Property Tax Post: Are States Taking Their Takings Power Too Far?



Eminent domain power is often associated with the taking of private land by a state or the federal government. It is seldom associated with government takings of surplus equity value[1] generated by local property-tax sales. But, that may soon change.

In July, Michigan taxpayers petitioned the United States Supreme Court requesting certiorari[2] in Wayside Church, et al., Petitioners v. Van Buren County, Michigan, et al. In this case, Michigan taxpayers allege that the county sold their property to recover delinquent taxes and retained the excess equity[3] in violation of the U.S. Constitution’s Takings Clause.[4] The taxpayers’ Petition for a Writ of Certiorari points out that Michigan,[5] Arizona, Minnesota, Montana, North Dakota, and Massachusetts expressly authorize and/or require local taxing authorities to retain the excess funds, essentially enabling them to reclassify the private equity interests as public property without going through the appropriate legal channels.

In the Michigan case, the federal district court concluded that the taxpayers did not have a private interest in the equity, and the Court of Appeals for the Sixth Circuit subsequently dismissed the case on procedural grounds which, in turn, led to the taxpayers’ request that the Supreme Court review the lower courts’ decisions.

Now that the case may land in the Supreme Court’s lap, the Court could answer the following questions: 1) If taxing authorities keep monies in excess of outstanding tax obligations, have they effectuated a taking of a private property interest within meaning of the Fifth Amendment of the U.S. Constitution, and 2) in these circumstances, what steps must be taken by a taxpayer to pursue a claim for relief in federal court?[6]

Considering that property taxes account for a tremendous portion of state and local tax revenue,[7] having clarity on whether state and local governments may rightfully retain surplus tax-sale monies seems important enough by itself. Nevertheless, potentially more concerning is the procedural issue that the petitioners claim undercuts taxpayers’ ability to seek recovery for possible unlawful government taking.

As the taxpayers point out, there is no uniformity in federal courts as to whether plaintiffs must initiate and exhaust their claim in state court before a federal court may be authorized to decide their case.[8] While some courts believe that they may waive this state filing requirement, others expect strict compliance from plaintiffs, leading to significantly different results for people with similar circumstances throughout the country.[9]

Should the Supreme Court decide to grant certiorari, its decision could have profound effects on both taxpayers and local governments, as unlike some other tax types, property taxes generally reach a very broad base of people and industries. On the one hand, the court may rule that a taxpayer’s private interest is lost when it fails to pay property taxes, as the federal court concluded in the case of the Michigan taxpayers. On the other hand, the court may conclude that tax sale revenue in excess of a taxpayer’s obligations belongs to the taxpayer. Regardless, aggrieved taxpayers should benefit from a decision if, at a minimum, the court is willing to address the procedural issues surrounding these of cases. Either way, the Michigan case raises interesting questions about the application of the Takings Clause in the property tax-sale context.

Note: This post has been corrected to indicate that a petition for a writ for certiorari has been filed, but review has not yet been granted.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How do you think the Supreme Court will rule in this case?

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[1] Generally, tax-sale properties are sold to the highest bidder and often generate surplus revenue in excess of the outstanding taxes due.

[2] The Supreme Court is not obligated to review cases decided by lower courts. The court grants these requests “if [a] case could have national significance, might harmonize conflicting decisions in the federal Circuit courts, and/or could have precedential value.”

[3] The surplus is claimed to have exceeded the outstanding tax obligations, penalties and fees by more than $200,000, according to their Petition for a Writ of Certiorari.

[4] The Fifth Amendment of the U.S. Constitution prohibits the government from taking private property for public use without “just compensation.”

[5] See Mich. Comp. Laws §211.78.

[6] 42 U.S.C. §1983 states if the government deprives a person of a right or privilege guaranteed under the U.S. Constitution, that individual is entitled to legal or equitable redress.

[7] The Council on State Taxation reported that in the 2016 fiscal year, property taxes were the largest source of revenue for state and local tax revenue paid by businesses.

[8] In states that treat this as a mandatory requirement, filing the case in federal court will most likely be treated as a “jurisdictional” defect resulting in a dismissal.

[9] The petition points out that state taxing authorities often remove the cases to federal court at which time federal courts requiring plaintiffs to exhaust state remedies will dismiss the case.