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Property Owners Celebrate Fair Taxation Ruling by Pennsylvania Supreme Court

"Nearly every state constitution requires uniformity in taxation, meaning that two like properties should receive the same assessment, no matter how they are owned, occupied, built or financed." Commercial property owners around the country are cheering a recent Pennsylvania Supreme Court decision that breathes new life into constitutional guarantees of uniformity in taxation.  Overruling a decade of lower court decisions, the ruling reestablishes the primacy of constitutional uniformity protections to taxpayers in the strongest possible language, fittingly issued just one day after the July 4 holiday. Nearly every state constitution requires uniformity in taxation, meaning that two like properties should receive the same assessment, no matter how they are owned, occupied, built or financed.  Yet commercial property owners across the nation have been under attack by assessors attempting to alter appraisal theory in order to pin higher assessments and higher real estate taxes on specific owners. These assessors have been...
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Pennsylvania Supreme Court Takes Up Issue of Reverse Property Tax Appeals Across State

The Philadelphia School District is looking to increase the number of reverse property tax appeals, which could result in more tax dollars for schools such as South Philadelphia High School Pennsylvania property owners and tenants, who pay some of the highest property taxes in the nation, are no doubt aware of the annual deadline to file a property tax appeal. After all, one look at a new tax bill is often enough to make even the most seasoned tax manager scramble to contact their local tax counsel. However, very few taxpayers are aware that the assessment they may have accepted as favorable could easily trigger a reverse appeal filed by the local school district. Assessment appeals filed by the taxing entities, often referred to as reverse appeals, are increasingly common as cash-strapped school districts seek to fill their coffers. Just as a tax manager might view an inflated assessment as...
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Why Taxing Authorities are Suing Taxpayers

Municipalities and school districts increasingly file lawsuits to increase property tax assessments. As property owners increasingly participate in transactions across multiple states and countries, they could be shocked to find themselves defending against a lawsuit filed to increase their real estate taxes. A minority of states allow the local real estate tax assessing body or school district to appeal a tax assessment, arguing that the property's value and resulting taxes should be higher.  States where these types of appeals are allowed include Ohio, Pennsylvania and New Jersey.  Property owners in those states should  be aware that someone may be filing a lawsuit to increase their property taxes. Method to the madness Taxpayers cannot prevent a school district or assessing body from appealing a property tax assessment in states that allow them to do so.  Property owners should be especially watchful in the following situations where it is more likely to...
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Tax Resolution Conundrum

Pittsburgh resolves to reduce taxpayers' inflated property assessments. Politics makes strange bed fellows. Pittsburgh's city council recently ordered its finance director to draft policies that protect taxpayers from assessment appeals by the city, and even to file appeals on taxpayers' behalf. Unlike many states, Pennsylvania allows the three entities that levy real estate taxes (counties, schools and municipalities) to appeal annual real estate assessments, just as taxpayers do. Taxpayers file appeals when they believe their property is over-assessed, in order to reduce their assessment and their real estate taxes. When taxing authorities file annual appeals, they seek to increase assessments and taxes. The city of Pittsburgh has historically filed appeals following the sale of a property assessed at a lower value than the sale price. This practice, where taxing authorities essentially sue individual taxpayers (and voters) to increase real estate tax payments, is common in Western Pennsylvania. In a strange...
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Washington County Pennsylvania 2017 Property Tax Reassessment

Sharon DiPaolo, an attorney for Siegel Jennings tax law firm, discusses the upcoming property tax reassessment for Washington County Pennsylvania in 2016/2017 and what you can do to file an appeal. 

A Fair Share of Taxes

Frequent reassessments benefit Pittsburgh-area property owners. Pittsburgh-area properties are being reassessed more frequently than in the past – and that is good news for property owners.  Periodic reassessment helps to keep property assessments current with actual values and ensure that everyone pays their fair share. Unfortunately, frequent reassessments are not the norm throughout Pennsylvania.  Pittsburgh and surrounding counties are the exception, with Allegheny County (in which Pittsburgh is located) having four reassessments in the last 15 years.  Nearby Indiana County is undergoing a reassessment now for tax year 2016, its first since 1968, and neighboring Washington County is undergoing a reassessment for tax year 2017. Pennsylvania lacks a mandatory revaluation cycle.  A revaluation or reassessment is a thorough analysis of every property in the entire county, with the objective of bringing each property’s assessment into line with its current market value.  Revaluations are often conducted by outside firms, usually with...
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Big-Box Retail Offers Property Tax Lessons for Industrial Owners

Taxing jurisdictions have struggled to properly value big-box retail buildings for many years, and the potential for improperly assessing the real estate value of these buildings remains high. Yet the ongoing dance between big-box owners and assessors provide useful insights for property owners in other commercial property types, particularly industrial. A big box of confusion Assessing the taxable value of a big-box retail property touches on many of the hot-button issues in property tax law. Some of the circumstances that often lead to incorrect tax assessments include development of big-box retail under build-to-suit arrangements, in which the tenant’s rent is a contractual repayment of the developer’s costs, rather than a market-rate rent. Big-box tenants are often creditworthy national companies under absolute net leases, valuable to a potential investor as a guaranteed income stream, but irrelevant to taxable value of the real estate. The sale/leaseback transactions that big-box retailers often enter...
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Finding Relief - Property Tax Appeals for Industrial Assets Yield Rewards

While it is common knowledge that tax relief is available for newly constructed industrial facilities that bring jobs and infrastructure to a region, business owners often overlook the opportunity to reduce property taxes on their existing facilities. That’s a pity, because successful property tax contests are a source of found money that goes straight to the company’s bottom line. Those savings can be significant. In Pennsylvania, a 2.5 million-square-foot manufacturing plant that had not challenged its assessments in more than a decade was overvalued by $30 million. An appeal ultimately yielded $500,000 in annual tax relief. Public perception vs. reality. Tax appeals for industrial properties present unique challenges. In rural areas, the property owner is often the region’s largest employer and the largest taxpayer in the jurisdiction, so that reducing the assessment also reduces funds available to local schools. Development costs are both widely publicized and somewhat misleading, because investment...
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Pennsylvania Property Tax Updates

UPDATED September 2017

PA Supreme Court Issues Landmark Ruling Favoring Taxpayers

Widely considered the most important property tax decision in 25 years, on July 5, 2017, the Pennsylvania Supreme Court issued its much-anticipated decision in Valley Forge wherein the Court took up the issue of constitutionally guaranteed uniformity in taxation in the context of school-initiated assessment appeals.  Fittingly, the Court’s decision – which reestablished the primacy of constitutional uniformity protections to taxpayers in the strongest possible language -- issued just one day after the July Fourth holiday.

In Pennsylvania, unlike most states, taxing districts have a statutory right to file annual assessment appeals seeking to increase property owners’ assessments. Because Pennsylvania has no mandatory reassessment cycle – some counties have gone more than fifty (50) years without a reassessment – many schools turn to increase appeals as a way to generate more revenue. When they do, schools frequently target just certain commercial property owners for appeals. The result is that schools’ selective or “spot” appeals disrupt constitutionally-required uniformity in assessment. This violates fundamental fairness and puts targeted commercial owners at a competitive disadvantage with owners of properties whose assessments are not increased. It also shifts more of the tax burden from residential to commercial property owners, since most schools are loathe to sue residential property owners (who vote) to increase their assessments.

In Valley Forge Towers Apts., LP v. Upper Merion Area School District, 135 A.3d 1017, (Pa. Commw. Ct. 2015), the Upper Merion Area School District (“School”) filed increase appeals only against commercial property owners and not against residential owners. The School selected properties for appeal after consultation with Keystone Realty Advisors (a New Jersey-based tax consultant which employs trained appraisers) which takes a 25% contingent fee on any increase in taxes as a result of the appeals. Four apartment building owners (“Taxpayers”) who had been targeted for these appeals challenged the School’s selection of only commercial owners for appeals as violating Pennsylvania’s Constitution which mandates uniformity in taxation. Both the trial court and the first-level appellate court denied Taxpayers’ challenge, holding that the School need only satisfy a “rational basis” test and that the School’s goal of “increasing revenue” justified the selective nature of the appeals.

Taxpayers sought review by the Pennsylvania Supreme Court. The Supreme Court agreed to take the case on the following issue:

[The School District] deliberately chose commercial properties, such as Petitioners’, for selective assessment appeals, but did not appeal assessments of any single-family-home properties, although the latter are significantly underassessed. The Uniformity Clause of the Pennsylvania Constitution prohibits disuniformity in taxation. Is a school district’s decision to appeal property assessment insulated from review because, inter alia, the school district has a statutory right to file appeals and can identify an economic reason for its appeals?

Above all, the Pennsylvania Supreme Court’s decision mandates that all taxpayers must be uniformly treated, whether they are residential or commercial taxpayers.  The Court held that there can be no assessment scheme that systematically treats residential and commercial taxpayers differently.  The Court stated no less than 13 times that all real estate is a single class. In making this point, the Court observed that this constitutional tenet had been in place since 1909, was reaffirmed by the Court on multiple occasions and – emphatically -- “this Court plainly had no intention of discarding it.”  Valley Forge Decision at 23 n. 17.  It follows that the government may not create sub-classifications of property for different tax treatment, a holding which the Court stated 10 times in its decision.

The Court’s decision makes it abundantly clear that all realty must be taxed uniformly and that this Constitutional protection is for the benefit of the taxpayer.  Residential and commercial taxpayers cannot be treated differently.   In the Court’s own words:

“First, 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.”  Valley Forge Decision at 18 (emphasis added).

The Court then remanded the case for discovery to determine if there was a violation of uniformity.  The discovery process will help to establish the facts either to prove or disprove that there was a systematic disparate treatment of the taxpayers in the Valley Forge case.  It will not be necessary to show that the school intended to treat the taxpayers differently from the other taxpayers.

The principal holding that we can take away from the case is that all taxes must be uniformly assessed and that no purposeful or unintentional systematic assessment that treats taxpayers in a disparate manner is constitutional.

What’s Next?: The Supreme Court’s decision underscores the need for a standard as to how all realty is to be taxed in Pennsylvania regardless as to whether it is residential or commercial.  In current practice, residential and commercial properties are taxed on different standards, thus the need for clarifying definitions in Pennsylvania’s statutes. 

Pennsylvania’s legislature has been taking up the issue of property tax reform in its current session which ends July 7, 2017.  Among other proposals under consideration was a definition to set the standard for valuation as “fee simple unencumbered.”  With Pennsylvania’s budget and financing still under consideration for the current session, it is not expected that legislature will enact property tax reform in the session that ends tomorrow, but we will be watching to for more developments when the legislature returns for the fall session.

The need for a uniform standard is best illustrated by example.

A residential property is valued as follows:  1) Pennsylvania’s case law definition of “actual value” presumes a hypothetical willing buyer and a willing seller even though the actual homeowners are still living in the house.  In other words, the presumption in an assessment appeal is that the homeowners move out and put their house on the open market. 2) The house is, of course, vacant at the time of the hypothetical sale.  It is not being leased.  It is unencumbered.  3) The question asked in the assessment appeal is “what would a hypothetical buyer pay for this house on the open market?”  The taxpayer and the taxing districts may have different opinions as to what the price would be, but both are answering the same question.  “What is the value of the real estate interest unencumbered by any lease or private restrictions?” The same standard – fee simple unencumbered is always sought in residential assessments.

Currently, in Pennsylvania assessment practice, commercial properties are valued differently than residential properties.  If a commercial property is leased, the taxing districts answer not “what would a hypothetical buyer pay for this commercial realty on the open market” but rather, “what would a hypothetical buyer pay for this commercial realty on the open market, encumbered by this lease?” Moreover, because commercial property trades quite often as part of an ongoing business or with long term leases or with deed restrictions or with non-public use restrictions, etc. it is imperative to have a single defined interest to be valued for tax purposes.  And the only interest that is uniform across all categories is the fee simple unencumbered value.  Functionally, residential properties are taxed on a fee simple standard and commercial properties are not.  As Valley Forge makes clear, there can only be one standard because all realty is a single class. 

The only uniform standard for all realty is to be taxed on the basis of fee simple unencumbered.  The Court in the Valley Forge decision lays out the roadmap that that the key is to tax all realty uniformly. 

Valley Forge holds that systematic disparate treatment (which is exactly what we have in practice now) between residential and commercial property taxpayers is unconstitutional.  The only way to get one uniform standard in Pennsylvania all realty is to include a definition in the statute that the standard is the same for all realty – fee simple unencumbered.

To read the decision in its entirety, go to http://www.pacourts.us/assets/opinions/Supreme/out/J-14-2017mo%20-%2010315970920113108.pdf?cb=1

If you have specific questions about this case or how Pennsylvania law applies to your property, please contact Siegel Jennings at:

Sharon F. DiPaolo, Esquire
Siegel Jennings, Co., L.P.A.
American Property Tax Counsel (APTC)

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How To Discover Whether Your Tax Assessment Is Fair

Many taxpayers pay more than their fair share of property taxes. Yet in a tax arena fraught with nuance, it can be difficult for a taxpayer to recognize an inflated assessment. The key to spotting a bad assessment lies in knowing precisely what the assessor is measuring and the requirements of the state's property tax law. What, then, is being assessed? The simplistic answer is that real estate is being assessed, but that response doesn't fully address commercial real estate, where values often hinge on contracts, encumbrances and regional legal definitions. That said, all states attempt to tax at similar levels properties that are similar to one another. The challenge to meeting that goal is that commercial real estate is subject to a variety of contracts and encumbrances, creating situations where nearly identical properties are taxed at significantly different assessments. Causing more trouble is assessors' tendency to rely on recent...
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American Property Tax Counsel

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