Historically, regulated public utilities in Pennsylvania have not received tax bills from local taxing
jurisdictions.  Rather, the state Department of Revenue imposes an annual uniform millage rate upon
the "state taxable value" of utility realty.  The Department of Revenue distributes these utility tax
payments among the local taxing jurisdictions throughout the Commonwealth.

Act 4-1999 effected a sea change in the definition of "state taxable value" of utility realty.
Previously, this was a state determination and was based upon original cost, less allowable
depreciation and depletion.  State taxable value is now based upon current market value.
The present definition of "state taxable value" is as follows:

"Current market value calculated by adjusting the assessed value for county real estate tax purposes for the taxable year for the common level ratio of assessed values to market values of the county as established by the State Tax Equalization Board after July 1 of the taxable year.  During the pendency of an assessment appeal, the term means the amount which the public utility has stipulated or alleged as the current market value for the taxable year."

Act 4-1999 Sec. 1101-A(4), 72 P.S. § 8101-A(4)

Moreover, the determination of current market value is by local assessing authorities.

The significance of this change is apparent.  Under the prior law, a public utility may have had little
concern about local county assessments because they did not affect the amount of the tax and to the
Department of Revenue.  Post-Act 4, localcounty assessments will determine the amount of a utility’s
"state taxable value" and the resulting imposition of the tax bill issued by the Pennsylvania Department
of Revenue.

The effective date of Act 4 was retroactive to January 1, 1998.  Local assessment offices were required,
not later than July 1, 1999, to notify all public utilities of the assessment, valuation and predetermined
ratio pertaining to utility realty for the current and prior fiscal year; and public utilities had the right to
file appeals from these assessments on or before July 30, 1999.  These hurried procedures
predominantly served fiscal desires and provided minimal realistic due process.  County assessment
office notification to public utilities was not always uniform or complete and many public
utilities—especially smaller ones—were caught unaware of the profound change in the law and a need
for prompt appeal of excessive county assessments.

Important Exclusion from Definition of PURTA "Utility Realty":
Act 4 of 1999 provides that after December 31, 1999, land and improvements to land that are
indispensable to the generation of electricity, located within this Commonwealth that at the end of the
taxable year are owned by a public utility or its affiliate either directly or by or through a subsidiary and
are used or in the course of development or construction for use, in whole or in part, in the furnishing,
including producing, storing, distributing or transporting, of public utility service will no longer be subject
to PURTA.  [Author’s Note: Beginning in 2000, real estate which is used for electrical
generation will be assessed by the counties and taxed locally under existing county
assessment codes. The valuation of these properties for assessment will raise complex
factual and legal issues.  See Determination of "Market Value" of Utility Realty, below.]

Although public utilities must continue to file annual reports with and pay utility realty taxes to the
Pennsylvania Department of Revenue, assessment appeals of "state taxable value" now will be filed in
the local counties in the manner provided by law for appeals from assessment of real estate by other
taxpayers.  However, the Public Utility Realty Tax Act establishes certain definitions and procedures
peculiar to "utility realty" assessments and appeals:

Exempt Property:

a. Easements or similar interests;

b. Railroad beds or rails, land owned or used by a railroad as a right-of-way for a rail line, and superstructures thereon.
This sub-clause does not include stations, buildings, warehouse, shops, engine houses, plants or miscellaneous structures, or the land appurtenant thereto.

c. Pole, transmission tower, pipe, rail or other lines whether or not said lines are attached to the land or to any structure or enclosure which is physically affixed to the land.

Public Utility’s Liability for Assessment Appeal Costs:
Act 4-1999, in Sec. 1105-A(e) provides that in an administrative or court proceeding regarding the local assessment of utility realty, a local taxing authority that has substantially prevailed may be awarded reasonable costs incurred in relation to the administrative or court proceeding.  [Author’s Note: Presumably, these "costs" would include appraisal costs, expert witness fees and attorneys fees. Importantly, the Act does not impose similar costs upon a taxing jurisdiction where the public utility prevails.]

Tax Payments During the Pendency of Assessment Appeal:
During the pendency of an assessment appeal the utility may report as "state taxable value" the amount which it has stipulated or alleged as the current market value for the taxable year. [Author’s Note: This differs from the general assessment codes which require a taxpayer to pay taxes on the appealed assessment during the pendency of appeal proceedings.]

Change-Notice Assessment Appeal:
By April 1 of each year, the assessment office is to provide the public utility written notice of a new or changed assessment, valuation and predetermined ratio and the requirements to appeal the assessment, valuation or ratio.  [Author’s Note: Under existing assessment codes, assessors may give notice of interim assessment changes at any time and, in all events, by July of each year.  Significantly, the State Tax Equalization Board does not issue its certification of a county’s prior year common level ratio until June of the succeeding year.  A taxpayer who wishes to appeal a changed assessment must do so within thirty days following receipt of the new assessment notice; and the applicable common level ratio will be that which is most recently certified by STEB.  Thus, a public utility which determines to appeal an April 1 assessment change-notice will have the common level ratio of the second preceding calendar year.]

Annual Assessment Appeal:
PURTA permits a public utility to file an assessment appeal with local assessing authorities in the same manner as other taxpayers.  For those counties other than Allegheny and Philadelphia, this would be on or before either August 1 or September 1.  See County Assessment Office Information.  However, PURTA provides that, on or before each May 1 a public utility must pay its tentative tax which may be based upon the "state taxable value" for the taxable year.  Also, the Department of Revenue on or before August 1 of each year shall calculate the millage rate applicable to the taxable year.  As a practical result, a utility which seeks to challenge its county assessment for the current year may wish to file the appeal prior to May 1 and take advantage of the PURTA provision which permits it to stipulate or allege its determined current market value for purposes of reporting to the Department of Revenue.  As in the case of change-notice appeals, the annual appeal filed prior to May 1 will call for the application of the county’s common level ratio for the second preceding calendar year (unless the STEB determines to certify the prior year’s common level ratios at an earlier date).

Existing assessment legislation and court decisions provide that market value may be determined by any
one of, or a combination of three valuation methodologies:  income approach, cost-depreciation
approach and sales comparison approach.  Also, traditional assessment decisions have clarified that
valuation is to be based upon a market value of the real estate and not the valuation of the business
which occupies or operates the real estate.  Moreover, a determination of market value is dependent
upon what the real estate would be expected to sell for in the open marketplace between a willing
buyer and a willing seller.  See Market Value in Terminology and Definitions.  Specifically, the test is
value-in-exchange and not value-in-use to a particular owner or user.

PURTA excludes machinery and equipment from the definition of utility realty subject to assessment. 
This is consistent with the several Pennsylvania county assessment codes which also exclude industrial
machinery and equipment from inclusion within assessable real estate.

Although much utility realty is of a nature which is relatively commonplace and can be evaluated in a
normal fashion, some utility real estate is highly specific in design and function.  For purposes of
assessment determination, Pennsylvania appellate courts have not yet specifically adopted a
"special purpose" or a "single purpose" property doctrine.  [Author’s Note: For those states which
have adopted a "special purpose" property doctrine for assessment determination,
unusual properties which are (a) uniquely designed for a specific use, (b) which are not
ordinarily sold in the marketplace and (c) which cannot be converted to other uses without
an expenditure of substantial sums of money may be valued by an approach based upon
reproduction or replacement cost less accrued depreciation and obsolescence. 
Importantly, calculations of accrued depreciation/obsolescence usually are not
market-based, but upon the evaluator’s determination of condition and diminished
functionality—often a highly subjective analysis.]

Where there exist market data of sales of public utility real estate, the sales comparison approach to
valuation will be useful.  Where the sale of real estate is combined within other non-real estate assets
(such as machinery and equipment, going business or exempt property) the contest will revolve around
the appropriate allocation of the total purchase price to the assessable real estate portion.

A more difficult and questionable analysis will arise if the taxpayer or taxing authority seeks to allocate
a portion of a utility’s income or revenues to the taxable real estate component of total assets.
A "going business" has both tangible assets (e.g., real estate, equipment and other personal property)
and intangible assets (e.g., established customers, good will, management expertise, experienced work
force, patents and trademarks and contracts).  The flow of total revenues and income for the entire
enterprise arise from the entire mixture of all these tangible and intangible assets.  Except in cases of 
hotel/motel valuations where accepted and standardized accounting practices exist for income
allocation, courts generally reject speculative attempts to value assessable real estate by an income
approach which seeks to identify a specific amount of an undivided stream of business income to the
contributory value of a specific property asset.

Nevertheless, local assessing offices and, ultimately, the courts are charged with the responsibility of
determining "current market value" of assessable "utility realty."  The unusual nature and design of
some utility real estate will require different analyses than normally are brought to bear with other
business real estate.  In contested utility property appeals, the parties will be well advised to employ
appraisers and counsel who are experienced in assessment valuation matters.

If and when court decisions are issued on the market valuation of utility realty they will be posted on
Assesslaw at What’s New.