Pennsylvania State and Local Tax Update—First Quarter 2023

The first quarter of 2023 was an eventful one in the Pennsylvania tax world, with the resolution (at least for now) of long-running disputes in the corporate net income tax and real estate tax worlds. It also saw the Commonwealth Court uphold a decision that could have far-reaching implications for charities in Pennsylvania.

Synthes USA HQ Inc. v. Commonwealth marked the end of a long-running dispute that involved not just the taxpayer and the Department of Revenue, but also the Attorney General’s Office as well. In 2020, the Commonwealth Court agreed with the department and the taxpayer that the taxpayer was entitled to a refund because the taxpayer should source revenues from its services for its sales factor on a market sourcing basis, as opposed to a cost of performance calculation.

The DOR stipulated that, even under the costs of performance regime, the location of customers was essentially always dispositive of where receipts from the provision of services should be sourced. Intriguingly, after the Attorney General’s appearance was entered,

• The DOR intervened to agree with the taxpayer’s theory of the case, and
• The Attorney General’s office disagreed with the DOR contending the taxpayer’s original cost of performance calculations were correct.

Because the taxpayer and DOR agreed with the result, neither appealed. However, the Attorney General did appeal arguing the office is vested with authority to conduct appeals and that it’s not bound by the DOR’s interpretation of tax laws.

The Supreme Court of Pennsylvania found in favor of the taxpayer and held that the refund should be paid. At least as applied to the taxpayer’s facts, the court agreed that the location of the income-providing services was the customer’s location. The court concluded that the term “income-producing activity” isn’t defined in the corporate net income tax law and therefore potentially can be interpreted differently. But, in the case of Synthes, the location of the customers is determinative.

School Tax Assessments

The Supreme Court of Pennsylvania split in the long-awaited decision in GM Berkshire Hills LLC v Berks County Board of Assessment, thereby leaving in place a school district’s ability to target recently sold properties for real estate tax assessment appeals.

The issue in GM Berkshire Hills was whether the Wilson Area School District’s policy of appealing recently sold properties where the imputed fair market value underlying the real estate tax assessment was more than $150,000 less than the sales price violated the Uniformity Clause of the Pennsylvania Constitution.

The high court issued three decisions, but because of the 3-3 split, none of the decisions is precedential.

Justice Sallie Updyke Mundy, supporting affirmance, noted that the Uniformity Clause prohibits “the systematic differential treatment of a subclass of property defined, for example, by property type or residency status of the owner.” She also noted that using “monetary figures and recent sales data is qualitatively different.”

But Justice Christine Donohue, supporting reversal, said she failed “to see how the school district’s policy doesn’t create an unconstitutional subclass of properties, which can be described as ‘properties recently purchased at a price exceeding an established threshold.’”

Because of the split, school districts likely will continue to target recently sold properties for real estate tax appeals.

Tower Health Cases

Elsewhere in the property tax world, the Commonwealth Court issued a decision in four related cases involving the Tower Health system and the Pottstown School District, Brandywine Hospital, Phoenixville Hospital, and Jennersville Hospital.

These cases involved the successful challenge by Chester County, Montgomery County, and local school districts to the real estate tax exemption for hospitals owned by the Tower Health system through single-member LLCs. Interestingly, the court first found that Tower Health had waived all issues on appeal, but nevertheless provided a detailed legal analysis upholding almost all of the Common Pleas Court’s holdings.

There were two major legal conclusions reached by the trial court: first, that the hospital didn’t demonstrate it was operating without a profit motive and, second, that the hospital didn’t demonstrate that it rendered a substantial portion of its services gratuitously.

The Commonwealth Court found that, based on the evidence considered by the trial court, it couldn’t find that the trial court’s determination on either issue was erroneous. At first glance, these cases seem to be a situation of bad facts making bad law, but it remains to be seen whether taxing authorities will see an opportunity to target charitable exemptions.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Christopher A. Jones co-leads Ballard Spahr’s tax-real estate team. He advises clients on a wide range of federal, state, and local tax matters, as well as the tax consequences of complex transactions and associated planning opportunities.

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