Less than six months ago the Pennsylvania Supreme Court in Mount Airy #1, LLC v. Pennsylvania Dep’t of Revenue, 2016 Pa. Lexis 2174 (Pa. Sept. 28, 2016), held that the Pennsylvania Race Horse Development and Gaming Act’s “local share assessment” (a tax imposed upon slot machine revenue) violated the Uniformity Clause of the Pennsylvania Constitution. As a result of the Mount Airy decision, more than $140 million in tax payments to host municipalities are in limbo. The Court initially gave state lawmakers 120 days from its decision to find a proper solution. The legislators, however, failed to meet the 120 day deadline. Consequently, a group of state senators filed a petition for an extended stay on January 12, 2017 and on January 20, 2017, the Court gave lawmakers an additional four months -until May 26th- to fix the tax on casino slot revenue.
Now with the looming dark cloud deadline of May 26, 2017 as a backdrop, the Pennsylvania Supreme Court is going to hear oral arguments on two more tax cases involving Uniformity. On March 8 and April 5, 2017, the Pennsylvania Supreme Court will be hearing oral arguments in Valley Forge Towers Apts., et. al. v. Upper Merion Area School District, No. 49 MAP 2016 and Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, Pa., No. 6 EAP 2016, respectively.
In Valley Forge Towers Apts. N, LP v. Upper Merion Area School District, 124 A.3d 363, 365 (Pa. Cmwlth. 2015), the Pennsylvania Commonwealth Court held that a school district does not violate the Uniformity Clause when it has reasonable financial considerations of increasing its revenue by appealing certain high-valued properties within its district. On April 26, 2016, the Pennsylvania Supreme Court granted allocator in Valley Forge Towers v. Upper Merion Area School District, 49 MAP 2016. The Supreme Court phrased the issue presented for review, as follows: “[i]s 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?” The taxpayers claimed in their suit that the Upper Merion Area School District (“School District”) violated the Uniformity Clause by appealing only commercial properties and not appealing any of the thousands of under assessed single-family properties within the School District.
If the Supreme Court determines that the School District’s selection process in determining which properties to appeal in a given tax year violates the Uniformity Clause, it could take away school districts’ ability to file assessment appeals, drastically change the way school districts select properties to appeal, or it could give property owners a guide map on how to successfully fight school district-initiated assessment appeals. All of those outcomes could be financially devastating not only to the school districts that initiated the appeals, but also for the local municipality and county that piggy backed on any assessment increase. Unfortunately, many local taxing jurisdictions have grown accustomed to balancing their yearly budgets using real estate tax revenue generated from school district -initiated assessment appeals. If and when that ability to appeal is altered in any way, the local taxing jurisdictions are going to have to come up with more creative and hopefully constitutional ways to make up any lost revenue.
In Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, 129 A.3d 1 (Pa. Cmwlth. 2015), the Commonwealth Court held that Pennsylvania’s cap on the use of net operating loss carryforwards to the greater of a fixed dollar amount of $3 million or a percentage of taxable income of 12.5 percent of taxable income for the 2007 tax year violated the Uniformity Clause. The Commonwealth Court reasoned that, while the Uniformity Clause does not require absolute equality and perfect uniformity in taxation, if no legitimate distinction exists between the classes subject to differing tax treatment, and a substantial unequal tax burden is imposed on similarly-situated taxpayers, the tax violates the Uniformity Clause. The court found that the only factor that distinguishes between those taxpayers who paid no corporate net income tax as a result of the 2007 net operating loss deduction limitation and those that paid some, was the amount of their taxable income – a classification that cannot withstand the scrutiny afforded under the Uniformity Clause.
Accordingly, the Commonwealth Court granted the taxpayer in Nextel full use of its net operating loss carryforwards, which resulted in a $3.94 million dollar refund. Although the Commonwealth Court decision specifically stated that it only applied to Nextel and the 2007 tax year, other similarly situated taxpayers filed refund appeals that could ultimately cost the Commonwealth hundreds of millions of dollars if the Pennsylvania Supreme Court upholds the Commonwealth Court’s analysis.
If you are subject to a school district initiated assessment appeal, or if you are not able to utilize your full net operating loss carryforwards, please contact Paul Morcom, or any member of McNees’ state and local tax group, to discuss.