The Use & Occupancy Tax: Applying the Proper Assessed Value

Most Philadelphians think of their tax bills as being levied by the City of Philadelphia. Not true in the case of the use and occupancy tax  (U&O) bills, as well as a few others, such as the liquor and cigarettes taxes. In the Philadelphia Code, and specifically Chapter 19, on taxes, there are entries for realty transfer taxes, for "mechanical amusement devices," and many others, but there is no entry for "U&O" taxes. The U&O tax is discussed in Chapter 19-1800, entitled "School Tax Authorization," as "Authorization of Realty Use and Occupancy Tax." 

The School District of Philadelphia authorizes the levy of U&O taxes, intended "to impose a tax for general school purposes on the use or occupancy of real estate within the School District of Philadelphia . . . for the purpose of carrying on any business, trade, occupation, profession, vocation, or any other commercial or industrial activity." Phila. Code § 19-1806(2)(a). Although it is imposed against the user or occupier of the real estate being used, the landlord is required to collect U&O taxes "as agent for the School District of Philadelphia." Phila. Code § 19-1806(5)(b).  That is why the U&O tax is known as a "trust" tax; it is collected and held in trust for one party, the School District, by another party, the property owner.  

How is U&O calculated? It is "measured by the assessed value of the real estate." Phila. Code §19-1806(4)(a). In fact, in order to challenge your U&O tax, you must challenge the assessed value of property as determined by the Philadelphia Office of Property Assessment ("OPA").  The assessed value used for this calculation is "the assessed value of the real estate as most recently returned by the Office of Property Assessment prior to the start of the Tax Year," which is "July first of any calendar year through June 30 of the following calendar year." This presents a problem. 

The Act of 1939, P.L. 1199, at 72 P.S. § 5341.1, et seq., otherwise known as the First Class County Assessment Law, provides that real property value assessments returned by the OPA every year "shall constitute the assessed value for tax purposes of real property located in the county for the next ensuing calendar year." 72 P.S. § 5341.8.  In other words, the value of a given real property by the OPA is not to be used "for tax purposes" (not real estate tax purposes, for tax, general, purposes), until the next calendar year.  The First Class County Assessment Law trumps the Philadelphia Code, which should require use of the assessed value certified and applicable for any given calendar year throughout the year, as opposed to switching the assessed value for levy of U&O tax every July 1st. Even beyond the legal technicalities, the use of the the most recent assessed value by the OPA is just nonsensical. 

The entire structure of tax assessments are purposefully intended to allow for taxpayers to challenge the assessed value of their properties in any given year prior to the time they actually have to pay the taxes levied on that property by issuance of the tax rate. The deadline to challenge a property's assessed value before the Board of Revision of Taxes ("BRT") is the first Monday in October each year, at which time the U&O tax has been levied against this value for three months. 72 P.S. § 5341.8(a).  If the value is too high, this system effectively allows the School District to, for months, take an advance on money that it never should have received. Moreover, the clock on the deadline for refund of this money, a statute of repose that has sharp teeth, is started about six months too soon, and there is no mechanism to require the School District to set aside a portion of this money for the taxpayer's protection as there is for real estate taxes. 72 P.S. § 5020-518.1(a)(requiring the taxing district to set aside 25% of the total tax paid under protest pending the determination of an assessment appeal).

Perhaps most importantly, while any downward adjustment in the assessed value of realty will automatically result in a credit on the real estate tax account for the subject property, there is no such automatic adjustment for taxpayers' U&O tax accounts. The best that the City can offer is to change the monthly amount due "as quickly as possible" on the monthly U&O tax bills. See U&O Tax Regs. § 202. Therefore, a U&O taxpayer cannot merely file an application for refund after a determination that the applicable U&O tax was too high, but must in fact, after appealing the assessed value of property before the BRT, file a subsequent petition before the Tax Review Board in order to get a decision that entitles the taxpayer to a credit or refund. 

The flip side, of course, is that where property is under-assessed, the U&O taxpayer is allowed the tax advantage of this under-assessment about six months earlier than would otherwise be the case. Still, to allow the U&O tax to be levied against a value that is not yet valid "for tax purposes," and, in fact, three months prior to the deadline to appeal such value, undermines the purpose of the statutory assessment scheme.



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