With over $1.8M annually at stake, MacDonald Illig secures unanimous decision on appeal upholding prior grant of summary judgment which held that client is immune from property taxes.
MacDonald Illig recently secured a unanimous decision from a seven member en banc panel of the Commonwealth Court in favor of its client, the Erie County Convention Center Authority. The decision held that, as a matter of law, two hotels owned by the Authority on the Erie Bayfront are immune from local real property taxes. The amount at stake was over $1.8 million per year in real estate taxes.
Background
The Authority was created under Pennsylvania law as an instrumentality of the Commonwealth to promote business, industry, commerce, and tourism in Erie County. In particular, the Authority had lead a transformation of Erie’s bayfront from a blighted shell of its once thriving industrial past—filled with a sand and gravel plant, abandoned grain elevators, an abandoned coal fired power plant, abandoned docks, and a shingle plant—to today’s preeminent destination for tourists and visitors. It had done so by constructing "Bayfront Landing" on the Erie bayfront, consisting of the Bayfront Convention Center, two hotels, two parking garages and three restaurants. In addition, the Authority had recently renovated the Erie Insurance Arena, UPMC Park, and The Warner Theatre in downtown Erie. As a result of the Authority’s efforts, these venues generate nearly $90 million in direct spending each year in the community and hundreds of thousands of dollars in fees and taxes paid to the local taxing bodies each year.
The Case
In 2016, the City of Erie and the School District of the City of Erie filed a tax assessment appeal, claiming that the Sheraton Erie Bayfront Hotel and the Courtyard Erie Bayfront Hotel—the Authority’s two hotels that are connected to the Authority's Bayfront Convention Center—should be subject to local real property taxes. The theory put forward by the taxing bodies was that the hotels should be taxable because the Authority rented hotel rooms to the general public in addition to persons attending events at the Bayfront Convention Center, and was therefore engaged in taxable commercial activity rather than operating a convention center. The Erie County Board of Assessment appeals rejected this argument and determined that the hotels were immune/exempt. The taxing bodies appealed that decision to the Erie County Court of Common Pleas, where MacDonald Illig obtained summary judgment in favor of the Authority. The taxing bodies then appealed to the Pennsylvania Commonwealth Court.
The Commonwealth Court unanimously ruled in the Authority’s favor, finding that under Pennsylvania law, the Authority’s hotels are immune from real estate taxes because building and operating the hotels is within the Authority’s statutory purpose—to promote business, industry, commerce, and tourism.
The Takeaway
The essence of the argument put forth by the City and School District was that the hotels could be taxed because some hotel patrons were not also attending the Bayfront Convention Center to which the hotels are attached. The key holding in the case is that the Court rejected this novel "percentage of use" test and instead focused on whether the construction and operation of the hotels promoted the statutorily defined purposes of the Authority. Had the Court accepted the percentage of use test proposed by the taxing bodies, many municipal authorities throughout the Commonwealth would have been subjected to claims by local taxing bodies based on the identity and nature of the individuals and entities using their services. Property owned by such municipal entities which had previously been considered tax exempt without question would now be vulnerable to challenge on the grounds that the use of the property by some users fell outside the core purposes of the authority. For example, would a restaurant within a museum become taxable because some of its patrons were not persons patronizing the museum itself, but were merely dining at the restaurant? It is readily apparent that adoption of a percentage of use theory would have had far reaching implications for many municipal authorities throughout the Commonwealth.