The Pennsylvania Commonwealth Court (in Duffield House, L.P. v. City of Philadelphia - available here) unanimously held that the City’s reassessment of only commercial real estate (not residential real estate) in 2018 violated the Uniformity Clause of the Pennsylvania Constitution and that the City must refund real estate taxes to the commercial property owners who appealed their assessments.
Background and Trial Court Decision
The City is required to assess all properties in the City each year at the fair market value of each property. Effective for 2014, the City completed its first countywide reassessments in a very long time. 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 2018. The City did not reassess residential properties for 2018.
In Duffield House, a group of commercial property owners challenged their 2018 assessments, arguing that the City violated the Uniformity Clause of the Pennsylvania constitution by reassessing only commercial properties.1 The trial court (in an opinion we discussed in detail here) found that the City deliberately targeted only commercial properties for the 2018 reassessment while not reviewing the value of other properties. The court agreed with the plaintiffs that this selective reassessment of commercial properties was unconstitutional, effectively ruling that the City could not ignore the law in order to maximize tax revenue.
The trial court also found that paying refunds to the affected property owners–estimated by the City to be approximately $48 million before taking into account interest and any use and occupancy tax refunds–was the appropriate remedy, notwithstanding the burden such refunds would impose on the City. Because of this anticipated burden, the trial court allowed the City two years to pay the refund claims to allow time to adjust its finances.
Commonwealth Court Decision
The Commonwealth Court first rejected the City’s assertion that the evidence showed commercial properties in the City to be disproportionally underassessed prior to 2018. The court stated that, in fact, the City’s own evidence indicated that residential properties were more likely to be underassessed.
Notwithstanding that evidence, the City announced publicly that it was targeting only commercial properties in the 2018 reassessment. The Commonwealth Court agreed with the trial court that this decision was unconstitutional, finding that “[t]here is no lawful basis on which the City may choose to selectively reassess a certain sub-class of properties at current market value, while not similarly reassessing other sub-classes of properties in a given tax year. By singling out Taxpayers’ properties for reassessment based solely on their commercial nature, the City engaged in disparate treatment of sub-classes of properties within a taxing district.” Thus, the City’s decision to reassess commercial properties was unconstitutional.
Turning to the remedy, the Commonwealth Court noted that the appropriateness of refunds depends on whether the case involves a “facial” or an “as-applied” constitutional challenge. A facial challenge is a challenge to a statute or ordinance in which the plaintiff alleges that the law is de jure unconstitutional and therefore void. In an as-applied challenge, the plaintiff alleges that a particular application of a law or a particular practice is unconstitutional.
In the case of a facial challenge to a practice, Pennsylvania courts frequently have determined that refunds are not appropriate because the court’s decision is the first clear statement that the law itself is unconstitutional and the taxing authorities could presume the constitutionality of a law. Though, importantly, many of these decisions also imply that it would be unfair to force a taxing authority to repay funds it may already have budgeted or spent relying on a law or practice it believed constitutional.
But, in the case of an as-applied challenge, courts are more likely to order refunds, presumably because the taxing authority could have or should have known that its actions were unconstitutional. The Commonwealth Court in Duffield House held that the challenge by the commercial property owners to the 2018 reassessment was an as-applied challenge and that refunding the taxes to those owners who appealed their 2018 reassessments is the only suitable remedy, even if such refunds will place a financial burden on the City. The Commonwealth Court noted that the trial court’s decision to allow the City two years to pay the refunds allowed sufficient time for the City to plan for payment of the refunds to mitigate the harm to its budget.
The Commonwealth Court did overturn a procedural decision of the trial court in which the trial court dismissed the plaintiff’s administrative appeals as moot in light of its order to pay the refunds. The Commonwealth Court held that the trial court lacked jurisdiction with respect to the administrative appeals and that only the City Board of Revision of Taxes can dismiss the appeals, whether upon request by the property owners or sua sponte.
The City likely will appeal the Commonwealth Court’s order, both on the Uniformity Clause issue and as to whether refunds are the appropriate remedy. So, the fight is not necessarily over. But the Commonwealth Court’s decision shows that courts are willing to force the City to follow the law as written, even when the City argues that its practices are designed to raise revenue for the City’s budget. We will continue to monitor this case and related developments.
1: The Uniformity Clause 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.