City of Philly defends wiping clean SEPTA's $22M tax bill in letter to Bill Green, Darrell Clarke

Defending their decision to abandon steps to collect $22 million in taxes from SEPTA, city officials have told City Council and the Philadelphia school district that a 2003 state Supreme Court opinion left them in a weak position to collect the money.

"The City determined that it was unlikely to prevail in a lawsuit to collect these taxes and was willing to negotiate a resolution to its claims as part of a long-term lease agreement with SEPTA," wrote Rina Cutler, the Deputy Mayor for Transportation and Utilities in a letter to Council President Darrell Clarke and School Reform Commission Chairman Bill Green.

Since at least 1978, year after year, the city has dunned SEPTA for back taxes owed on properties it leased to commercial businesses at sites throughout Philadelphia. The transit authority built up a total bill of $22 million in delinquencies, interest and penalties through June 2014, according to the city's own records.

The complete tab will be wiped clean when the city's new 30-year lease-leaseback agreement with SEPTA goes into effect tomorrow on July 1.

Because the School District of Philadelphia is entitled to 55 percent of all collected city real estate taxes, the deal represents a loss of about $12 million for the schools.

SEPTA leases out dozens of storefronts on property it owns. Those properties are concentrated at Suburban Station, a massive underground complex that occupies four city blocks between 15th and 18th streets. The station currently houses numerous fast food restaurants, two newsstands, two Hallmark card shops, several fashion boutiques, a beauty supply store and a jeweler.

Last week, SEPTA said because Amtrak -- the previous owner of many of the properties -- didn't pay taxes, they should be accorded the same rights. Congress granted Amtrak an exemption to all state and local taxes in 1982.

SEPTA had previously fought the property taxes all the way to the Pennsylvania Supreme Court. The transit agency had argued space leased out to private businesses inside its highrise headquarters at 1234 Market St. was immune from property taxes because the space was used to raise revenues and reduce SEPTA's expenses. The court disagreed in 2003, concluding that the property leased to commercial entities was not immune from taxes.

"Very simply, SEPTA is acting as a commercial landlord, which is clearly distinct from acting as a 'metropolitan transportation authority,'" the justices wrote. "Therefore, SEPTA property leased to commercial tenants is not immune from taxation."

SEPTA maintains that the court ruling only pertained to the office building.

"They knew our position [regarding the property taxes]," SEPTA General Manager Joe Casey said in an interview Friday. "The city knew we didn't think we were liable for them."

This year, the city gave up the fight.

The decades-long dispute ended sometime during negotiations that hammered out the agreement. SEPTA will not have to pay the taxes it has been billed for since 1978. SEPTA agreed to spend more than $50 million to improve city-owned infrastructure and maintain several miles of the underground concourse. Both city and SEPTA officials stressed the two items were not related. A SEPTA spokesman said there was no quid pro quo that led to the tax forgiveness.

"It was part of the negotiations with the city that has gone on a number of years," Casey said. "This is one of of the many issues."

In her letter, the city's Deputy Mayor for Transportation wrote: "The City at one time believed that it could collect taxes from all SEPTA properties leased to commercial entities in the Suburban Station Concourse and continued to send SEPTA real estate bills. SEPTA responded that under current law, the Authority had no obligation to pay real estate taxes on transportation facilities."

According to city Solicitor Shelley Smith, the fast food restaurants and other commercial businesses were "directly related to the operation of a transportation system."

"Those businesses facilitate the efficient operation of the transit system by serving travelers en route," she wrote in an email forwarded to Philly.com.

Smith did not provide information as to how the retail stores contributed to an efficient operation. She was not available for further comment.

State statute provides a definition for a transportation system. The statute says a transit system "includes, but is not limited to" the infrastructure necessary for moving people.

Joseph Bright, an attorney at Cozen O'Connor who specializes in tax law, said there is a history of litigation over similar arguments.

"There are a couple of very well known Pennsylvania Supreme Court cases that say that a commercial hotel located at an airport and located on city or state or county ground is not taxable because you need hotels to operate an air transit system," Bright said. "People get stranded or have layovers."

But Bright said the businesses operating in complexes near the trains "presents a more difficult issue." There is nothing in the City Charter or in the state statute that authorizes an exemption for any property that is used for anything other than transportation services, he said.

"There is a plausible argument that says you need places for the public to refresh themselves," he said. "But there's also the opinion that they don't need a place to buy gold bracelets."