Property Tax Alert. Don t Miss Your Chance To Appeal Your Company s Real Property Tax Assessment. Introduction

Transcription

1 July 2007 Authors: Jacqueline E. Bedard Evan A. Bloch David R. Cohen Raymond P. Pepe Don t Miss Your Chance To Appeal Your Company s Real Property Tax Assessment Introduction Are you aware that every taxpayer may file an appeal each year challenging the assessment of real property for local tax purposes in Pennsylvania? It is that time of year again. It is the time of year when your company should consider whether to file an appeal of your tax assessments. You do not need to wait for the county to conduct a reassessment. Instead, you may file an appeal by the deadline indicated in the attached table from the tax assessment to be effective for the next tax year. If a tax assessment appeal is filed by the deadline, any redetermination will generally be effective for the 2008 county and municipal taxes and the school taxes. Tax Assessments K&L Gates comprises approximately 1,400 lawyers in 22 offices located in North America, Europe and Asia, and represents capital markets participants, entrepreneurs, growth and middle market companies, leading FORTUNE 100 and FTSE 100 global corporations and public sector entities. For more information, please visit In order to determine whether it is desirable to file an assessment appeal, you need to consider whether your property is over-assessed relative to comparable properties located in the county municipality and/or school district; whether your property is correctly described in the county s assessment rolls; whether your assessment properly has excluded interests in property not subject to local realty taxation; and whether any savings possible due to an assessment appeal justify the cost of pursuing the appeal. To evaluate these issues, it is helpful to understand concepts like predetermined ratio, common-level ratio, base-year value and fair market value. When you hear these terms, do your eyes glaze over or does your head begin to hurt? We ve attempted below to provide some common sense explanations we hope you will find helpful. Common-Level Ratio, Predetermined Ratio, and Base-Year Value. What do these words mean to you or your company? The common-level ratio reflects a comparison of a previous year s actual sales prices in each county to the assessed value of the properties established in the respective county. Predetermined ratios, in contrast, represent the percentage of market values at which counties announce that they intend to set assessed values. To the extent reassessments have not been recently conducted, there are often substantial differences between the two amounts. Since 1947, an obscure agency known as the State Tax Equalization Board annually compiles surveys of property sales for each county and municipality. For example, if assessed values are on average half of sales prices, the common level ratio would be 50. The assessed value is relevant to the amount of taxes that you pay. Each county in Pennsylvania is responsible for determining the assessed value of property within its boundaries. The assessed values determined by the County Tax Assessment Office are then utilized by the county, cities, boroughs, townships and school districts to levy real property taxes. Tax rates are stated in millage rates that are one-tenth of a percent of assessed value. For example, a 16-mill tax is equivalent to a tax of 1.6% of assessed value. To determine

2 the tax that you would pay, in a county that has a 100% predetermined ratio (and a common-level ratio that is within 15% of the predetermined ratio), a commercial or industrial property that has a market value of $2.5 million also would have an assessed value of $2.5 million. A 16-mill property tax on that property results in an annual payment of $40,000, i.e., $2,500,000 x.016. To the extent you believe that the true value of your property is less than its assessed value divided by the common level ratio or that it is over assessed in comparison to comparable properties in the taxing districts, it may be beneficial to pursue an assessment appeal. Base-year value. Some counties have sought to assess properties as of a base-year when they conducted a reassessment. When reassessing properties following the completion of improvements or subdivisions, assessors in base-year counties are to seek to value the improved properties as of the base year. A very recent opinion by Judge R. Stanton Wettick, Jr. of the Allegheny County Court of Common Pleas, discussed in more detail below, suggests that base-year valuation systems violate the Equal Protection clause of the Pennsylvania Constitution. As a result, counties that have not conducted recent reassessments and instead rely on old base-year valuations may present particularly attractive venues for assessment appeals. How Do I Know What My Assessment Is? In most counties, each spring taxpayers should receive a notice from the tax collector informing them of the assessment(s) on their property and corresponding taxes. However, if you are not sure of your assessment or taxes, that is generally easy to check on-line or through your county assessment office, based on the property addresses or parcel numbers. If you are in a county where the predetermined ratio varies from the common-level ratio by less than 15%, divide your assessment by the predetermined ratio to determine indicated fair market value of the property. Otherwise, divide by the applicable common-level ratio to determine the indicated value. If you believe that your property is worth less than the indicated fair market value, you should consider an appeal. Further, under recent case law, if you believe that the indicated fair market value of your property is higher than the indicated values of similar properties in the county, municipality or school district, you may challenge the value of your property on a uniformity basis. Appeals based on uniformity alone, however, tend to be more difficult and expensive to pursue. Assessment Appeals Who? Assessment appeals may be filed by property owners, their authorized representatives, or lessees responsible for the payment of property taxes. Only lawyers licensed to practice law in Pennsylvania may appear as representatives of property owners at appeal hearings, and testimony regarding valuation may only be provided by property owners or licensed real estate appraisers or brokers. At assessment hearings, property owners are required to make a full and complete disclosure of all information bearing on the market value of the property. Assessment Appeals How? Once a property owner has determined to appeal an assessment, the appeal is filed with the county s board of assessment appeals. The appeal must be filed within the applicable deadlines, which vary from county to county. The table at the conclusion of this article indicates the applicable statutes. Any municipalities or school districts in which the real property that is the issue of the appeal is located may also file an appeal or may oppose an appeal filed by the taxpayer. After an appeal is filed, the county board of assessment appeals is responsible for scheduling a hearing. The board may schedule the hearings as early as 30 days after mailing the notice. In smaller counties, hearings must be scheduled and the boards must act no later than October 31, P.S (6); 72 P.S a. Board-level hearings tend to be informal. To prepare for a hearing before the Board of Assessment Appeals, owners of commercial and industrial properties should consider obtaining an independent professional appraisal of the real property at issue. Due to the short time frame, it can be wise to commission such an appraisal well in advance of a hearing and possibly prior to even filing the tax assessment appeal. After hearing the appeal, the Board may raise, lower or not change the reassessed value. If the taxpayer or any taxing authority does not agree with the Board s decision, they may file an appeal with the county court 2

3 of common pleas. The appeal typically must be filed within 30 days of the mailing date of the decision form, but legal counsel should be consulted about the form and timing of a court appeal. The courts hear such appeals on a de novo basis, affording no weight to the determination of the Board so long as any party produces at the hearing independent credible evidence of the actual property value. Pending the outcome of any appeal, the taxpayer is responsible to pay all taxes that have been levied. If the appeal is successful, the taxpayer will then be entitled to a refund of any excess taxes paid. Other Relevant Issues To Consider A. Machinery and Equipment For owners of industrial facilities, some of your property may be excluded from taxation. Section 201(a) of the General County Assessment Law provides that tax assessments may not include the value of machinery, equipment and other improvements used in an industrial establishment. The State Supreme Court has recognized that the scope of exclusion from taxation provided to machinery, equipment and other improvements used in an industrial establishment is at least concurrent with the assembled industrial plant doctrine. In BFC Hardwoods, Inc. v. Board of Assessment Appeals of Crawford County 1, the Supreme Court reviewed the historical context in which the machinery and equipment exclusion was adopted, concluding that the context compelled a broad interpretation of the exclusion. The basic long-standing test is if the improvements, whether fast or loose, are used directly in manufacturing the product that the establishment is intended to produce, are necessary and integral parts of the manufacturing process and are used solely for effectuating that purpose. If so, then they are excluded from real estate assessment and taxation. Jones & Laughlin Tax Assessment Case. 2 B. Personalty v. Realty Real property tax assessments must be based upon the actual value of real property and permanently attached improvements to real property. 72 P.S (a), (a), 5348(c). While the degree of permanency with which an item is attached or installed upon real property and whether the item can removed from real property without permanent damage to the land or the fixture is relevant to classifying an attachment as real or personal property. Ultimately, how the property is classified depends upon objective evidence regarding whether it was intended to remain permanently affixed to the realty for its useful life. As a result, depending upon relevant facts and circumstances, equivalent items may constitute either taxable real property or non-taxable personal property. C. Environmental Contamination and Casualty Losses A property that is environmentally contaminated is adversely impacted by that contamination. Often, the existence of substantial contamination, if supported by evidence, reduces the market value of the property significantly. Likewise, if the value of property has been impaired by a fire or other casualty, it may be eligible for a reduced assessment. D. Oil, Gas and Mineral Interests In Independent Oil and Gas, the Pennsylvania Supreme Court held that oil and gas interests are not subject to tax because they do not constitute one of the subjects of tax specifically enumerated as subject to taxation by Section 201 of the General County Assessment Law. Independent Oil and Gas v. Board of Assessment Appeals of Fayette County. 3 In contrast, a few years later, the Commonwealth Court held that limestone that had not been removed from the ground constituted an interest in land, a subject of tax that is specifically enumerated in the General County Assessment Law. Coolspring Stone Supply v. County of Fayette. 4 E. Other Improvements to Real Property One of the consequences of the Independent Oil and Gas and Coolspring Stone Supply litigation has been a renewed focus on whether and to what extent improvements to real property are taxable. The Supreme Court has stressed that, because tax laws are to be strictly construed against the government and in A.2d 759 (Pa 2001) A.2d 856 (Pa. 1961) A.2d 180 (Pa. 2002) A.2d 323 (Pa. Cmwlth. 2005), allocatur granted, 892 A.2d 824 (Pa. 2005).

4 favor of taxpayers, only the types of improvements made explicitly subject to assessment may be taxed. These improvements are generally limited to houses, house trailers, permanently attached mobile homes, parking lots and trailer parks, manufactories, wharves, offices, and enclosures for machinery and equipment. While the issue continues to be fraught with controversy, most other types of improvements, unless incorporated into or associated with otherwise taxable improvements, may be excluded from assessment and taxation. These concepts have generated disputes concerning the taxation of billboards, windmills, amusement park rides and cell towers and seem likely to spread to other classes of improvements to realty. As a result, it is important for a taxpayer, when evaluating the taxable nature of the company s land and improvements, to determine whether they fall within the list of enumerated items subject to tax under the assessment laws. Recent Case Law A. Uniformity Challenges You may file an appeal if you believe that your property s fair market value is too high. You also may file an appeal if you believe that your assessment-tovalue ratio is higher than that of similar properties. Until a recent decision by the Pennsylvania Supreme Court in Downingtown Area Sch. Dist. v. Chester County Bd. of Assessment Appeals, 5 it was questionable whether taxpayers could challenge assessments on uniformity grounds beyond seeking application of the applicable common-level ratio in counties where it differed from the predetermined ratio by more than 15%. The Downingtown decision, however, has opened up new avenues for uniformity challenges. The Dowingtown litigation addressed a situation in Chester County in which the predetermined ratio was 85.2% and the common-level ratio was 100%. The litigation addressed the question of whether in these circumstances there should be a presumption of uniformity simply because the difference between the predetermined ratio and the common-level ratio was less than 15% or whether a taxpayer may demonstrate a lack of uniformity of taxation with respect to the property if it can prove that similar properties are assessed at a lesser value than that of the subject property. The Pennsylvania Supreme Court held that in the context of a uniformity challenge, the parties and the trial court may rely upon evidence concerning the assessment-to-value ratio of similar properties. What does this decision mean to your company as the taxpayer? After Downingtown to prove lack of uniformity your company may not be limited to reliance upon common-level ratios and may not need to do a complicated countywide study of ratio comparisons. Rather, if after reviewing the assessmentto-market value ratio of properties that are similar (i.e., warehouse to warehouse), you determine that the ratio of assessment-to-market value of your property is much greater than that of similar properties, you may file a uniformity challenge to the assessment. This gives taxpayers a second method by which to attack their property assessments. B. Use of Base Year In a landmark 94-page opinion (not including a 17-page attachment) dated June 6, 2007, Allegheny County Court Judge R. Stanton Wettick, Jr. voided Allegheny County s entire county assessment system. Clifton v. Allegheny County and Pierce v. Allegheny County. 6 In Clifton, Judge Wettick found that the Pennsylvania assessment laws that permit counties to use a base-year system indefinitely to assesses property values violate the Pennsylvania Constitution s Uniformity Clause. Pa. Const. Article III, 1. The Uniformity Clause requires that all taxes must be uniform upon the same class of subjects. Relying on empirical evidence and expert testimony, Judge Wettick determined that base-year valuation methods inevitably produce unacceptable inequalities. It is not yet clear what impact this decision will have beyond Allegheny County. Although Judge Wettick condoned continued use of the base-year system in Allegheny County for a limited time while appellate courts and/or the legislature have time to review his decision and implement alternatives, some taxing authorities in Allegheny County are now arguing that 2007 market values, rather than 2002 base year values, should be applied to current-year assessment appeals within the county. Further, according to Isobel Storch, A.2d 194 (Pa. 2006). 6 No. GD and No. GD , respectively.

5 Solicitor for the Allegheny County Board of Property Assessment Appeals and Review, the Board plans to continue considering only evidence of base-year values, unless the taxpayer (not the taxing authorities) bases his/her tax appeal on current market value. Allegheny County officials have announced their intention to appeal Judge Wettick s determination. Absent new legislation, the Pennsylvania appellate courts determination will guide assessment law throughout Pennsylvania. In the meantime, however, Pennsylvania s General Assembly may act to clarify current assessment law. Regardless of the outcome of the appeal of Judge Wettick s decision, by focusing attention on the inequities inherent in the use of a base year to reassess new improvements to property, the decision may open up new avenues of relief for taxpayers to pursue appeals using base-year values versus current market values as adjusted by common-level ratios. A review of both base-year and current year values may be particularly advisable in portions of counties that have experienced comparatively rapid growth and development since the base year because the use of a base-year valuation would magnify the current impact of any over assessment that occurred in the base year and has not been previously appealed and corrected. The Role of Legal Counsel in Assessment Appeals As you consider whether to pursue a property tax assessment appeal, it is important to be cognizant of the governing and emerging law. Property tax assessment appeals, especially for commercial and industrial properties, often can result in substantial valuation adjustments and tax savings. The assistance of counsel may be critical in the effective pursuit of negotiations or appeals. Lawyers experienced with assessment appeals can assist taxpayers in retaining and working with professional appraisers and can ensure that all appropriate tax exemptions and exceptions are claimed in appeals, including exemptions for charitable organizations and exclusions for machinery and equipment issued in industrial establishments. Effective representation by counsel also can help protect taxpayers against attempts by municipalities and school districts to increase assessments. Our firm s Harrisburg and Pittsburgh offices have significant experience with taxation issues, including complex appeals from real estate property assessments of commercial and industrial properties. Our lawyers have successfully appealed or negotiated favorable resolutions of the assessment of various industrial, power generation, office, retail, storage, utility and lowincome properties across the state. Several examples of K&L Gates recent tax assessment appeal issues include challenging whether a county may assess billboards as real property; challenging the method by which lowincome and senior housing may be taxed; negotiation of multi-million dollar reductions in assessments for various industrial, utility, hotel and office properties; successfully litigating in Pennsylvania appellate courts the scope of the machinery and equipment exclusion and the application of obsolescence in computing the assessed value and value reductions or zero values based on environmental issues. We have handled assessment appeals in counties across Pennsylvania, including Allegheny, Armstrong, Beaver, Berks, Bradford, Bucks, Clinton, Dauphin, Franklin, Indiana, Lancaster, Lawrence, Lycoming, Mercer, Montgomery, Reading, Warren, Washington, and Westmoreland.

6 COUNTY TAX ASSESSMENT APPEAL COMMON-LEVEL RATIO BASE-YEAR DEADLINE Adams 9/1/ Allegheny To be established for Armstrong 9/1/ Beaver 9/1/ Bedford 9/1/ Berks 8/15/ Blair 9/1/ Bradford 9/1/ Bucks 8/1/ Butler 9/1/ Cambria 9/1/ Cameron 9/1/ Carbon 9/1/ Centre 9/1/ Chester 8/1/ Clarion 9/1/ Clearfield 9/1/ Clinton 9/1/ Columbia 9/1/ Crawford 9/1/ Cumberland 9/1/ Dauphin 8/1/ Delaware 8/1/ Elk 9/1/ Erie 8/1/ Fayette 9/1/ Forest 9/1/ Franklin 9/1/ Fulton 9/1/ Greene 9/1/ Huntingdon 9/1/ Indiana 9/1/ Jefferson 9/1/

7 Juniata 9/1/ COUNTY TAX ASSESSMENT APPEAL COMMON-LEVEL RATIO BASE-YEAR DEADLINE Lackawanna 9/1/ Lancaster 8/1/ Lawrence 9/1/ Lebanon 9/1/ Lehigh 8/1/ Luzerne 9/1/ Lycoming 9/1/ McKean 9/1/ Mercer 9/1/ Mifflin 9/1/ Monroe 9/1/ Montgomery 9/1/ Montour 9/1/ Northampton 9/1/ Northumberland 9/1/ Perry 9/1/ Philadelphia 10/1/ Ongoing Pike 9/1/ Potter 9/1/ Schuylkill 9/1/ Snyder 9/1/ Somerset 9/1/ Sullivan 9/1/ Susquehanna 9/1/ Tioga 9/1/ Union 9/1/ Venango 9/1/ Warren 9/1/ Washington 9/1/ Wayne 9/1/ Westmoreland 9/1/ Wyoming 9/1/ York 8/1/

8 K&L Gates comprises multiple affiliated partnerships: a limited liability partnership with the full name Kirkpatrick & Lockhart Preston Gates Ellis LLP qualified in Delaware and maintaining offices throughout the U.S., in Berlin, and in Beijing (Kirkpatrick & Lockhart Preston Gates Ellis LLP Beijing Representative Office); a limited liability partnership (also named Kirkpatrick & Lockhart Preston Gates Ellis LLP) incorporated in England and maintaining our London office; a Taiwan general partnership (Kirkpatrick & Lockhart Preston Gates Ellis) which practices from our Taipei office; and a Hong Kong general partnership (Kirkpatrick & Lockhart Preston Gates Ellis, Solicitors) which practices from our Hong Kong office. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners in each entity is available for inspection at any K&L Gates office. This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Data Protection Act 1998 We may contact you from time to time with information on Kirkpatrick & Lockhart Preston Gates Ellis LLP seminars and with our regular newsletters, which may be of interest to you. We will not provide your details to any third parties. Please london@klgates.com if you would prefer not to receive this information Kirkpatrick & Lockhart Preston Gates Ellis LLP. All Rights Reserved.