On December 21, 2015, the Supreme Court of Pennsylvania held that the exception in 53 P.S. §6924.301.1(f)(1) of the Local Tax Enabling Act (LTEA), which prohibits the taxation of leases and lease transactions, does not preclude a municipality from applying its business privilege tax to businesses whose income is derived solely from leasing real property.
Fish, Hrabrick and Briskin v. Township of Lower Merion, No. 29 MAP 2015, involved the Township of Lower Merion's (Township) municipal code, which requires every individual or for-profit business entity engaged in a business, trade, occupation or profession in the Township to: (1) pay an annual business privilege tax calculated as a percentage of gross receipts; (2) purchase and display a business registration certificate; and (3) file an annual tax return. The Township had notified the individual taxpayers, Fish, Hrabrick and Briskin (Lessors), that pursuant to the municipal code, they were obligated to: (i) purchase separate business registration certificates for each parcel of real estate in the Township that they rented to tenants; and (ii) pay the Township’s business privilege tax based on all rental proceeds. The Township maintained that the leasing of real property was a business, trade, occupation or profession for purposes of the municipal code, and that each parcel was a discrete business location subject to the registration, tax-return and tax-payment requirements. Lessors filed a complaint in the Montgomery County Court of Common Pleas to seek a declaratory judgment that the LTEA could not be applied to rental proceeds from leases and lease transactions. Lessors argued that their real property rental activities fell within the leasing exception of §6924.301.1(f)(1).
In general, 53 P.S. §6924.301.1(a) of the LTEA authorizes the tax authorities of townships (as well as various other political subdivisions) to "levy, assess and collect…taxes…on persons, transactions, occupations, privileges, subjects and personal property" within townships' jurisdictional limits. The LTEA further provides in 53 P.S. §6924.301.1(f)(1) that "[s]uch local authorities shall not have authority by virtue of this act…[t]o levy, assess and collect or provide for the levying, assessment and collection of any tax on…leases or lease transactions."
By way of background, the Court of Common Pleas dismissed the Lessors' complaint, explaining that it viewed the tax as a gross-receipts tax, rather than a transactional tax of the type that had been held to be prohibited under the LTEA in Lynnebrook & Woodbrook Associates, L.P. v. Borough of Millersville, 600 Pa. 108, 963 A.2d 1261 (2008) (ordinance imposing a $30 flat tax on the consummation of residential leases was prohibited by the LTEA). However, the Commonwealth Court in Fish, Hrabrick and Briskin reversed the Court of Common Pleas, stating that because the lease provision in subsection (f)(1) of the LTEA was a tax "exclusion" or "exception" rather than a tax "exemption," any doubt about its reach should be resolved in the taxpayer’s favor and construed against the taxing authority. The Commonwealth Court went on to state that there was no material difference, other than title and timing, between a transactional tax that imposed a tax on the receipt of each rental payment, and a privilege tax that imposed an annual tax on all rent receipts. As such, the Commonwealth Court held that applying the municipal tax on Lessors was prohibited under subsection (f)(1) of the LTEA.
A dissenting opinion from the Commonwealth Court's decision highlighted the well-established distinction made by the Pennsylvania courts between “privileges” and “transactions” as distinct subjects of taxation and noted that the LTEA authorizes the Township to tax privileges. The dissenting opinion distinguished this case from Lynnebrook on grounds that this case involved a tax on Lessors that was imposed on the privilege of leasing property and not on the leases or lease transactions themselves, as in Lynnbrook. The dissenting opinion determined that School District of Scranton v. Dale & Dale Design & Development, Inc., 559 Pa. 398, 741 A.2d 186 (1999) supported its position regarding the privilege tax versus transaction tax distinction and concluded that this distinction should have been the controlling principle in the majority’s opinion.
The Supreme Court of Pennsylvania based its decision, in large part, on the dissenting opinion from the Commonwealth Court and relied heavily on the Dale case, which it found to be directly analogous to the circumstances in this case. The Court explained that in Dale, it held that the city’s business privilege tax was enforceable against a construction contractor involved solely in erecting residential dwellings, despite a prohibition in subsection (f)(11) of the LTEA preventing the imposition of municipal taxes on the construction of, or improvements to, residential dwellings. The Court in Dale held that the tax at issue was a tax on the privilege of doing business within the city limits and was not a tax upon the construction of residential dwellings. The Court went on to rule that the reasoning in Dale was consistent with other cases distinguishing business privilege taxes from taxes imposed on transactions or sales.
In reaching it conclusion, the Court agreed with the Township's argument regarding a similar exception in the LTEA, the manufacturing exception. The Township pointed out that subsection (f)(4) of §6924.301.1 not only precluded the imposition of municipal taxes on manufactured goods, it specifically precluded a privilege tax on "any privilege, act or transaction related to the business of manufacturing." The Court adopted the Township’s position that because this same privilege prohibition does not appear in the lease exception of the LTEA, it would not read the lease exception as barring the imposition of a general business privilege tax to businesses that generate rental income from leases.
Lessors argued that the tax at issue was a business privilege tax in name only, because it essentially operated to tax income from leases. Lessors cited a number of cases to support the position that a tax should be characterized by how it operates in practice rather than by its name. The Court agreed that, in the abstract, there was no substantive difference between a tax upon the total of all rent payments and a tax on each individual rent payment, but the Court found, further, that the Commonwealth Court overlooked the fact that, unlike the tax invalidated in Lynnebrook, the Township's tax was not targeted at leases. Rather, the Court described the municipal tax in this case as a general business privilege tax which encompassed all for-profit businesses that offer services to the public within the Township’s borders. The Court ruled that, based on the precedent clarifying that privileges and transactions are separate subjects of taxation, as well as the absence of any language in subsection (f)(1) prohibiting taxes on privileges, acts or transactions related to leases, the Township’s tax was applicable to businesses which derive their income only from leases.