In Duffield House LP v. City of Philadelphia–a case involving assessment appeals by approximately 700 owners and lessees of commercial and industrial properties in the City–Philadelphia County Court of Common Pleas Judge Gene Cohen held that the City of Philadelphia’s reassessments of commercial real property for the 2018 tax year violated the Uniformity Clause of the Pennsylvania Constitution, that the plaintiffs’ assessments must be stricken, and that the City must pay refunds to the plaintiffs (taxpayers that appealed their 2018 real estate tax assessments on or before October 2, 2017).

Background

The City is required to assess all properties in the City each year at the current fair market value of each property. The City completed the first countywide reassessments in a very long time in 2013, effective for the 2014 tax year.

In 2017, the City announced that it had better information to establish the value of commercial properties than it had in 2013 and began reassessing commercial and industrial properties in the City for the 2018 tax year. The City did not reassess residential properties for the 2018 tax year because it argued that studies showed the assessed values of residential properties already reflected the fair market value of those properties.

Duffield House Case

A group of commercial real property owners challenged their reassessments for the 2018 tax year based on the Uniformity Clause of the Pennsylvania Constitution, which requires that “[a]ll taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws” – i.e., all taxes must be imposed uniformly and without discrimination.

Judge Cohen found that, by reassessing only commercial and industrial properties and not residential properties, the City violated the Uniformity Clause. Accordingly, he ordered the City to reassess the plaintiffs’ properties at their 2017 assessed values and to pay refunds to the plaintiffs based on the difference between the 2018 assessments and the 2017 assessments by July 1, 2021. The City estimates that–before including interest–the real estate tax and use and occupancy tax refunds it will be required to pay as a result of the order will be approximately $48 million.

The court rejected the City’s contention that the commercial reassessments were constitutional because, based on information that became available after the 2013 countywide reassessment, they were necessary to bring the valuation of commercial properties in line with the valuation of residential properties. The court reasoned that the “equalization of the quality of the real estate tax assessments” was not a compelling justification for treating the property classes differently.

Judge Cohen also rejected the City’s argument that paying refunds to the plaintiffs would cause a budget shortfall, stating that “[w]here there is a conflict between maximizing revenue and ensuring that the taxing system is implemented in a nondiscriminatory way, the Uniformity Clause requires that the latter be given primacy.” In essence, Judge Cohen told the City that it could not violate the law to obtain revenue.

It is notable that Judge Cohen ordered the City to pay refunds to the plaintiffs. Pennsylvania courts frequently do not order the payment of tax refunds when tax statutes are struck down or a taxing authority collects a tax unconstitutionally. At least in part, the courts’ reasoning in such cases has been that requiring a taxing authority to refund amounts that it collected when it believed the taxes were legally collected and it already spent (or earmarked for spending) would be unduly burdensome on the financial health of the state or municipality. This case presented somewhat unique facts because the City was on notice of the challenge because the lawsuit was filed before the due date for the 2018 real estate taxes.

The order requires the City to change its assessment practices. By giving the City two years to pay the refunds, Judge Cohen is allowing for budgetary planning by the City. However, the City said it is likely to appeal the order, and whether refunds are payable is expected to be a part of that appeal. Owners/users of and tenants in buildings that are the subject of this appeal should file use and occupancy tax refund claims for use and occupancy tax paid based on the 2018 assessments.

Ballard Spahr can assist with any questions about the challenge to Philadelphia’s real estate tax assessments as well as other issues related to Philadelphia taxes.

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