Personal Property Tax



1. As you may know, Thursday the Mercer County Commissioners intend to adopt a resolution to reassess the 4 mill personal property tax for the years 1993 through 1996 inclusive. This is required by reason of recent appellate court decisions which I will explain in a moment. The effect will be to tax stocks that were previously exempt because they were subject to the capital stock or franchise taxes for state purposes. At the same time, the Commissioners intend to adopt a resolution to give every taxpayer the option to sign a mutual release with the County , the effect of which will be to release any claim for a tax refund for the years in question in exchange for the County releasing any taxpayer from having to file a new return and pay any additional tax that might thereby be due. Notices will promptly be mailed to taxpayers explaining all this.

          2. I have been requested, as County Solicitor in charge of litigation and having lived through some of these battles in recent years, to explain briefly to the media the history of this matter, both the legislative history and the judicial history , and why it is necessary that the County now take this action. The Commissioners felt it might be helpful to the media to have some advance information and background on this rather complicated situation so that the coverage is both accurate and constructive in advising the general public. At the conclusion of my remarks, I will field any questions you may have on matters I have covered, and I will then be followed by Mr. Michael P. Deforest, Director of the Mercer County Board of Assessment Appeal, who has the tremendous job of doing all of the paperwork. He will inform you concerning the arithmetic and practicalities here in our situation.

II. Therefore, let me give you some background on this situation, and review briefly and in a chronological fashion, first the legislative history of the personal property tax in Pennsylvania and then, secondly, the recent judicial history of it up to the moment.

A. The Legislative History

1. The starting point is 1831 when a law was passed requiring all counties to levy a 4 mill tax on all corporate stock and other intangibles with certain exceptions. Note: This was mandatory and remained as such, as you will see, for the next 147 years, until 1978.

                    2. In 1840, Pennsylvania enacted its first capital stock tax applicable only to Pa. corporations .

                    3. In 1868, that tax was extended to reach out of state corporations that were doing business in Pennsylvania.

                    4. In 1889, to alleviate the double taxation (viz, personal property tax and capital stock tax), the county's personal property tax was amended to exempt stock that was subject to the capital stock tax.

                    5. In 1935, a "franchise" tax was enacted as a substitute for the capital stock tax on foreign corporations doing business in Pennsylvania.

                    6. In 1939, the personal property tax was then amended to exempt stock taxable either by the capital stock tax or the franchise tax.

                    7. In 1978, the personal property tax, as I mentioned earlier , became discretionary instead of mandatory. I might note at this point that roughly two thirds of our 67 counties then, or in the years since, discarded the tax. Mercer County kept it.

                    8. Finally, in 1995, the 4 mill mandate, as such, became a discretionary amount item, that is to say, that became the maximum, and you could levy less if you wanted to tax personal property.

                    9. Therefore, to set the stage, we come to 1994 and 32 of our 67 counties still have the personal property tax, including Mercer County.

         Allegheny, Butler, Indiana, Schuykill repealed it for tax year 1995 and then Adams, Columbia, Crawford, Dauphin, Lancaster, Lebanon, McKean, and York then repealed it for tax year 1996.

          So, as of 1996, when everything hit the fan, Mercer County was one of 20 counties that still had the tax. I would conclude this chronology by saying that in 1994 the tax collected by the counties named was over 95 million dollars; in 1995 it was over 70 million, and in 1996 was over 85 million, or a total for those three years of almost 231 million dollars.

          By far the biggest collector was Montgomery County with over 68 million dollars, followed by Philadelphia with almost 44 million. Here in Mercer County 1.7 million.

          B. Now to the judicial history of the personal property tax

                    1. On February 21, 1996, the U.S. Supreme Court announced its decision in Fulton Corporation v. Faulkner. In that case, the court held the North Carolina personal property tax was unconstitutional on the grounds that it discriminated against interstate commerce in violation of the commerce clause of the U. S. Constitution. The case was complicated and the tax was different than the Pennsylvania tax in that it involved the complicated reward for shareholders of utility companies which did business in North Carolina with a percentage of income deduction and so forth. The theory of the decision, however, was clear and that was the holding that it was an unconstitutional fostering of investment among North Carolina residents in domestic companies at the expense of out of state competitors.

                    2. That case was close enough to forecast the doom of our 165 year old personal property tax. Almost immediately two cases arose in Pennsylvania somewhat parallel which brought us to where we are today, and we were right in the middle of the first one.

          3. The first case was the late Judge John Q. Stranahan suit here in Mercer County that I handled for five years through all the courts .

  1. By background, he had been upset, personally, since 1978 because the Mercer County Commissioners, which involved four different boards over that period of time, would not do away with the personal property tax here in Mercer County . It was called an honest man's tax because it was very difficult to enforce and little attempt was made to.

  2. Therefore, when the Fulton case came down, even though he was still an active senior judge, hearing cases here, and elsewhere, on May 2, 1996, he and his older brother, James A. Stranahan, III, using the Stranahan law firm, filed a Complaint here against the Mercer County Commissioners seeking to accomplish three things:

       (1) Declare our tax unconstitutional.

       (2) Seek a refund with interest for the taxes they have paid over the last six years (1990 through 1996).  (However the refund law clearly said you cannot go back more than three years.)

       (3) More importantly, from our present position, they also tried to assert a class action of behalf of everyone who had paid the personal property tax, even though no refund claims were filed by most.

         4. At about the same time, the Annenberg case started in Montgomery County which I will tell you about in a minute. Unlike the Stranahan case here, it was not a class action, but it involved millions of dollars and ultimately set the rules on the substantive issues involved.

          5. To make a long story short, we litigated the Stranahan class action issue and won, and the other substantive issues were deferred awaiting the Annenberg case out of Montgomery County.

          Our first victory in the Stranahan case was October 18, 1996, when a visiting senior judge assigned to hear the case, the Honorable Calvin E. Smith, sustained my position that you could not file a class action to recover a tax refund.

The Stranahans immediately appealed to the Commonwealth Court and by its decision rendered July 7, 1997, they affirmed Judge Smith. Stranahan promptly then appealed to the Pennsylvania Supreme Court, and by that court's order entered September 12, 1997, it deferred a decision on whether to take the case until the pending Annenberg decision was filed.

          Finally, after Annenberg was decided, the Pennsylvania Supreme Court on August 29, 2000, dismissed the appeal of Stranahan. In the meantime, Judge Stranahan sadly had passed away.

          The net effect of all of this is two fold. First, we established new law in Pennsylvania that you cannot maintain a class action for a tax refund. Secondly, we made it possible to pursue our present effort to resolve this mess now without bankrupting the County.

          6. Let me now complete this with the chronology of the Annenberg case and the rules that it gave us.

          (a) In 1996, when the North Carolina Fulton case first came down, Walter Annenberg sued Montgomery County both personally and as his father's trustee to declare the personal property tax unconstitutional and to get a refund of 3.3 million dollars in taxes he had paid just for the year 1996. Remember that Montgomery County , like Mercer County, was one of the twenty counties left still levying the tax in 1996.

          (b) I will not detail the long chronology of this case other than to say that the Pennsylvania Supreme Court finally decided the case on June 1, 2000. However, the decision remained in limbo until October 30, 2000, when the United States Supreme Court denied Annenberg's petition for certiorari and the decision thus became final and binding.

          (c) So, the Pa. Supreme Court's decision is now solid law, and here is what it held. It is a mixed bag, witness the fact that Annenberg unsuccessfully appealed it. In layman's language, it was both good news and bad news.

          First the good news: Montgomery County did not have to give Walter back his 3.3 million dollars, automatically, because it held the Pennsylvania personal property tax is not unconstitutional as such! Translating this, the court has instructed Mercer County we do not have to make refunds for those who claimed them, automatically.

Now the bad news -2 points:

1. The 168 year old personal property tax provision that taxes only stock of out of state unregistered corporations and exempts Pennsylvania corporate stock is discriminatory and unconstitutional, and must end.

2. Mercer County and others in like position not only have to remove it in the future if you want to keep the tax, and thus tax all stock but, in addition, unless you want to throw up your hands and give refunds to everyone who claimed them in time, you have to retroactively correct the past discrimination by reassessing to tax g1l stock for the years in question. More specifically, the court's language was you have to give "meaningful backward-looking relief".


           In conclusion, before I turn it over to Mr. Deforest, let me tell you that all of the counties mentioned and the 20 that still had the tax in 1996 have the same problem and we have been living with this. Various counties have various ideas of how to handle this. for example, Philadelphia County is going to reassess for just the year 1996 and then use the extra money collected from now, in addition, taxing Pennsylvania stocks to pay the tax refunds for 1993, 1994, and 1995 to those that filed for them.

          Here in Mercer County we have opted to follow the Montgomery County lead, and that is to reassess for each year and thus tax all stock which, for the first time, taxes Pennsylvania stock; but, at the same time, give any taxpayer the right to exchange a mutual release and call it square.

For more information regarding personal property tax please email:

Michael DeForest or Sheryl Skarica