The Pennsylvania Commonwealth Court recently issued two decisions finding that the use of monetary thresholds by school districts to determine tax assessment appeals did not violate state constitutional principles requiring uniform taxation, even though the practices resulted in assessment appeals of only commercial properties.1 The decisions distinguish a 2017 ruling by the Pennsylvania Supreme Court, which found that a school district’s practice of selectively targeting commercial properties for tax assessment appeals while ignoring residential properties was an unconstitutional targeting of a single class of property in violation of uniformity requirements.2
The Uniformity Clause of the Pennsylvania Constitution requires that “all taxes shall be uniform, upon the same class of subjects, and shall be levied and collected under general laws.”3 With respect to property tax appeals, Pennsylvania case law has established that taxpayers are entitled to relief under the Uniformity Clause where one property is assessed at a higher percentage of fair market value than other properties throughout the taxing district.4 However, the Uniformity Clause does not require equalization across all sub-classifications of property.5
In Valley Forge Towers Apartments N, LP v. Upper Merion School District, the Pennsylvania Supreme Court considered whether a school district could selectively appeal only the assessments of commercial properties, while refraining from appealing the assessments of other property types. Upper Merion School District retained a private consulting firm to advise on which properties to target for appeal. The firm recommended that the district solely concentrate on commercial properties, specifically apartment complexes, which resulted in greater tax revenue increases than doing the same to underassessed single-family homes. The court ruled that the district violated the Uniformity Clause by treating a single class of properties differently than other properties when it decided to target commercial real estate for assessment appeals.6 In so doing, the court articulated the following principles: (i) under the Uniformity Clause, all property within a taxing district is a single class and may not be treated in a disparate manner; (ii) similarly situated taxpayers should not be deliberately treated differently by taxing authorities; and (iii) “deliberate” does not exclusively connote wrongful conduct, but includes any intentional or systematic method of enforcement of the tax laws. The court did not go as far to say whether the adoption of monetary thresholds by school districts to identify properties for assessment appeals violated the Uniformity Clause.7
Bethlehem Area School District
In Bethlehem Area School District, the school district in 2012 hired consultants to assist in identifying undervalued properties for tax assessment appeal purposes,8 to correct “valuation inequities” among comparable properties, and to address the proper share of taxation between commercial and residential property owners. The consultants advised the district to appeal properties that resulted in additional tax revenue of at least $10,000. It so happened that such properties were all commercial properties. Included in the district’s assessment appeals were two multi-unit apartment complexes owned by the same taxpayer and classified as commercial properties. The Northampton County Board of Revenue Appeals dismissed the district’s appeals. On appeal to the trial court, the property owner moved for summary judgment, arguing that the school district selectively appealed a class of properties – commercial properties – to the exclusion of lower-assessed residential properties in violation of uniformity principles and as provided in Valley Forge. The trial court sided with the property owner, taking the evidence as proof that the district distinguished between commercial and residential property owners and juxtaposed one class against another. Accordingly, the trial court concluded that the instant tax assessment appeal was borne out of a “systematic and intentional practice” of selectively targeting commercial properties for district-initiated appeals, in violation of the Uniformity Clause.
On appeal to the Commonwealth Court, the school district argued that the trial court erred in granting the taxpayer’s motion for summary judgment. Upon review by a three-judge panel, the Commonwealth Court observed that the trial court was required to view the record “in the light most favorable to the District.” In doing so, the court found that the evidence before the trial court was subject to varying interpretations and that reasonable minds could differ as to their meaning. In particular, the court referenced evidence indicating that the District implemented the $10,000 threshold without regard to property type, and that no residential properties had been appealed simply because they did not meet the $10,000 threshold. Therefore, the court agreed with the district that reasonable minds could differ as to whether the district established and implemented an appeals policy designed to target commercial properties. Finding that the evidence did not conclusively prove that the district established an appeals policy designed to target commercial properties, the court remanded the case for further proceedings, directing the trial court to consider the evidence in a light most favorable to the district.
Kennett Consolidated School District
In a similar case decided less than two months later, the Commonwealth Court considered whether a school district’s adoption of a monetary threshold to make tax assessment appeal decisions violated the Uniformity Clause. In 2017, Kennett Consolidated School District asked an appraiser to investigate potential assessment challenges to pursue, regardless of property type. The district requested that the appraiser not limit its review to any particular class of properties in the taxing district, “but review all classes of properties including commercial, residential and otherwise.” In response, the appraiser identified 12 properties that were undervalued by more than $1 million of market value. The school district filed the assessment appeals, and the Chester County Board of Assessment Appeals upheld the valuation of one of the properties, the site of an Autozone store. On appeal to the trial court, the school district argued that the assessment did not reflect the actual market value of the property. The taxpayer argued that the district’s strategy of singling out undervalued properties violated uniformity requirements. The trial court disagreed, and the taxpayer appealed to Commonwealth Court.
Siding with the school district, the three-judge panel agreed that the use of a monetary threshold was permissible under the Valley Forge ruling, even if it resulted in only one class of property subject to tax appeals. With respect to the school district’s method of property classification, the court determined that the district’s actions did not systematically target commercial properties, but rather focused on properties that were worth the cost and expense of an appeal. Weighing the evidence presented, the court found that the district deliberately ignored the property type and focused only on fiscal considerations. “Where a taxing authority intentionally disregards the type of property when deciding what property assessments to appeal,” the court reasoned, “its conduct is inherently not deliberate.” Therefore, the court concluded that this facially neutral action by the district did not result in a uniformity violation.
The court next addressed whether the use of monetary thresholds violated the Uniformity Clause. Although not addressed specifically by the Pennsylvania Supreme Court in Valley Forge, the court found that the use of monetary thresholds to pursue cost-effective appeals did not violate uniformity. Consistent with the court’s case law on the subject,9 the panel reasoned that the district was using a monetary threshold “only for the purpose of making prudent fiscal decisions,” and not for the purpose of discriminating against sub-classes of properties. Further, nothing in Valley Forge precluded application of a reasonable monetary threshold for assessment appeals, based on an estimate of the minimum potential revenue gain making an appeal cost-effective.10 Thus, even though the district’s monetary threshold resulted in the assessment appeals of only commercial properties, the court concluded that such a practice did not violate uniformity. For these reasons, the court upheld the district’s practice in appealing the assessment of the taxpayer’s property.
The Commonwealth Court’s decisions in Bethlehem School District and Kennett Consolidated School District represent several important developments in Pennsylvania’s uniformity jurisprudence after the Valley Forge decision. Most notably, the cases distinguish Valley Forge by suggesting that local taxing authorities may rely on financial metrics in pursuing assessment appeals, even if the practice results in a distinction between property types. Valley Forge stood for the proposition that taxing authorities cannot treat different property sub-classifications in a disparate manner. However, the Pennsylvania Supreme Court declined to address the issue of whether the use of specific monetary thresholds as an identification mechanism violated uniformity requirements. Taxpayers have interpreted Valley Forge to mean that classification by property value is an unconstitutional basis upon which to base assessment appeals. However, the Commonwealth Court’s decisions have clarified that monetary thresholds are constitutional where they are based upon reasonable financial and economic considerations of increasing revenue, without regard to the type of property evaluated. Even though property type was disregarded at the outset, the districts’ use of monetary thresholds resulted in the exclusion of residential properties from assessment appeals, and therefore different treatment of the properties on a de facto basis.
The cases indicate a potential loosening of an otherwise stringent reading of the Uniformity Clause by the Commonwealth Court, if not an effort to clarify the limits of the Valley Forge ruling. Pennsylvania courts have historically applied a strict interpretation of uniformity, especially in recent years.11 The courts’ Uniformity Clause jurisprudence extends well outside the property tax arena to various other tax types. For example, in Nextel Communications of the Mid-Atlantic v. Commonwealth, the Pennsylvania Supreme Court held that a statutory fixed dollar cap on net loss carryover deductions violated the Uniformity Clause because it resulted in disparate treatment of similarly situated taxpayers according to taxable income.12 Additionally, the court held that the local share assessment imposed under the state’s Gaming Act violated the Uniformity Clause because it imposed grossly unequal local share assessments upon similarly situated licensed casinos located outside Philadelphia based on gross terminal revenue.13
Whether the Commonwealth Court’s decisions on these uniformity issues become final remains uncertain in the near term, as the taxpayer in Bethlehem Area School District has filed an appeal with the Pennsylvania Supreme Court.14 It is unclear whether the taxpayer in Kennett Consolidated School District will also appeal the court’s decision to the state’s high court. Should the cases be upheld, they would have potentially broad applicability to all taxing districts across the state, including Philadelphia. Concurrently, a number of cases are making their way through the court system regarding the city’s methods of selecting only commercial properties for reassessment.15
1 Kennett Consolidated School District v. Chester County Board of Assessment Appeals, Pennsylvania Commonwealth Court, No. 253 C.D. 2019 (Feb. 28, 2020); Bethlehem Area School District v. Northampton County Board of Revenue Appeals & Lehigh Crossing Associates, LP, Pennsylvania Commonwealth Court, Nos. 298 & 357 C.D. 2019 (Jan. 16, 2020).
2 Valley Forge Towers Apartments N, LP v. Upper Merion Area School District, 163 A.3d 962 (Pa. 2017). For further discussion of this case, see GT SALT Alert: Pennsylvania Supreme Court Finds Selective Appeals of Commercial Property Assessments by School District Unconstitutional.
3 PA. CONST. ART. VIII, § 1.
4 Downingtown Area School District v. Chester County Board of Assessment Appeals, 913 A.2d 194 (2006).
5 Id., citing Weissenberger v. Chester County Board of Assessment Appeals, 62 A.3d 501 (Pa. Commw. 2013); In re: Springfield School District, 101 A.3d 835 (Pa. Commw. 2014).
6 The court noted that “all property in a taxing district is a single class, and, as a consequence, the Uniformity Clause does not permit the government, including taxing authorities, to treat different property sub-classifications in a disparate manner. Second, “this prohibition applies to any intentional or systematic enforcement of the tax laws, and is not limited solely to wrongful conduct.”
7 The court clarified that “nothing in this opinion should be construed as suggesting that the use of a monetary threshold … or some other selection criteria would violate uniformity if it were implemented without regard to the type of property in question or the residency status of its owner.”
8 Under Pennsylvania law, taxing district are given the same rights as taxpayer to pursue administrative appeals of property assessments. 53 PA. CONS. STAT. § 8855.
9 See In re: Springfield School District, 101 A.3d 835 (Pa. Commw. 2014); East Stroudsburg Area School District v. Meadow Lake Plaza, LLC, No. 371 C.D. 2018 (Pa. Commw. Oct. 17, 2019).
10 Citing East Stroudsburg Area School District, No. 371 C.D. 2018.
11 Vito A. Cosmo, Jr., Matthew D. Melinson & Patrick K. Skeehan, The Power behind Pennsylvania’s Uniformity Clause, PA. CPA JOURNAL, Fall 2015.
12 171 A.3d 682 (Pa. 2017). For a detailed discussion of this case, see GT SALT Alert: Pennsylvania Supreme Court Finds Net Loss Carryover Deduction Cap Violates Uniformity Clause; Severs Fixed Dollar Limitation.
13 Mt. Airy # 1, LLC v. Pennsylvania Department of Revenue, 154 A.3d 268 (Pa. 2016).
14 66-67 MAL 2020, Pennsylvania Supreme Court, filed Feb. 14, 2020.
15 In Duffield House LP v. City of Philadelphia, for example, a trial court found that the city’s selection of approximately 700 commercial and industrial properties for reassessment during the 2018 tax year violated uniformity, and ordered that refunds be paid to the property owners. The city argued that it did not reassess any residential properties during the tax year because studies showed the assessed values of residential properties already reflected the fair market value of those properties. No. 170901536, Court of Common Pleas, Philadelphia County, Jul. 17, 2019. The decision has been appealed to Commonwealth Court. No. 1501 C.D. 2019, Commonwealth Court of Pennsylvania.
Donald L. Lippert Jr.
Don Lippert is a principal with Grant Thornton LLP specializing in property tax services. He has over 25 years of professional experience.
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Matthew D. Melinson
Matthew Melinson is a partner in Grant Thornton's Philadelphia office and the national leader of the SALT practice's indirect tax services. Melinson is responsible for all aspects of multistate tax consulting and planning and compliance related to income tax, franchise tax, sales and use tax, credits and incentives, real estate tax, and personal property tax.
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Jamie C. Yesnowitz
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
Washington DC, Washington DC
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