In 2017, the Kennett Consolidated School District consulted an appraiser to determine which, if any, properties might be underassessed by the Chester County Assessment Office for the 2018 tax year. The appraiser was asked not to limit his review to a particular class of properties. Ultimately, the appraiser recommended 13 properties that he believed were underassessed by at least $1 million, all of which were commercial properties. Among those properties was a property owned by Autozone Development Corp. The district appealed the assessment of the taxpayer’s property to the Chester County Board of Assessment Appeals, arguing that it was underassessed. The Chester County Board of Assessment Appeals disagreed and upheld the original assessment.
The district appealed to the Chester County trial court. The trial court found in favor of the district. It held that the taxpayer’s property’s fair market value was approximately $1.85 million and its assessed value was $980,500 in 2018 and $949,050 in 2019, over $400,000 more than the original assessed value for each tax year.
The taxpayer appealed the trial court’s decision to the Commonwealth Court, primarily on the grounds that the district’s strategy for assessing its property was unconstitutional under the Uniformity Clause of Pennsylvania’s Constitution. Kennett Consol. Sch. Dist. v. Chester County Bd. of Assessment Appeals. The taxpayer argued that the district’s approach was unconstitutional, because its property was treated as part of a class of commercial properties that had been targeted for reassessment by the district based on a monetary threshold (i.e., properties that were underassessed by at least $1 million). By singling out commercial properties and by setting a monetary threshold for which to appeal properties, the taxpayer argued, the district’s practice unconstitutionally created a subclass of properties and targeted them for reassessment.
In response, the district argued that its policy was not intended to target a particular class of properties; rather, the dollar-threshold was intended to better utilize its resources by appealing assessments likely to generate enough revenue to justify the cost of the appeal. The Commonwealth Court upheld the district’s assessment method and the reassessment of the taxpayer’s property. In its view, the district’s policy did not target commercial properties because the district initially advised the consultant it hired to consider all property types for appeals, not just commercial ones. In the Court’s view, the fact that the properties identified for appeal in the 2018 and 2019 tax year were commercial properties did not, alone, establish that the district singled out commercial properties for appeal.
The crux of the taxpayer’s argument was based on Valley Forge Towers. Valley Forge Towers Apartments N, LP v. Upper Merion Area School District. There the Pennsylvania Supreme Court held that specific classes of properties may not be singled out by a taxing authority for reassessment based on property type (e.g., only residential, commercial, or industrial, etc.). The taxing authority in Valley Forge Towers hired a firm to help it determine which properties to appeal, which focused solely on commercial properties because they were viewed as generating more tax revenue than single-family homes. The court held this practice to be unconstitutional. The court stated that the use of a monetary threshold could be constitutional if it were implemented without regard to property type or the residency status of the property’s owner; however, those issues were not before the court.
Over the approximately three years since Valley Forge Towers was decided, school districts across Pennsylvania have applied the dollar-threshold methodology in choosing which property assessments to appeal. Numerous taxpayers have unsuccessfully challenged this approach as unconstitutional on the grounds that, even if stated methodology applied by a taxing authority in form purports to be uniform, the result is not uniform because it results in targeting mostly, if not all, larger, typically commercial, properties. See, e.g., East Stroudsburg Area School District v. Meadow Lake Plaza, LLC, 219 A.3d 724 (Pa. Commw. Ct. Oct. 17, 2019), appeal denied, 231 A.3d 772 (Pa. May 4, 2020) (declining to hear taxpayer’s appeal of decision upholding school district’s use of a monetary threshold to identify underassessed properties for appeal); Bethlehem Area School District v. Board of Revenue Appeals of Northampton County, 225 A.3d 212 (Pa. Commw. Ct. Jan. 16, 2020), appeal denied, 237 A.3d 968 (Pa. Aug. 12, 2020) (declining to hear taxpayer’s appeal of decision upholding school district’s use of a monetary threshold to identify underassessed properties to appeal). Other methods that do not seek out commercial properties by name, but target them by result, have also been upheld by the Commonwealth Court. Punxsutawney Area School District v. Broadwing Timber, LLC, 219 A.3d 729 (Pa. Commw. Ct. Oct. 29, 2019), appeal denied, 234 A.3d 399 (Pa. May 20, 2020) (declining to hear taxpayer’s appeal of decision upholding use of a revenue-based method based on realty transfer tax records to identify underassessed properties for appeal). In each of these cases, the result was to seek reassessment of commercial properties. How many residences, for example, are underassessed by $1 million?
The underlying difficulty appears to be that the use by the school districts of the right of appeal has the effect of defeating uniformity. The properties reassessed are entirely, or almost entirely, commercial properties. The court could permit the practice to continue by allowing appeals that in form are not discriminatory, even though in actual result they are. That is what the Commonwealth Court did. Or the court could apply the Uniformity Clause to all reassessments, whether or not they are the result of school district appeals. The court could allow school districts to appeal, but require the assessment board or court to reassess each property only at a valuation that is uniform among all properties, at or at least close to, the common level ratio in the county. The effect would be that uniformity trumps value, as has long been required. In re Appeal of Brooks Bldg., 137 A.2d 273, 276 (Pa. 1958) (explaining that the same assessment ratio should apply to all properties, even if some properties are assessed below their true value).
There is no reason why the constitutional requirement of uniformity should not be applied in school district appeals as well as to board assessments. Indeed, there are good reasons why it should. The Uniformity Clause requires that property taxes be “uniform, upon the same class of subjects.” Pa. Const. Art. VIII Section 1. Real property in a taxing district is all one class. Valley Forge Towers, 163 A.3d at 973-74 (citing Westinghouse Elec. Corp. v. Bd. of Prop. Assessment, Appeals & Review of Allegheny Cnty., 652 A.2d 1306, 1314 (Pa. 1995) (citing McKnight Shopping Ctr., Inc. v. Bd. of Prop. Assessment, Appeals & Review of Allegheny Cnty., 209 A.2d 389, 391 (Pa. 1965)). Applying this rule, the Pennsylvania Supreme Court held in Valley Forge Towers that commercial taxpayers cannot be targeted for reassessment. It should follow that school districts cannot do indirectly what they cannot do directly. The Pennsylvania Supreme Court has already held that larger taxpayers cannot be singled out for disparate treatment for corporate net income tax. See Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, 171 A.3d 682 (Pa. 2017) (holding that the application of the flat dollar-cap limit on the use of net operating losses as applied to the taxpayer resulted in a classification of taxpayers based on their amount of taxable income, with taxpayers with more than $3 million of taxable income owing more tax than smaller taxpayers). The same reasoning should hold true for real estate taxes.
While the Supreme Court recognized in Valley Forge Towers that school districts have a right to appeal the valuation set by local assessment offices, the court did not say that school districts get a pass on uniformity through the appeal route. The Commonwealth Court has focused its inquiry, at least in part, on striking a “balance” between taxpayers’ constitutional right to uniformity and a school district’s ability to appeal. Kennett Consol. Sch. Dist. v. Chester County Bd. of Assessment Appeals, 228 A.3d at 35. The inquiry should be whether a school district’s statutory grant of authority to appeal assessments conflicts with taxpayers’ constitutional right to uniformity, and, if not, what limits should be placed on the resulting reassessments. As the Pennsylvania Supreme Court stated, the school district’s statutory right to appeal “cannot justify an action which the Uniformity Clause prohibits.” Id. (citing Valley Forge Towers, 163 A.3d at 978). If the court applies the rule of uniformity to the results in school district appeals (a.k.a. reverse assessment cases), it could provide an avenue of relief for commercial property-owners whose properties were assessed using the monetary threshold methodology.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Joe Bright is a member and Heidi Schwartz is an associate at Cozen O’Connor in Philadelphia.