Interest on Abated Taxes

Date Posted: Tuesday, August 13, 2024
Posted In: Legal Notes

(Updating the July 2010 Legal Notes)

Question: Are municipalities required to pay interest on taxes that were paid but later abated?

Answer: Yes. However, the municipality has some discretion as to the rate of interest.

Pursuant to 36 M.R.S. § 506-A, a taxpayer who pays more than the amount finally assessed must be repaid the amount of the overpayment plus interest from the date of overpayment at a rate established by the municipal legislative body (town meeting or council). The vast majority of “overpayments” result from tax abatements granted after taxes that were originally assessed have been paid.

The municipal legislative body must establish the interest rate on overpayments annually. The rate of interest may not exceed the interest rate established by the municipality for delinquent taxes, nor may it be less than that rate reduced by 4%. (In other words, the overpayment rate cannot be more than 4 percentage points lower than the delinquency rate established by the municipality). If a municipality fails to set any interest rate for overpayment of taxes, the “default” rate is the interest rate it has established for delinquent taxes.

When taxes are assessed in one year but are abated in another year, there is a question under the statute about which year’s interest rate for overpayments applies. MMA Legal Services and numerous other attorneys believe the rate established for the year the tax was assessed should be applied, not the rate for the year the tax was abated.

Incidentally, there is another type of “overpayment” that is governed by different rules and a different statute. If the municipality has authorized its tax collector and treasurer to accept “prepayments” of the current year’s taxes before those taxes have been committed (see 36 M.R.S. § 506), sometimes a taxpayer making a prepayment pays more than the amount ultimately due. In those cases, state law does not require that interest be paid on the overpaid amount. However, a municipality may (but is not required to) vote to pay interest on tax prepayments when the amount finally assessed exceeds the prepaid estimate.

For more information on interest rates applicable to abatements, delinquent taxes and prepayments, see MMA Legal Services’ Tax Collectors & Treasurers Manual (2023 ed.), available to members in the “Legal” section of MMA’s website. (By S.F.P.)