Pennsylvania Court Decision Bolsters Uniformity Challenges in Real Estate Tax Assessment Appeals

Judge Wettick's recent decision in the case of S&D Shah Corporation v. Allegheny County Board of Property Assessment Appeals & Review, GD 15-13517 (Al. Cty. Comm. Pl. 2015), provides an additional arrow in the quiver of property owners to challenge their real estate tax assessments and attempt to lower their taxes. The holding confirms and strengthens a string of Pennsylvania appellate court decisions that assessments must be uniform and brings a measure of reason and clarity to a confusing corner of Pennsylvania's real estate tax assessment law.

Article VIII, Section 1 of the Pennsylvania Constitution requires that "All 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." Uncertainty over how to implement this requirement has prevailed for the last 50 years in large part because of Pennsylvania’s arcane ratio system for calculating tax assessments based on a property's fair market value.

Pennsylvania counties administer real estate taxes on a "base year" system by establishing property values in the year a countywide reassessment is conducted. In tax appeals in subsequent years, the appellant may elect to challenge the assessment using either a base-year methodology or a current market value methodology. 72 P.S. 5020-511(d); 72 P.S. 5020-518.2(c). Under the base-year methodology, the appellant introduces evidence of the property’s value in the base-year and then adjusts that base-year value by the county’s established predetermined ratio (discussed below) to calculate the proposed assessment. In a current market value methodology appeal, the appellant provides evidence of the property’s value in the current year and then adjusts the current value by the county’s common level ratio (discussed below) to compute the proposed assessment. Judge Wettick's decision concerns the current market value methodology.

Each county has an "established predetermined ratio," which is the ratio that assessed value bears to fair market value. 72 P.S. 5020-102. For example, Allegheny County has a predetermined ratio of 100% while Washington County has a predetermined ratio of 25%. So, a property with a fair market value of $1 million would have an assessed value of $1 million in Allegheny County (100% of fair market value) and an assessed value of $250,000 in Washington County (25% of fair market value). Since assessments are lower in counties with lower predetermined ratios, tax rates must be higher to produce the necessary amount of tax revenue.

To test whether assessments in fact bear the stated ratio to fair market value, the Commonwealth's State Tax Equalization Board annually calculates the common level ratio for each county. 72 P.S. §5020-102). The common level ratio indicates the actual relationship between fair market value and assessed value for the county as a whole and is calculated by dividing the total recorded sale prices for all property in the county sold at arm’s length during the test year by the total assessed value of those properties. For example, the current common level ratio in Allegheny County is 1.09, meaning that on average across the County, a property that sold for $109,000 is assessed for $100,000. So, while the County’s predetermined ratio of 100% indicates that a property assessed for $100,000 is worth $100,000, the County’s common level ratio shows that a property assessed for $100,000 is actually worth $109,000.

Pennsylvania's assessment statutes provide that if the common level ratio differs from the predetermined ratio by more than 15%, then in a tax appeal, the assessment appeal board must first determine the property’s fair market value and then adjust it by the common level ratio to determine assessed value. 72 P.S. 5020-511(c). But under the statute, if the common level ratio differs from the predetermined ratio by 15% or less, no such adjustment is required. While the Pennsylvania Supreme Court held in Downingtown Area School District v. Chester County Board of Assessment Appeals, 913 A.2d 194 (Pa. 2006) that this 15% threshold is unconstitutional, because it creates a band of permitted non-uniformity, in-practice county tax appeal boards have often continued to refuse to apply the common level ratio unless it exceeds the 15% watermark.

But the 15% cutoff in statute can produce inequitable results which reveal the rationale behind the Supreme Court's holding in Downingtown. In Allegheny County, for example, if the tax appeal board determines that a property’s fair market value is $100,000, the assessed value could differ significantly depending on whether the common level ratio is then 1.16 or 1.14. At 1.16, which differs from the 100% predetermined ratio by more than 15%, the property’' current market value would be adjusted (i.e., divided) by the 1.16 common level ratio to produce an assessment of $86,200. But if the common level ratio were 1.14, which differs from the 100% predetermined ratio by less than 15%, the property's assessed value would not be adjusted by the 1.14 common level ratio, so the property's assessment would be $100,000, even though comparable properties across the county that are also worth $100,000 would be assessed at only $87,720.

Before the creation of the State Tax Equalization Board and the publication of countywide common level ratios, taxpayers in assessment appeals had to produce their own evidence of the common ratio between assessments and fair market values based on expert testimony and a comprehensive review of individual sales and assessments in the county. Pennsylvania courts embraced this practice as a means to achieve constitutionally required uniformity. See, e.g., Deitch Company, Appellant, v. Board of Property Assessment, 209 A.2d 397 (Pa. 1965) (in uniformity challenge, parties and court may rely on evidence concerning assessment-to-value ratio of similar properties in neighborhood); F.W. Woolworth Tax Assessment Case, 426 Pa 583, 235 A.2d 793 (Pa. 1967) ("Second, we hold that a valid study of the ratio of assessed value to market value covering the entire taxing district is the preferred way of determining a common level ratio.")

In S&D Shah Corporation, Judge Wettick reached the sensible result that to achieve constitutional uniformity, the fair market value always needs to be adjusted by the common level ratio to calculate the assessment, whether or not the common level ratio differs from the predetermined ratio by more than 15% and whether or not any party to the appeal requests the adjustment. Judge Wettick wrote:

"…it is hereby ordered that the Allegheny County Board of Property Assessment Appeals and Review apply the Common Level Ratio to its findings of fair market value where the appellant elects a current market value methodology. The Board shall apply the Common Level Ratio regardless of whether it is sought by any party. This Order of Court also applies to proceedings before the Board of Viewers."

This decision ends the controversy – at least in Allegheny County – regarding the appropriate way to determine assessed value for a given fair market value, so long as the appellant elects to contest the current market value rather than the base-year value. No longer will parties need to undertake painstaking and expensive reviews of record sales to calculate their own common ratios of value to assessment. No longer will uniformity be available only when non-uniformity in the county has become widespread (i.e., when the ratios differ by more than 15%). If other property owners in a county on average are assessed at a particular percentage of fair market value, then every other property owner should have the right on appeal to be assessed at the same percentage of value. Judge Wettick's decision, which was not appealed, has made that possible for the first time in Pennsylvania for the benefit of taxpayers. Kudos to fellow attorney Sharon DiPaolo for pursuing this important issue.