In Valley Forge Towers Apartments, LP v. Upper Marion Area School District,¹ the Pennsylvania Supreme Court (Court), in a unanimous decision, held that, under the Uniformity Clause of the Pennsylvania Constitution, a taxing authority may not selectively appeal only assessments of commercial properties, such as apartment complexes, while choosing not to appeal the assessment of other types of properties, such as single-family residences.

Upper Marion Area School District (District) retained Keystone Realty Advisors (Keystone) to advise it on which properties in the District to assess. Upon Keystone's recommendation, the District chose to assess only commercial properties because their values were generally higher and, therefore, this manner of selective assessment would likely raise revenues in a way that efficiently used District resources. Another factor in the District selecting only commercial properties was that owners of single family residences are voters and assessing them would likely have negative political ramifications for the District's board members.

After rejecting the District's argument that the lower court lacked jurisdiction because the taxpayers, a group of entities that owned apartment complexes in the District, had not fully exhausted their statutory remedies, the Court focused on and agreed with the taxpayer's Uniformity Clause argument. The taxpayers argued that the District had created a sub-classification of properties (i.e., commercial properties) and treated it differently from other property sub-classes. The Commonwealth Court, however, applied a rational-basis test to conclude that the District did not create a suspect or sensitive classification and, therefore, the classification was constitutionally permissible because the purpose of the District selectively assessing commercial properties increased revenues in a cost-efficient manner.

On appeal, the Court unanimously reversed the Commonwealth Court's ruling. In so doing, the Court pointed to the following:

— The "federal Equal Protection Clause … sets the constitutional 'floor' for the protection of property owners' rights under the Uniformity Clause."² Therefore, the Uniformity Clause in Pennsylvania's constitution supplies taxpayers with protections that extend beyond those provided under the Equal Protection Clause of the federal constitution.

— The Court disagreed with the Commonwealth Court's application of the rational-basis test. "[W]e are not persuaded that the conventional rational-basis standard advanced by the School District, a common feature of equal protection jurisprudence, applies in a dispute such as this."³

— The Court unequivocally concluded "that all real estate in a taxing district forms a single collective class to be treated uniformly, and that systematic disparate enforcement of the tax laws based on property sub-classification, even absent wrongful conduct, is constitutionally precluded — it follows that a taxing authority may not implement a program of only appealing the assessments of one sub-classification of properties, when that sub-classification is drawn according to property type — that is, its use as commercial, apartment complex, single-family residential, industrial, or the like."⁴

— The Court noted "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. Such methodologies are not presently before the Court."⁵

— With respect to the District's argument that efficient use of government resources justified its selective enforcement, the Court found that, "[when] there is a conflict between maximizing revenue and ensuring that the taxing system is implemented in a non-discriminatory way, the Uniformity Clause requires that the latter goal be given primacy."⁶

Implications

While the tests under the Uniformity and Equal Protection Clauses are similar, the Court made clear that "the Uniformity Clause is more restrictive in that it does not allow the government to engage in disparate tax treatment of different sub-classifications of real property, such as residential versus commercial."⁷ Under an Equal Protection analysis, a general taxpayer's burden is to overcome a rational basis for the governmental classification, which is nearly impossible to attain (as evidenced in the US Supreme Court ruling on Armour v. City of Indianapolis⁸). The Court's statement of this principle, coupled with its holding, reminds taxpayers that, although challenging, uniformity issues are subject to a lower burden of proof and thus, potentially winnable.

More importantly, Valley Forge Towers could give some indication as to how — and how soon - the Court may rule in Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, 6 EAP 2016 (see Tax Alert 2017-632), another important uniformity clause case. From a timing perspective, Valley Forge Towers was argued just a month before Nextel. If the Court is on a similar time frame for issuing a decision in Nextel, we could see a decision in about a month. Of course, many factors, such as the complexity and importance of the case, affect the Court's timing. Therefore, the issuance of this decision does not necessarily indicate that Nextel will be issued in a similar timeframe.

This unanimous decision demonstrates how strictly the Court interprets the commonwealth constitution's Uniformity Clause. For instance, the Court pointed out that its precedent has " … never suggested that the government could divide the realty within a taxing district into multiple sub-classifications and either apply disparate assessment ratios to the different sub-classifications, or otherwise systematically treat them differently."⁹ The Court immediately noted that, for over 50 years, it has been an " … established feature of Pennsylvania uniformity jurisprudence that all real estate is a constitutionally designated class entitled to uniform treatment and the ratio of assessed value to market value adopted by the taxing authority must be applied equally and uniformly to all real estate within the taxing authority's jurisdiction."¹⁰ (citations and internal quotations omitted).

Finally, the Court clarified that its precedent of permitting 'meaningful sub-classifications' was limited "solely to evidence that a court may consider in the context of an individual assessment appeal."¹¹ It would not be surprising if the Court were to apply these principles in Nextel. If that were the case, the Court may find that the statutory net loss carryforward cap impermissibly creates sub-classifications of corporate taxpayers: those that are subject to the statutory cap and those that are not. Alternatively, the Court could — perhaps applying the principle that a "monetary threshold" may not violate uniformity - find that corporate taxpayers that are subject to the net loss carryforward cap and those that are not are indeed in the same class and, therefore, the statutory cap does not create an invalid sub-classification.

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ENDNOTES

¹ Valley Forge Towers Apartments, LP v. Upper Marion Area School District, 49 MAP 2016 (Pa. S. Ct. July 5, 2017) (Slip Op.).

² Slip Op. at 15.

³ Slip Op. at 21-22.

⁴ Slip Op. at 23-24.

⁵ Slip Op. at 25-26.

⁶ Slip Op. at 26.

⁷ Slip Op. at footnote 4.

⁸ Armour v. City of Indianapolis, Ind., 132 S. Ct. 2073, 566 US 673, 182 L. Ed. 2d 998 (2012).

⁹ Slip Op. at 15-16.

¹⁰ Slip Op. at 16.

¹¹ Slip Op. at 22.