Refunds Available for Local Business Privilege Taxes in Pennsylvania
Contractors and other local businesses have been unnecessarily overpaying local business privilege taxes in Pennsylvania for years. The Pennsylvania Supreme Court has recently reaffirmed the limits on the taxing power of local governmental authorities (cities, municipalities, boroughs and school districts) in the Northwood Construction case. It is critical for taxpayers to be aware that a business 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 taxpayer may now determine whether his or her 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 clearly represents 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. A few recent cases from across Pennsylvania have significantly limited the ability of a local taxing body to impose taxes based on the particular ordinance in effect.
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 reached 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 may 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 cannot be imposed on a taxpayer 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 Pennsylvania Supreme Court decided Northwood Construction on September 2, 2004. 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 Supreme 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. Additionally, the Supreme Court invalidated the municipality's ability to tax receipts from interstate commerce (i.e., receipts from jobs performed in other states).
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. A local governmental authority, however, may impose such a tax only to the extent that the local taxing ordinance actually authorizes the taxation of all of the gross receipts of such a business. This analysis, in turn, depends 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 situated 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.