the taxpayer (e.g., septic tanks and wells do relieve the taxpayer of paying sewer or water special district assessments). However, if the town refuses to perform the garbage pick-up request, or its rules preclude such pick-up (e.g., weight restrictions, content restrictions, etc.), the property is not benefited and, thereby, cannot be assessed.¹²

The Court of Appeals summarized this line of cases, as follows:

By contrast, a lot that is vacant, but otherwise amenable to development, would be "benefited." Although undeveloped, there is no legal or practical disability to the lot's one day receiving garbage collection. Likewise, a hypothetical home whose owners never produced refuse or garbage of any kind would, for the purposes of RPTL §102(14), be directly benefited by municipal garbage collection. By the same token, home or business owners could not opt out of a special ad valorem levy funding the local sewer or water district simply by virtue of having a septic tank or well on their properties. The same logic would apply to others who would seek to avoid special ad valorem levies under analogous circumstances. In determining whether a property is capable of receiving a benefit, our focus is on the innate characteristics of an individual property as representative of a species of property (in our last example, homes), not the conditions or proclivities of individual owners.

New York Telephone Co., supra, 4 N.Y.3d at 394.

Utility and Railroad Real Property. The second line of cases involves utility and railroad property. Here, to be subject to a special district assessment, the utility or railroad improvements must be directly benefited by the special district services. See New York Telephone Company v. Supervisor of Oyster Bay, supra.¹³ In addressing utility improvements, the courts recognize that the innate characteristics of those improvements, as a matter of law, preclude any possible use of certain special district services. For example, a utility pole or wire cannot defecate, urinate or produce solid refuse to use a town's sewer system or garbage district service. Long Is. Light. Co. v. Office of Supervisor, 233 A.D.2d 300, 301 (2d Dept. 1996).¹⁴

The Court of Appeals also found that "indirect" benefits are not sufficient when addressing utility improvements:

If an indirect benefit is sufficient for the purposes of RPTL §102(14), every conceivable species of real property could be said to benefit from garbage removal, or any other municipal service.… The Legislature's use of the modifier "benefited" plainly implies that there is some class of property that is not benefited.

New York Telephone Co., supra, 4 N.Y.3d at 392.

Similarly, railroad improvements and their fee-owned corridors must be shown to be directly benefited. In People ex rel. New York Central Railroad Company v. Limburg, 283 N.Y. 344 (1940), the Court of Appeals upheld the striking of a town's assessment for a sewer system, as it was "legally unavailable for the disposal of storm water or surface water which may collect along the relator's right of way." See also, Matter of Long Island R.R. Co. v. Ryan, 240 N.Y. 199, 208 (1925). Both the railroad improvements and fee-owned land comprising the corridor were found not to be benefited.

Finding land not to be benefited (when the improvements are not benefited) is consistent with the Court of Appeals' integrated plant rule, which focuses on the primary function of the property comprising the integrated plant. Thus, a proper application of the theory precludes taxing any component of the integrated plant or system, even if such component were otherwise individually taxable. When the primary property of the system is utility or railroad improvements and those improvements are not directly benefited by the special district, neither is the fee-owned land underlying those improvements. People ex rel. New York Central Railroad Company v. Limburg, supra; Long Island Lighting Company, supra.¹⁵

Recent Cases

The recent case of Niagara Mohawk Power Corporation v. Town of Watertown, 6 N.Y.3d 744 (2005), has sometimes been relied upon by municipalities for the proposition that these two lines of special district tax cases were blurred when dealing with fee-owned land of electric transmission corridors. Such an interpretation is erroneous.

In remanding the case, the Court of Appeals sought to develop the taxing authorities' argument that storm water drainage systems "benefited" utility lines by reducing flooding. The contention was that sewer district systems included storm water drainage systems. In reality, storm water drainage systems are, generally, required to be separately maintained and financed by a taxing authority's highway department, not sewer department. See, e.g., Town Law §§202-a, 231 (et seq); Highway Law §§46, 218(4). Cf. General Municipal Law Article 14-f. In fact, storm water drainage and sewer systems are now required to be separate to preclude cross contamination.

Another argument misconstruing Watertown is that mere ownership of land in fee by a utility makes the utility improvements and fee-owned land subject to the special district tax, as a matter of law. In fact, the case law is contrary. In Long Island Lighting Company, supra, and People ex rel. New York Central Railroad Company v. Limburg, supra, the Court of Appeals previously held that when the improvements were not benefited, the land was also not benefited. In both cases, the land was owned in fee by the utility company and the railroad.¹⁶

While in any particular municipality, special district assessments may appear to be insignificant, for taxpayers having multiple sites over numerous and different municipalities, special district assessments become costly. Thus, in these times of over-taxation of real property, management of these costs is necessary to ensure that owners are paying only their equitable share of the taxes. Taxpayers should review their special district assessments, analyzing whether their property is benefited.

Mark D. Lansing is a partner at Hiscock & Barclay, in the real property tax and condemnation, and energy and utilities practice groups.

Endnotes:

1. See Town Law §54, 190.

2. See RPTL §102(14). New York Telephone Company v. Supervisor of Town of Oyster Bay, 4 N.Y.3d 387 (2005); Long Island Lighting Co. v. Office of Supervisor, 233 A.D.2d 300, 649 N.Y.S.2d 717 (2d Dept. 1996).

3. See also, Kahal Bnei Emunim v. Town of Fallsburg, 78 N.Y.2d 194, 205 (1991); Averback v. Board of Assessors of the Town of Delhi, 176 A.D.2d 1151 (3d Dept. 1991).

4. New York Telephone Company v. Supervisor of Town of Oyster Bay, supra.

5. Kahal Bnei Emunim v. Town of Fallsburg, supra, 78 N.Y.2d at 205; Averback v. Board of Assessors of the Town of Delhi, 176 A.D.2d 1151 (3d Dept. 1991).

6. Caveat: make sure that the town has not created separate special district assessment rolls, as the filing of these special district assessment rolls will control.

7. See also, Matter of Crandall Pub. Lib. v. City of Glens Falls, 216 A.D.2d 814, 815 (3d Dept. 1995); Matter of L.P.A. Associates v. Daby, 231 A.D.2d 827, 829 (3d Dept. 1996).

8. See Hassan v. City of Rochester, 67 N.Y. 528, 533 (1876); Roosevelt Hospital v. City of New York, 84 N.Y. 108, 112 (1881). Also, whether the boundary of the special district is coterminous with the town boundary is not determinative or a factor as to whether the special district tax or assessment is either a special ad valorem levy or a general tax. See, e.g., RPTL §102(14/15). The sole inquiry is whether the subject real property receives a benefit from the special district services.

9. In Applebaum, supra, no benefit was found where the homeowner agreed to avail itself solely of private garbage service to obtain favorable zoning consideration by the town. In Landmark Colony at Oyster Bay, supra, no benefit was found when property owner was required to forgo town garbage services to obtain condominium construction approval. In Matter of Sperry Rand Corp., supra, no benefit conferred on large industrial plant, as town's limit on the volume of garbage and rubbish that could be collected, precluded that plant's use of the town's garbage service.

10. N.Y. Tel. Co., supra, 4 N.Y.3d at 393-95, so summarizes. One must disregard the subsequently issued opinions of the New York State Office of Real Property Services, as they lack sound legal analysis and can lead a municipality to an unenviable litigation. See, e.g., NYSORPS Memorandum of Law, dated April 25, 2006.

11. N.Y. Tel. Co., supra.

12. Applebaum, supra; Landmark Colony at Oyster Bay, supra; Matter of Sperry Rand Corp., supra. Cf. Niagara Mohawk Power Corporation v. Town of Tonawanda, 17 A.D.3d 1090 (4th Dept. 2004), aff'd, Niagara Mohawk Power Corporation v. Town of Watertown, 6 N.Y.3d 744 (2005).

13. Only the Real Property Tax Law defines real property that can be assessed. Herkimer County Light & Power Co. v. Johnson, 37 A.D. 257 (4th Dept. 1899).

14. The courts have uniformly focused on the existing use of the property, and the direct benefit that the special district's service provided to that parcel. This focus comports with the fundamental Real Property Tax Law principle that value and benefit of a real property parcel are determined as the property exists on the statutorily defined valuation and condition dates. See Kalski v. Fitzgerald, 25 A.D.2d 573 (3d Dept. 1966); Addis Co. v. Srogi, 79 A.D.2d 856 (4th Dept. 1980).

15 Cf., Niagara Mohawk Power Corporation v. Wanamaker, 286 A.D. 446, 449 (4th Dept. 1955), aff'd, 2 N.Y.2d 764 (1956); Jackson v. State of New York, 213 N.Y. 34 (1914); Hasnas v. Hasnas, 91 A.D.2d 1058 (2d Dept. 1983); Glen & Mohawk Milk Association Inc. v. State, 2 A.D.2d 95 (3d Dept. 1956).

16. Niagara Mohawk Power Corporation v. Town of Tonawanda, supra, is not contrary, as the Fourth Department failed to address the prior utility and railroad cases dealing with land, or the integrated property rule. The Fourth Department also failed to consider the wholesale absence of benefit to the improvements, as distinct from the theoretical benefit found with respect to the land.