Frost Law
In an article in The Washington Post, Glen Frost was quoted when he talked about a “mystery business.” The business found an ingenious and legal way of making a 10 percent return on their money. The business just made sure to significantly overpay its estimated taxes, triggering a law that required the city to refund the overpayment plus 10 percent—in this case, an amount reportedly equaling around $475,000– “If somebody could legally think of a way to get a guaranteed 10 percent, why wouldn’t you do it?” said Glen Frost, adding, “Especially with the uncertainty of the market right now, I’d put that down.”
Richmond’s Refund Interest Law
Section 26-298 of the Richmond, VA Code of Ordinances addresses the interest on refunds “[w]henever the Director of Finance determines that any taxes due under this chapter have been erroneously assessed or that payments have been remitted in excess of the taxes due the City, the Director shall refund such erroneous or excess tax payments with interest at the same rate as charged by the City for delinquent or omitted tax payments.” The ordinance also adds “[i]nterest shall be calculated beginning from the date of the payment that created the refund or the due date of the tax, whichever is later, until the date of issuance of the refund to the taxpayer[,]” and that “[n]o interest shall be paid on a refund that is made not more than 30 days from the date of the payment that created the refund or the due date of the tax, whichever is later.
Virginia’s Refund Interest Law
On the other hand, the state of Virginia has a different approach on paying interest in cases of overpayment or improper collection. Section 58.1-1833 of the Code of Virginia stipulates three different situations when the interest starts accruing: (1) “sixty days after payment of the tax, or sixty days after the last day prescribed by law for such payment, whichever is later,” (2) in case of “any tax refunded pursuant to a court order or otherwise as a result of an erroneous assessment shall bear interest from the date the assessment was paid,” or (3) “if an individual overpays his individual income tax, the overpayment was for individual income taxes for the immediately preceding taxable year, and the overpayment has not been refunded, then interest shall accrue on the amount of the overpayment, beginning: (i) thirty days after payment of such tax if the individual filed his individual income tax return via electronic means; or (ii) sixty days after payment of such tax if the individual filed his individual income tax return using a method other than electronic means.”
Maryland Refund Interest Law
Maryland refund interest law is even stricter, and allows only limited circumstances when the state has to pay interest on refunds. The Code of Maryland, §13-603(b)(2)(i) of Tax General Article clarifies that interest will not be paid on a refund if the claim for refund is based on “an error or mistake of the claimant not attributable to the State or a unit of the State government.” Basically, Maryland will not pay any interest on refunds unless it was clearly the state’s fault, and the interest will only start accruing 45 days after the claim for refund was filed.
Comparing Richmond’s and Virginia’s Refund Interest Laws
According to Virginia state law a locality must pay a business the same interest rate on an accidental over-payment as they charge those businesses on delinquent taxes. Va. Code §58.1-3916. The State has their rate at 6%, while Richmond has its rate at 10%–a real incentive to taxpayers like the “mystery business.” Va. Code §58.1-15.
Unlike Richmond’s approach, Virginia’s approach also offers the state a window of 30 to 60 days after filing taxes to issue the refund in case of overpayment, before any interest starts to accrue. Usually, that time frame is enough to process the taxes and issue overpayment refunds. Virginia’s law allows interest to accrue right away only in rare situations when there is court order or an erroneous assessment was made. The Richmond city ordinance, however, does not differentiate between an overpayment or an erroneous assessment, and allows interest to accrue right away in both situations. If Richmond does not process the refund within 30 days from the tax payment date or the date the taxes were due, whichever is later, than the city will have to pay the interest regardless of whether there was an erroneous assessment or whether the taxpayer deliberately overpaid his or her taxes. Once the 30 day refund window is gone, Richmond has to pay.
If the city of Richmond’s taxpayers hope to avoid another “mystery business” incident such as this one, they will need to consider changing their laws. Matching the State’s lower interest rate would provide less incentive for taxpayers to attempt this gambit. Additionally, Richmond’s current time frame of 30 to 60 days after taxes are filed to issue a refund in case of overpayment, before any interest starts to accrue, may be due for an overhaul since it appears insufficient to prevent situations like this from occurring.
