Local Business Privilege Taxes Being Overpaid in Pennsylvania
As the federal and state income tax base has eroded in recent years, thereby reducing local funding support, pressure has been building for local governmental authorities (cities, municipalities, boroughs and school districts) to develop independent sources of revenue. In addition to local governments taking aggressive positions with respect to real property values, those same local authorities are heavily trolling the waters for additional local business privilege tax revenue. A taxpayer needs to be aware that it has no obligation to pay a local business privilege tax in Pennsylvania if the taxpayer does not have an office in that political subdivision.
When is Tax Due?
The Pennsylvania Local Tax Enabling Act generally allows local governmental authorities to impose a tax on any business exercising the privilege of "doing business" within the jurisdiction of the local governmental body. The boundaries for determining when a taxpayer is "doing business" within the confines of a local taxing body have been drawn by several recent Pennsylvania court decisions. Based on these cases, a business may now determine whether that business is, indeed, subject to business privilege tax and, correspondingly, paying no more than its fair share of the local governmental tax burden. These court decisions bear directly on the company's obligation to pay a business privilege tax to any Pennsylvania city, municipality, borough or school district (other than the City of Philadelphia).
The governing principles for determining a taxpayer's fair share of the local business privilege tax were established in the Pennsylvania Supreme Court's Gilberti decision in 1986. The Gilberti case holds that where a business has only one permanent office location, the city or municipality where that sole office is located may include the entire Pennsylvania gross receipts of the business in the computation of the local business privilege tax. This holds true whether or not those gross receipts were principally earned within the territorial boundaries of the taxing body. In Gilberti, maintenance of an office within the City of Pittsburgh gave the city the right to levy the business privilege tax on all of the taxpayer's gross receipts.
Maintaining a business office within a city or municipality is definitely an exercise of a privilege within the limits of the taxing district and, consequently, the tax base may be computed using the entire Pennsylvania gross receipts of the taxpayer. Notwithstanding that gross receipts from outside the territorial limits of the political subdivision are included in the computation of the business privilege tax, the tax remains one that is levied only upon a privilege exercised within the political subdivision and does not undermine the legitimacy of the tax. Of course, the specific language of any local business privilege tax ordinance must be consulted in order to determine whether the particular city or municipality specifically includes all gross receipts of the business in the calculation of the particular local business privilege tax.
The taxpayer in Gilberti argued that on-site supervision at construction projects outside the City limits of Pittsburgh, essentially, represented temporary office locations in other taxing jurisdictions. These temporary offices, it was argued, subjected the taxpayer to taxation in the municipality where the construction project was being undertaken. The Pennsylvania Supreme Court disagreed and ruled that a local governmental authority could impose a business privilege tax only on a "base of operations." On-site supervision at a construction project did not provide a sufficient base of operations upon which a business privilege tax could be levied.
Gilberti clearly establishes that a political subdivision may tax the entire gross receipts of a business having its sole, permanent office in that political subdivision. The corollary to the Gilberti decision was found in Township of Lower Merion v. QED by the Commonwealth Court of Pennsylvania. The Lower Merion decision held that a construction contractor's work on various construction projects within a municipality were outside the scope of a tax on the privilege of doing business in that municipality where the contractor had no permanent office within the municipality seeking to impose the tax. The Lower Merion court, relying on the principles established in the Gilberti case, found that the construction contractor was not liable for a business privilege tax where it did not maintain a "base of operations" (explained by the court to mean a permanent office location) within the confines of the local governmental authority seeking to impose the tax. Lower Merion stands for the proposition that a business cannot be taxed where that business does not have a permanent office.
This is a critical point for many construction contractors because a political subdivision will attempt to impose a business privilege tax on a contractor obtaining a building permit in the political subdivision. Once the governmental entity discovers the building permit, the local tax officials typically send out notices that business privilege tax is due attributable to the construction project occurring within the boundaries of the political subdivision. Nevertheless, under the foregoing case law, business privilege tax is not due unless the business has a permanent office in that political subdivision. These principles govern all businesses, however, not merely construction contractors. Business privilege tax is not due in a city, municipality or borough merely because sales occur in that locality.
Consistent with the above cases, the Commonwealth Court decided Northwood Construction on July 19, 2002. In the Northwood Construction case, a construction contractor had only one place of business which was located in the Township of Upper Moreland. The contractor attempted to exclude in the computation of the township's business privilege tax all gross receipts attributable to jobs outside the limits of the township. The contractor argued that on-site trailers at construction sites outside of the township were bona fide office locations. The Commonwealth Court concluded that the local ordinance authorized the township to tax the entire amount of gross receipts which were generated by the sole permanent office of the contractor (which was located in the taxing township). Thus, taxing jurisdiction is not gained or lost by the presence of temporary business locations within a political subdivision. The Northwood Construction case is at this writing on appeal before the Pennsylvania Supreme Court.
Tax Limitations and Refund Opportunities
Where a contractor, or any other business, does not have a permanent office in a Pennsylvania city, municipality or borough, then that political subdivision may not impose its local business privilege tax on that contractor or other business. Therefore, a business which has paid business privilege tax to a city, municipality or borough where the business does not have a permanent office, can obtain a refund for the last three years in which it has paid tax.
On the other hand, it appears that the city, municipality or borough where a taxpayer has its sole permanent office has the potential to impose its local business privilege tax on the entire Pennsylvania gross receipts of that taxpayer. However, a case decided on January 28, 2004, may limit a local governmental authority's ability to tax all of the gross receipts of a business having its sole office within the jurisdiction of that local governmental authority, depending on the specific language of the business privilege tax ordinance.
In J & K Trash Removal, the taxpaying business had only one office location, which was situate in the City of Chester. The taxpayer excluded from the calculation of its business privilege tax amounts received from business conducted outside the city. The specific language of the taxing ordinance limited the basis of the business privilege tax to business "transacted within the territorial limits of the city." The Commonwealth Court concluded that the language used in the ordinance, as enacted, did not allow for a business privilege tax to be calculated on gross receipts attributable to business transacted outside the territorial limits of the city. This case reminds us that, while Gilberti may provide broad authority to a political subdivision to tax the gross receipts of a business having only one permanent office, the specific language used by the political subdivision should be carefully examined to properly determine the extent of the business privilege tax's reach.
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