Wilson Partners v. BD. OF FINANCE & REV.

• Decision Date: 01 October 1999
• Citation: 558 Pa. 462,737 A.2d 1215
• Parties: WILSON PARTNERS, L.P., Appellant, v. COMMONWEALTH of Pennsylvania, BOARD OF FINANCE AND REVENUE, Appellee. Academic Properties, Inc., Appellant, v. Commonwealth of Pennsylvania, Board of Finance and Revenue, Appellee.
• Court: Pennsylvania Supreme Court

558 Pa. 462

737 A.2d 1215

WILSON PARTNERS, L.P., Appellant, v. COMMONWEALTH of Pennsylvania, BOARD OF FINANCE AND REVENUE, Appellee.

Academic Properties, Inc., Appellant, v. Commonwealth of Pennsylvania, Board of Finance and Revenue, Appellee.

Supreme Court of Pennsylvania.

Submitted July 12, 1999.

Decided October 1, 1999.

Joseph C. Bright, Kevin J. Moody, Wolf Block Schorr & Solis-Cohen, Philadelphia, for Wilson Partner, L.P.

Ronald H. Skubecz, Harrisburg, for Office of Atty. Gen.

Jill M. Strouss, Pa. Dept. of Revenue, Harrisburg, for PA Dept. of Revenue.

Before FLAHERTY, C.J., and ZAPPALA, CAPPY, CASTILLE, NIGRO, NEWMAN and SAYLOR, JJ.

OPINION

SAYLOR, Justice.

In these consolidated direct appeals, Appellants present constitutional challenges to the imposition of a tax at the one-percent rate established by the Pennsylvania Realty Transfer Tax Act within the context of a real estate transfer in which one party to the transaction is exempt.

In late 1993, Appellants Wilson Partners, L.P. and Academic Properties, Inc. (collectively, "Taxpayers") entered into separate, unrelated agreements with the Federal Deposit Insurance Corporation, as receiver for a failed bank, for the purchase of various parcels of property located in Chester and Philadelphia Counties. In early 1994, pursuant to its agreement, Appellant Wilson Properties, L.P. ("Wilson") took title to the Chester County property and, in accordance with the Pennsylvania Realty Transfer Act,¹ paid realty transfer tax of $24,380.00 to the Department of Revenue. Such payment represented one percent of the purchase price and the entire tax imposed by the Commonwealth. In February of 1994, Appellant Academic Properties, Inc. took title to the Philadelphia-based properties and paid transfer taxes of $69,920.00, also representing one hundred percent of the state realty transfer taxes imposed. Taxpayers subsequently filed petitions in the Department of Revenue seeking full or partial refunds on the ground that imposition of the taxes constituted a violation of their rights under the state and federal constitutions. Specifically, Taxpayers contended that the Act unconstitutionally imposed an unequal tax burden upon a nonexempt party entering into a taxable real estate transaction with an exempt party. According to Taxpayers, such inequality resulted from the fact that a nonexempt party must bear exclusive liability to the Commonwealth for the taxes, whereas parties transacting with other nonexempt parties share the liability to the Commonwealth jointly and severally (Taxpayers characterized this circumstance as "doubling" their liability). Taxpayers claimed that this asserted inequality constituted discrimination violative of the supremacy clause of the United States Constitution, U.S. CONST. Art. VI, cl. 2, as well as the uniformity clause of the Pennsylvania Constitution, PA. CONST. Art. VIII, § 1, and the equal protection clause under the United States Constitution, U.S. CONST. Amend. XIV. The Department of Revenue denied the petitions, and the Board of Finance and Revenue affirmed.

The Commonwealth Court affirmed in a published decision and entered judgment in favor of the Commonwealth. Wilson Partners, L.P. v. Commonwealth, 723 A.2d 1079 (Pa.Cmwlth. 1999). It opened its analysis by noting that the Act uniformly imposes a single tax upon all transfers, with liability for the full amount of the payment generally being shared jointly and severally among the parties to the transaction, and with the parties being free to discharge such liability in any agreed manner. Although the scheme imposes exclusive liability upon a party transacting with an exempt entity such as a governmental unit, the Commonwealth Court rejected Taxpayers' claim that this results in either disparate treatment or inappropriate classification. To the contrary, the Commonwealth Court concluded that parties who transact with the United States simply are "no worse off" than parties who transact with nonexempt parties. Wilson Partners, 723 A.2d at 1084. It drew this conclusion based upon the following logic:

Contrary to the Taxpayers' contentions, the exempt status of one party to a real estate transfer transaction does not result in the other party paying twice the amount of tax otherwise owed by that party. As we stated above, both parties to a transaction are liable for the full amount of the transfer tax, and the classification of governmental parties as exempt does nothing to increase the liability of a nonexempt party. As a practical matter, in most taxable transfers the parties have apportioned the tax liability by agreement. Where the parties have not agreed to apportion the amount of the transfer tax, the liability inevitably falls upon the party that presents the instrument for recording; that party may then seek contribution from the other party.

Wilson Partners, 723 A.2d at 1083. The Commonwealth Court also concluded that any classification resulting under the Act rested upon a reasonable distinction between governmental and nongovernmental parties to real estate transfer transactions; thus, the Act conformed to principles of uniformity and equal protection. This direct appeal followed.²

In the Act, the General Assembly has imposed a one-percent tax upon certain transfers of real property in the Commonwealth.³ Liability to the Commonwealth is ordinarily shared jointly and severally among the parties to the transaction. 72 P.S. § 8102-C; see also 61 Pa.Code § 91.111. Where, however, the United States or the Commonwealth (or their instrumentalities, agencies or political subdivisions) are parties, they are exempt from the tax, 72 P.S. § 8102-C.2; see also 61 Pa.Code § 91.192.⁴ In such instances, liability to the Commonwealth rests exclusively upon the nonexempt party or parties to the transaction, since the exempt status of one party does not relieve the other parties from liability for the full amount of the tax. 72 P.S. § 8102-C.2; see also 61 Pa.Code § 91.192(b). The liability of a nonexempt party may be discharged by the parties as they may agree; however, such contractual apportionment is without prejudice to the right of the Commonwealth to enforce the obligations of the nonexempt parties. See 61 Pa.Code § 91.192(b).

In this appeal, Taxpayers maintain that the Act discriminates against parties dealing with the federal government in violation of the federal supremacy clause, as well as that the asserted unequal burden imposed by the Act results in a violation of principles of uniformity and equal protection under the Pennsylvania and United States Constitutions.

With regard to the claim of impermissible discrimination, the reasoning employed by the United States Supreme Court in Washington v. United States, 460 U.S. 536, 103 S.Ct. 1344, 75 L.Ed.2d 264 (1983), is of relevance. In Washington, the United States brought an action seeking to invalidate a state statute generally imposing a sales tax for construction materials upon owners of construction projects, but, in the case of a federal project (in which the owner was exempt), shifting the legal incidence of the tax to the contractor. The government argued that such statutory scheme discriminated against federal contractors in violation of the federal supremacy clause,⁵ since contractors engaged in private construction projects were not directly subject to an equivalent tax. In considering the government's claim of discriminatory treatment, the Court directed its focus to the economic burden of the tax upon the transaction between the federal government and its contractor, rather than upon the differentiation by the state in selecting the entity subjected to the legal incidence of the tax. See Washington, 460 U.S. at 545,

103 S.Ct. at 1349 (stating that "[t]he important consideration, therefore, is not whether the State differentiates in determining what entity shall bear the legal incidence of the tax, but whether the tax is discriminatory with regard to the economic burdens that result"). Thus, the Court's concern centered, not upon the fact that federal contractors bore legal responsibility to the state for a tax that other contractors did not bear directly, but rather, upon the economic impact of the tax upon transactions involving federal contractors vis-à-vis the impact upon transactions involving contractors engaged in private construction. See id. at 545-46, 103 S.Ct. at 1350 (stating that "[t]he State does not discriminate against the Federal Government and those with whom it deals unless it treats someone else better than it treats them"). The Court stated that where transactions are subject to an equivalent rate of taxation, but the state merely shifts the legal incidence of the tax in a non-discriminatory manner, leaving the parties free to apportion the economic burden of the tax among themselves, there is no impermissible discrimination. Id.⁶

Applying the principles to circumstances before it, the Washington Court found that, although the Washington sales tax scheme shifted the legal incidence of the tax from project owner to contractor in circumstances where the property owner was exempt, the scheme was not discriminatory. According to the Court, since the taxing statute imposed an equivalent rate of taxation upon all sales of construction materials and did not deprive the parties of the opportunity to apportion among themselves the economic burden of the tax, it thus required federal contractors to bear no greater tax burden than was shouldered by private buyers of construction work or which could be passed on by them to their contractors. Id. at 545, 103 S.Ct. at 1349.⁷See generally State Dep't of Fisheries v. DeWatto Fish Co., 100 Wash.2d 568, 674 P.2d 659, 662 (1983)

(stating, by analogy to Washington in the context of a commerce clause challenge, that "the identity of the party bearing the legal incidence of the tax shifted to reflect the fact that certain parties were not subject to...