Potential Penalty Relief for Late Property Tax Payments Related to COVID-19

Property owners who missed the April deadline for paying the second installment of real property taxes because of the COVID-19 pandemic may be eligible for relief from late payment penalties.  But to get this relief, you may need to act soon.

ALERT: On May 6, 2020, Governor Newsom issued Executive Order N-61-20, directing county tax collectors to waive, until May 6, 2021, all penalties, costs, and interest for late payment of the second installment of property taxes under the following conditions:

  1. The real property is owner-occupied residential property or owner-occupied “small business” property (this includes wineries with up to 1,000 employees);
  2. The taxes owed were not delinquent on March 4, 2020;
  3. The taxpayer timely files a claim for relief on a form prescribed by the county tax collector; and
  4. “The taxpayer demonstrates to the satisfaction of the tax collector that the taxpayer has suffered economic hardship, or was otherwise unable to tender payment of taxes in a timely fashion, due to the COVID-19 pandemic, or any local, state, or federal government response to COVID-19.”

As a result of Executive Order N-61-20, county tax collectors may revise the application forms, deadlines, and review process referenced below, so taxpayers should check the website of their county tax collectors for more information.  A link to a list of all county tax collectors and their websites is below.

The second installment of real property taxes was due April 10, 2020. Missing that deadline normally results in a penalty of 10% of any unpaid taxes, and monthly interest of 1.5% also starts accruing on July 1.  But, in light of the global COVID-19 pandemic, county tax collectors have indicated a willingness to cancel penalties where the failure to pay by the deadline “is due to reasonable cause and circumstances beyond the taxpayer’s control, and occurred notwithstanding the exercise of ordinary care in the absence of willful neglect.” This authority arises under Revenue and Taxation Code Section 4985.2(a), which allows tax collectors to cancel penalties, costs, and charges resulting from tax delinquency under certain circumstances.

While this is welcome news, tax payers should be aware that the grounds for relief are narrow, the current deadlines are tight (with Napa County’s application for penalty relief due on May 15, 2020), and all delinquent taxes will need to be paid to be eligible for penalty relief.

For example, Sonoma County’s tax collector had, before the governor’s executive order, issued guidelines providing that potential penalty relief requires that the property owner (“Owner”) sign a declaration under penalty of perjury that:

(a) Failure to make a timely payment is due to Owner’s experience of at least one of the following circumstances:

(i) A medical condition directly related to the COVID-19 disease;

(ii) The County Health Officer’s COVID-19 Shelter-in-Place Order No. C19-03, as amended by Order No. C19-05, (“Order”) precluded Owner from working or generating sufficient revenue/income, resulting in severe economic hardship;

(iii) Other reasonable cause or circumstance directly related to COVID-19 and/or the Order;

(b) The circumstance was beyond Owner’s control;

(c) Failure to make a timely payment occurred despite Owner’s exercise of ordinary care and without willful neglect.

Under the latest executive order, all counties will be able to use the same standard of impacts from COVID-19. Applicants will need to provide documents supporting their claim for relief.

Currently, deadlines to request relief are approaching, though those deadlines may change with the governor’s executive order. Napa County requires COVID-19-related penalty relief applications be filed by May 15, 2020, while Sonoma County property owners have until June 10, 2020 to file applications. Napa County does not require payment with the application, but if relief is granted, requires payment by June 10, 2020. In contrast, Sonoma County requires payment with the application. It is important to note that relief only applies to late payment of the second installment of property taxes; payment in full of any prior tax delinquencies plus applicable penalties and interest is required with the application in order to be eligible for relief.

Below are links, from prior to the governor’s order, to information and application forms for COVID-19-related late payment penalty relief, listed in order of the application deadlines.

  • Napa County (Filing Deadline: May 15, 2020)
    • Tax collector webpage on COVID-19, with links to FAQs and COVID-19 penalty relief application form.
    • Payment deadline: June 10, 2020
  • Sonoma County (Filing Deadline: June 10, 2020)
    • Tax collector webpage on COVID-19, with links to COVID-19 penalty relief guidelines and application form.
    • Payment required with application filing.
  • Lake County (Filing Deadline: June 30, 2020)
    • Tax collector webpage with links to COVID-19 FAQs and COVID-19 penalty relief application form.
    • Payment required with application filing.
  • Mendocino County (Filing Deadline: June 30, 2020)
    • Tax collector webpage with link to COVID-19 penalty relief application form.
    • Payment required with application filing.

For counties not listed above, a list of the websites for all California county tax collectors can be found here.

For additional information on potential COVID-19-related relief of penalties for late payment of property taxes, please contact Carol Kingery Ritter or Owen Dallmeyer.

Federal Rule Changes Make More Products Eligible for (Lower) Hard Cider Tax Rate

The start of the New Year brought federal tax relief to certain cider producers.  The PATH Act of 2015 made various changes to the Internal Revenue Code, which took effect on January 1, 2017.  Included in the changes was a modification of the definition of products eligible for the “hard cider” tax rate.  Under the new rule, more hard cider products can qualify for this tax rate and enjoy a much lower rate per gallon than the rates that might otherwise apply.

In order to meet the “hard cider” definition and be eligible for the lower tax rate, the product in question must meet certain criteria related to carbonation, alcohol content and contents.  The modified definition of “hard cider” under the PATH Act allows for an increased carbonation level (up to 0.64 grams of carbon dioxide/100 milliliters versus the previous 0.392 grams/100 milliliters), increased alcohol by volume (up to 8.5% versus the prevision limit of 7%) and the use of pear and pear concentrates, rather than just apple and apple concentrates.  Similar to the previous definition, the product may not contain any fruit product or flavoring other than apple or pear.

If a hard cider product does not meet the foregoing criteria, it will be taxed as a wine, for which there are various classifications and corresponding tax rates.  For example, a hard cider that contains more than 0.64 grams of carbon dioxide/100 milliliters is considered an effervescent wine and will be taxed as either a sparkling wine or artificially carbonated wine (depending on the source of the carbon dioxide).  The producer would pay $3.40/wine gallon if the product is classified as “sparkling wine” or $3.30/wine gallon if the product is classified as an “artificially carbonated wine.”  If, however, the product qualified as a “hard cider,” the applicable tax rate would be only $0.226/wine gallon.

On January 23, 2017, the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) published a temporary rule to implement these changes to the definition of “hard cider” under the Internal Revenue Code.  TTB is also imposing a new labeling requirement which requires the statement “Tax Class 5041(b)(6)” on any container of wine for which the hard cider tax is claimed.  TTB is providing a one year grace period for this rule, but products removed after January 1, 2018 must include the statement “Tax Class 5041(b)(6)” in conjunction with the designation of the product as “hard cider.”  This statement may appear anywhere on the label.

TTB is currently soliciting comments on the temporary rule within Docket No. TTB– 2016–0014 on the regulations.gov website.  If you have any questions about this modified definition of “hard cider” and the potential tax benefits for your business, please contact Katy Stambaugh via email or (707) 261-700.