Explaining Section 42.08 Tax Payment Requirements

Section 42.08 of the Texas Property Tax Code requires an owner to make timely payment of property tax assessments pending resolution of value and other protests that might affect the owner's tax liability. The penalty for failing to comply with Section 42.08 is the loss of any right to a correction. Thus, the owner is potentially required to pay taxes that he might not really owe.

There are certain procedures included in Section 42.08 that may allow a property owner to pay less than the full tax assessment. However, such procedures are not without risk.

The Texas Property Tax Code provides that property taxes will be considered delinquent if not paid on or before January 31 of the following tax year. Thus, for example, 2003 taxes must be paid on or before January 31, 2004. The statutory delinquency date is February 1.

For the 2003 tax year, taxes paid by mail must be postmarked on or before January 30, 2004. Because January 31 is a Saturday, a property owner may pay taxes on February 2, the next following business day, if such taxes are paid in person at the tax office. Tax payments cannot be mailed on February 2 and be considered timely paid.

The Tax Code allows a postmarked envelope to serve as proof of delivery. Unfortunately, the U.S. Postal Service sometimes does not actually postmark envelopes until after the date of mailing, and the taxing units may consider payments with a delayed postdate to be late.

Therefore, mailed tax payments should be sent by certified mail, return receipt requested, with the certified mail number included on the transmittal letter and preferably on the payment check. Also, the taxpayer should obtain a postmarked mailing receipt from the U.S. Postal Service when the payment is mailed. The return receipt will only show when the payment was received, not when it was mailed. Therefore, the mailing receipt is an important document in proving when the payment was mailed.

For most taxpayers, getting the payment timely mailed or delivered to the tax collector is sufficient. However, for some taxpayers (those with pending administrative or judicial protests), an additional issue arises: How much in taxes should I pay?

With a pending protest that might potentially reduce the amount of the tax assessment, some taxpayers mistakenly believe that they can just wait until their protest is resolved before paying the taxes. Upon such a resolution, the actual amount of taxes due can be calculated. Pending the appeal, the taxpayer might believe that a portion of the assessment is illegal or erroneous and thus the taxes should not be paid until the actual legal and correct amount can be calculated.

Such taxpayers are wrong and risk losing any right to a correction, even if they have a protest already pending at the administrative (for example, a 25.25(d) excessive value protest) or judicial level.

Property Tax Code Section 42.08 details the amount of taxes which must be paid when the taxpayer is pursuing a correction of the appraisal and tax roll. The section provides as follows:

A property owner who appeals as provided by this chapter must pay taxes on the property subject to the appeal in the amount required by this subsection before the delinquency date or the property owner forfeits the right to proceed to a final determination of the appeal. The amount of tax that the property owner must pay on the property before the delinquency date to comply with this subsection is the lesser of:
(1)The amount of taxes due on the portion of the taxable value of the property that is not in dispute (i.e., taxes calculated based on the owner's opinion of the proper appraised value); or
(2)The amount of taxes due on the property under the order from which the appeal is taken. (i.e., the amount billed)

What this section means is that a failure to timely pay property taxes in a given tax year may prevent the property owner from obtaining any value correction for that tax year, even if a protest or lawsuit is currently pending. In other words, the government must be paid during the pendency of the protest; it does not have to wait until the protest is decided to receive its taxes.

However, during the pendency of such a protest, the taxpayer is not required to pay all of the taxes assessed. He can instead pay only the undisputed portion of the taxes ("the amount of taxes due on the portion of the taxable value of the property that is not in dispute"). And, if the taxpayer truly and legitimately disputes all of the taxes (such as claiming that the property is exempt or not taxable for some reason), a zero tax payment could be considered to qualify under Section 42.08.

Making a reduced payment, however, does expose the taxpayer to some financial risk, in the form of potential interest and penalties if the taxpayer guesses wrong on what the final value will be when the protest is resolved.

If the final resolution of the protest or lawsuit results in a refund to the property owner, the refund normally will accrue interest at the rate of 8% per year from the February 1 statutory delinquency date until payment is made. But if the taxpayer pays less than the full amount due and the final resolution of the appeal requires the payment of additional taxes, the additional taxes owed will accrue interest at the rate of 1% per month from the February 1 delinquency date, plus a penalty of as much as 12%.

Most taxpayers with pending protests find it easiest to pay the amount billed in full and wait for any potential refund. Such a payment should never be a problem, though the taxpayer may have to wait an extended period of time for any refund (first, waiting for the protest to be resolved, and second, waiting for the tax collector to issue the refund).

However, a large increase in the taxes due or other financial considerations may make the reduced payment option under Section 42.08 a more viable choice for some taxpayers. If a taxpayer is willing to accept the potential risk of paying interest and penalties on any supplemental amount which might become due, then he can calculate the amount of undisputed taxes that would be due and make that payment pending resolution of his protest.

A taxpayer with a pending appeal who is financially unable to pay the taxes before the delinquency date may be excused from the prepayment requirement. However, such excuse is only available if, after notice and hearing, a district court finds that such a prepayment would constitute an unreasonable restraint on the taxpayer's right of access to the courts.

Another potential problem that a taxpayer may face regarding Section 42.08 compliance is that the tax prepayment requirement could apply even if no protest is currently pending. Previous versions of the Tax Code provided that a Section 42.08 payment must be made in order to receive a correction under Chapter 41 or Section 25.25(d) of the Tax Code. In both of these types of protests, the appeal process is normally initiated prior to the tax delinquency date.

The current version of the Tax Code, however, indicates that the Section 42.08 payment requirement is also required for Section 25.25(c) protests. These protests, primarily involving clerical errors in the valuation process that could reduce a property owner's liability, may be filed up to five years late. Thus, a taxpayer would need to show that he complied with Section 42.08 (i.e., paid the tax assessment prior to delinquency) even though he had no reason to believe at the time that there was any error in the assessment.

Timely payment of taxes not only avoids the imposition of high interest and penalties, but also preserves a taxpayer's potential right to current and future corrections that could reduce the amount of such taxes.

If you have any questions about the contents of this article, please contact Dan Donovan, David Kaplan, or Ron Gray or contact the GPD Property Tax Section at propertytax@gpd.com.