Jennifer Weidler Karpchuk, senior counsel with Chamberlain, Hrdlicka, White, Williams & Aughtry.

This year has proven to be a busy year in Pennsylvania's state and local tax (SALT) world, with some notable taxpayer wins and losses. This article will highlight the top three taxpayer SALT victories of 2019.

Taxpayer Uniformity Argument Wins (Again)

The uniformity clause of Pennsylvania's Constitution has a long and storied past, wrought with inequity in the form of special tax laws applicable only to particular industries or individuals. During the early 19^th century, such special tax laws began to thrive in Pennsylvania during a time when many states were trying to foster infrastructure development within their borders and engage in the boom of the Industrial Revolution. The Pennsylvania legislature directly financed many of these ventures and also provided indirect subsidies by bestowing preferential tax treatment upon certain industries. The railroad industry was especially successful in the field of taxation—so much so that in 1861 the Pennsylvania legislature voted to exempt the railroad industry from taxation altogether. Not surprisingly, this preferential treatment spurred anger among the people. This resentment ultimately pressured the legislature to authorize a constitutional convention to address the issue—resulting in the establishment of Pennsylvania's uniformity clause. The uniformity clause provides 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 rules."

Fast forward to present day, in the recent case of Valley Forge Towers N v. Upper Merion Area School District, 163 A.3d 962 (Pa. 2017), the Pennsylvania Supreme Court held that the uniformity clause requires that all property be viewed as a single class entitled to uniform treatment. Thus, all property, regardless of type, is a single class, thereby prohibiting a government from treating sub-classifications of properties in a disparate or different manner. Spurred by the decision in Valley Forge Towers, a number of property owners filed suit arguing that the city of Philadelphia violated the uniformity clause during 2018 when the Office of Property Assessment (OPA) reassessed commercial and industrial properties but not residential parcels. See Duffield House v. City of Philadelphia, No. 170901536. The Philadelphia Court of Common Pleas found that for 2018 the OPA's reassessments focused on nonresidential property while only reassessing 1% of residential properties. Thus, it held that effectively "the city conducted only a commercial reassessment for tax year 2018." During September 2019, based upon the clear discriminatory treatment of commercial properties, the court ordered the city's 2018 reassessments to be stricken and directed the city to issue refunds, plus interest, for the overpayment of taxes. The cases were recently appealed to the Pennsylvania Commonwealth Court and should be watched as they will be important in determining what methods municipalities are permitted to use in reassessing property in future tax years.

Ambiguities in Taxing Laws Construed in Favor of Taxpayer

Courts have long held that ambiguities in taxing statutes should be resolved in favor of a taxpayer and against a taxing authority. This axiom was again upheld in the 2019 case of S & H Transportation v. City of York, Pa. S.Ct., No. 8 MAP 2018, 07/17/2019. S&H was a freight broker that received money from its customers for arranging the shipment of commercial goods with freight carriers on the customer's behalf. S&H deducted its commission from the money it received and remitted the remainder to the freight carriers to pay the carrier's shipping fees. Pursuant to the Pennsylvania Local Tax Enabling Act (LTEA), municipalities cannot "levy, assess and collect a mercantile or business privilege tax on gross receipts or part thereof which are: charges advanced by a seller for freight, delivery or other transportation for the purchaser in accordance with the terms of a contract of sale." The city's regulation excluded from taxation of a business's gross receipts any: "freight delivery or transportation charges paid by the seller for the purchaser." The issue before the court was whether York's Business Privilege Tax (BPT) applied to all of the money S&H received, or only to the company's commission.

Initially, the Commonwealth Court upheld imposition of the BPT on all sums collected, including those paid for delivery and transportation charges, siding with York and finding that the exclusion was limited to those who were sellers of goods. In appealing that decision, the taxpayer argued that York's BPT regulation excludes "freight delivery or transportation charges paid by the seller for the purchaser," from business privilege tax, and that the regulation did not limit the class of individuals who can be considered sellers to only those who are sellers of goods. Although York, which drafted the regulation, had a much different interpretation, the city submitted no legislative history to support its suggested construction. These different possible interpretations created ambiguity.

Ultimately, the Pennsylvania Supreme Court sided with the taxpayer in finding that while the LTEA limits the class of gross receipts that may be excluded from local taxation, the class of gross receipts excluded from taxation by the BPT regulation is broader, and includes all freight delivery charges "paid" by a seller for the purchaser. The court found this would include S&H because S&H pays the delivery or transportation costs for the purchaser of its services, which can be construed as paying such charges "for the purchaser." Further, the court noted that a tax provision that excludes certain property, income or activities from taxation must be strictly construed in favor of the taxpayer and against the city. Therefore, the Supreme Court reversed the Commonwealth Court and held that the taxpayer was entitled to exclude the amount of the delivery costs paid by shippers who purchased the taxpayer's services from gross receipts for purposes of the BPT.

While the decision is arguably limited in its immediate scope and application, it further solidifies the broadly applicable adage that ambiguities in the statute should be construed in favor of the taxpayer and against the taxing authority.

Successful Equal Protection and Due Process Clause Challenge

Typically, constitutional SALT challenges revolve around the uniformity clause or the U.S. Constitution's commerce clause. However, a 2019 taxpayer win instead looked to the equal protection and due process clauses of the Fourteenth Amendment of the U.S. Constitution. Sands Bethworks Gaming v. Pennsylvania Department of Revenue, 207 A.3d 315 (Pa. 2019), involved amendments to Pennsylvania's gaming law, effective Jan. 1, 2018, which imposed a supplemental assessment upon Category 1, 2, and 3 casinos located in the state on slot machine revenue. The supplemental assessments were used to fund an account that would distribute revenue from the tax primarily to underperforming slot machine facilities for use in marketing and capital development. In practice, this resulted in some larger casinos receiving little or no distribution despite paying far more than some of the smaller casinos that were slated to receive distributions.

The casino raised challenges based upon the equal protection and due process clauses, as well as the uniformity clause—however, the majority's opinion focused on the Fourteenth Amendment and explicitly stated that since it found for the taxpayer on the Fourteenth Amendment issue, it saw no reason to delve into the uniformity clause issue. In analyzing the Fourteenth Amendment, the court first examined two cases: Thomas v. Kansas City Southern Railway, 261 U.S. 481 (1923) and Morton Salt v. City of South Hutchinson, 159 F.2d 897 (10th Cir. 1947). In Thomas, the state created a drainage district and imposed a 6% tax on the property in that district, which was used to pay for improvements. The taxpayer owned railroad tracks in the district and asserted that it would pay a significant portion of the costs of the improvements in the district but would not benefit from them since its tracks were above flood level. Noting the great disparity in treatment, the U.S. Supreme Court held that the tax was "grossly discriminatory" in violation of the equal protection clause.

Similarly, in Morton Salt the taxpayer would have paid a significant share of a tax for local improvements that would not enhance its property value. The city sought to finance a waterworks by issuing bonds, which were to be paid through a pro rata assessment of all property in the city. However, the taxpayer owned 46% of the assessed value in the city and would not have benefited from the waterworks. The U.S. Court of Appeals for the Tenth Circuit concluded that an injunction should be issued, reasoning that there was a serious constitutional question of law relating to whether the taxpayer's payment of 46% of the total tax burden was "so grossly disproportionate and discriminatory as to amount to a taking of property without due process of law." Thus, based upon analogous fact patterns, the courts found a violation of the Fourteenth Amendment on two different grounds—the U.S. Supreme Court in Thomas relied upon the equal protection clause, while the Tenth Circuit in Morton Salt relied upon the due process clause. In a footnote in Sands, the Pennsylvania Supreme Court noted that there was "uncertainty" among courts over which clause of the Fourteenth Amendment was implicated.

After addressing the inconsistency in the case law, the majority examined Allegheny County v. Monzo, 509 Pa. 26, 500 A.2d 1095 (1985), which involved an ordinance that imposed a 1% tax on all hotel room rental income in Allegheny County to fund the building of a convention center in Pittsburgh. The convention center would have resulted in increased business for hotels in Pittsburgh, however it would not have resulted in additional business for hotels in remote parts of the county. A taxpayer that owned a hotel in a distant part of the county challenged the tax and, in invalidating the tax, the Monzo court reasoned that where the benefit received and the burden imposed are "palpably disproportionate, a tax is not only a taking without due process under the Fourteenth Amendment to the U.S. Constitution, but also an arbitrary form of classification in violation of equal protection and state uniformity standards."

Ultimately, in the Sands majority's view, Monzo was dispositive. In finding in favor of the taxpayer, the court held that the small number of casinos subject to the assessment, coupled with the inverse relationship between the casinos paying the most and receiving the least, indicated that the benefit received and the burden imposed were "palpably disproportionate" and therefore inconsistent with the Fourteenth Amendment. Because the funds collected had not yet been distributed, the court ordered the refund of all assessments paid.

A number of justices issued concurring opinions related to the uniformity clause. Typically, the uniformity clause focuses upon the imposition and collection of taxes. Instead, in Sands, the uniformity issue alleged that while the tax itself was uniform, the distribution of the fund it created was not. The concurring opinions would have sided with the taxpayer and considered this to be an extension of the uniformity clause. Despite the fact that the majority did not rule upon the issue in Sands, the argument and concurring opinions' analyses may be applicable to future tax cases. Further, the majority's analysis of the equal protection and due process clauses has widespread application outside of the gaming world to any tax assessment that may be viewed as "palpably disproportionate."

As 2019 comes to a close and these three cases round out the top taxpayer wins of the year, we can look forward to 2020 and the corresponding victories to be had in the coming year.

Jennifer Weidler Karpchuk is a senior counsel at the law firm Chamberlain, Hrdlicka, White, Williams & Aughtry in Philadelphia. She focuses her practice on state and local tax compliance and litigation, and represents clients in a range of taxation matters with an emphasis on the minimization of state and local tax obligations. Contact her at [email protected] or 610-772-2314.