Navigating Pennsylvania’s Local Business Privilege Taxes
Navigating Pennsylvania’s Local Business Privilege TaxesThis article original appeared in Tax Notes State, July 26, 2021.
Many businesses first encounter the local business or mercantile privilege taxes (BPT) imposed by 272 local jurisdictions in Pennsylvania through an audit or the receipt of an assessment notice. However, the local BPTs, which are imposed on actual gross receipts, are not a recent development, having been authorized by the Local Tax Enabling Act of December 31, 1965 (LTEA or Act 511). The LTEA empowered localities (except the city of Philadelphia, which is governed by the Sterling Act of 1932) to enact BPT ordinances that impose tax on the privilege of doing business within the jurisdiction. The LTEA was intended to permit local governments to tax a broad range of commercial activity and advance “the underlying policy of allowing for taxation as a quid pro quo for businesses taking advantage of local governmental benefits such as police, fire and other services.”
Approximately 20 years after enactment of the LTEA, the Pennsylvania Local Tax Reform Commission, during its examination of methods local governments use to finance their services, described locally permitted BPT as a “nuisance tax” and highlighted drafting flaws in defining the scope of the tax base and situs of services. The Commission’s recommendations were incorporated in the Tax Reform Act of 1988, which prohibited local jurisdictions from imposing any new BPT measured by gross receipts, but which also grandfathered the existing BPTs in 272 jurisdictions. Jurisdictions with a grandfathered BPTs were also barred from increasing the rates that were in effect as of November 30, 1988. Pennsylvania’s municipal statistics website provides a list of jurisdictions that impose a BPT.
Local jurisdictions often rely on third-party tax collectors to administer their laws by conducting audits and issuing and collecting assessments. Based on 2018 statistics, 49 Pennsylvania jurisdictions collected over $1 million from their local BPT; the townships with the highest collections, Lower Merion, Radnor, and Upper Merion, collected over $10 million.
Although ordinances and regulations enacted by localities often follow similar principles, there are inconsistencies in the language and ambiguous provisions that may be interpreted liberally by the tax collectors on audit. With BPT collections generally down because of the coronavirus pandemic and uncertainty around future revenues, we can anticipate more aggressive audit and enforcement activity to compensate for the lost revenues, some of which will undoubtedly stem from creative interpretations of vague areas of the law. As a way to prepare for potential local controversy, this article brings awareness to the approaches taxing jurisdictions may use during upcoming audits and highlights effective strategies taxpayers can use during audits and to prevent hefty assessments.
One of the most significant developments in the administration of the BPT has been the evolution of BPT nexus standards. Pennsylvania courts have repeatedly addressed the “base of operations” standard for determining whether a business could be said to be “doing business” in a political subdivision and therefore subject to the local BPT. Many of these cases revolved around construction contractors, since those businesses typically have a fleeting presence in taxing jurisdictions and are highly visible to local governments because of construction permitting.
In Gilberti v. City of Pittsburgh, the Pennsylvania Supreme Court ruled that all of the taxpayer’s receipts could be taxed by the city of Pittsburgh because the taxpayer’s base of operations was in the city. In this case, the taxpayer had only one Pennsylvania office located in Pittsburgh. The taxpayer argued that on-site supervision at construction projects outside Pittsburgh essentially constituted temporary office locations and therefore subjected revenue from those projects to taxation in the municipality where the construction project was being undertaken. The court disagreed and ruled that a local governmental authority could impose a BPT only on a “base of operations.” On-site supervision at a construction project did not provide a sufficient base of operations upon which a BPT could be levied. The court found that it was reasonable for Pittsburgh’s tax to be extended to receipts earned outside the city because those receipts were contributed to by the operation of the Pittsburgh office. Gilberti established that a political subdivision may tax the entire gross receipts of a business having its sole, permanent office in that political subdivision.
In a subsequent case, Township of Lower Merion v. QED Inc., the Pennsylvania Commonwealth Court found that Lower Merion Township could not impose a BPT on a taxpayer when they did not maintain a base of operations in the jurisdiction. In this case, the taxpayer was a construction contractor that maintained its sole permanent office in Radnor Township. The taxpayer sent representatives into Lower Merion Township to visit worksites, determine the work to be done, and assume responsibility for the work. In previous years, Lower Merion Township had requested that the taxpayer register for and begin paying the local BPT. The township based this determination on an interpretation of its regulations that would allow the BPT to be imposed upon contractors for work performed within the township, regardless of the location of the contractor’s offices. However, the court held that a construction contractor’s work on various construction projects was outside the scope of a tax on the privilege of doing business where the contractor had no permanent office within the municipality seeking to impose the tax. The court further explained that a base of operations was a location where the taxpayer maintained a permanent place of business.
The state supreme court, however, overturned the base of operations rule in V.L. Rendina Inc. v. City of Harrisburg. In this case, the taxpayer was a general contractor with a permanent place of business in Lancaster County. During the tax period at issue, the taxpayer maintained a job site trailer in Harrisburg for use by an on-site superintendent for one project. The city and taxpayer stipulated that the job site trailer was not used to solicit new business, to store supplies, or to perform office work other than communications regarding work on the related job site. Also, meetings with subcontractors were not held in the trailer, and all mail related to the project was sent to the Lancaster office. Harrisburg imposed its BPT upon receipts from services rendered at the job site trailer. The taxpayer argued that the job site trailer was not a permanent place of business or base of operations as explained in Lower Merion and Gilberti, based on the limited activities conducted there. However, the court ruled that the taxpayer had benefited from the privilege of doing business in Harrisburg by operating from the trailer for the duration of the construction project. Whether the trailer was a base of operations or whether the project was a “single, lengthy transaction” was deemed immaterial. The court reasoned that the base of operations analysis in Gilberti was useful for the limited purpose of determining whether a political subdivision had the power to tax receipts earned from services performed in another jurisdiction, but that such analysis was not necessary to determine whether a taxing jurisdiction had the power to tax activities occurring within its borders. Therefore, this case established that a base of operations is not always necessary to establish nexus in a jurisdiction that imposes the BPT, so long as the presence of the taxpayer is sufficient to meet the definition of “doing business” in the local ordinances and regulations.
In Giles & Ransome, the commonwealth court found that when the language of the enacting ordinance of a BPT limits the tax to the territorial boundaries of a township, there is no need to engage in a base of operations test. In this case, the taxpayer had a small office in Whitehall Township from which its sales personnel were based. These employees traveled through a multicounty area visiting customers to make sales. The township argued that all sales arising from the office should be included in the taxable base of the BPT, regardless of where the sale had taken place. The court determined that a base of operations analysis was unnecessary because the plain language of the township’s ordinance excluded sales made outside the territorial limits of the township.
Legislative Development of Nexus Under Act 42
In response to these decisions, the Pennsylvania legislature enacted Act 42 in 2014. This law created a bright-line rule for when a locality may impose its BPT. Act 42 established that a business may establish nexus if it conducts transactions in a jurisdiction for all or part of 15 or more days within the calendar year. Also, the law codified the base of operations test from Gilberti, noting that the base must be an “actual, physical, and permanent place of business” to establish nexus within a jurisdiction. 
Furthermore, Act 42 provides that a business may deduct from its tax base in the jurisdiction of its base of any gross receipts that were subject to tax in another jurisdiction under the 15-day rule. While Act 42 may have partially succeeded in simplifying BPT nexus determinations, it also increased the number of filing obligations and potential tax liabilities for many taxpayers under the 15-day rule.
Following passage of Act 42, a company that is evaluating its BPT nexus profile should consider all the localities that impose BPT in which it has a permanent base of operations or in which its employees are present for all or part of at least 15 days during the tax year. Then, the BPT ordinances and regulations for these localities must be consulted to determine whether the company is subject to BPT in any of those jurisdictions. As demonstrated by Giles & Ransome, the particular ordinance should be examined closely to determine the extent of the taxing jurisdiction’s reach in each case.
Understanding Base of Operations
As a result of the codification of the base of operations test by Act 42, it is important to be aware of the definitions relied upon by each jurisdiction when applying the test. This is of particular concern during the coronavirus pandemic, during which many employees began working from home full time. At present, no jurisdiction has directly addressed how the pandemic may affect base of operations determinations. However, some have addressed the treatment of “home offices” as a base of operations.
Two such examples are found in the Radnor and Lower Merion townships. Both jurisdictions provide that a home office used for the convenience of the employee does not create a base of operations for BPT purposes. The regulations provide that when an employee works from a home office, it will be deemed to be for the convenience of the employee if there is another business office where the same services are performed. Therefore, businesses are unlikely to create a new base of operations in jurisdictions that have enacted similar exclusions from employees working from home, so long as a primary business location remains open in the state.
Wayfair overturned the long-standing rule that physical presence was required to establish substantial nexus for sales tax purposes. As a result of this decision, many states have enacted thresholds of activity, typically $100,000 in sales or 200 or more transactions, that will result in the establishment of sales tax nexus. Many states, including Pennsylvania, have relied on Wayfair to establish bright-line economic nexus standards for corporate net income tax.
The city of Allentown is testing the waters to extend the concept of economic nexus to the BPT. Effective January 1, Allentown established an economic presence test for taxpayers that have no physical presence in the city. Under this new test, taxpayers will be treated as having established economic presence and taxable nexus with the city, making them subject to the BPT, if they generated at least 15 or more transactions to customer locations within the city totaling at least $500,000 in gross sales in the calendar year. This change to Allentown’s BPT regulations will bring several remote retailers within the reach of its taxing jurisdiction that previously were not subject to taxation.
At this time, Allentown is the only Pennsylvania locality to have enacted an economic presence threshold for its BPT. However, should Allentown prove to be able to effectively enforce this new regulation, taxpayers should be wary of other localities following suit to own taxes and potentially setting various economic thresholds.
BPT Taxation of Nonprofit Entities
Under LTEA, taxing jurisdictions are permitted to impose a BPT on anyone conducting business within the jurisdiction. However, institutions qualifying for classification as a purely public charity under the Institutions of Purely Public Charity Act are generally exempt from BPT to the extent receipts are received in connection with their charitable purpose. Taxing jurisdictions may pursue nonprofits to collect tax on activities not related to a charitable purpose, which may create substantial liabilities for nonprofit organizations.
In a recent case, the commonwealth court ruled that a nonprofit is not a business for purposes of the local business privilege tax and does not owe tax on most of its income. The city of Allentown sought to impose approximately $800,000 in tax on a medical nonprofit operating out of the city. The nonprofit owned and operated three nonprofit subsidiaries, each recognized as purely public charities by the Pennsylvania Department of Revenue. The nonprofit provided services to its subsidiaries and received revenue as a result. Allentown argued that providing these services was sufficient to show that the nonprofit was a business within the meaning of its BPT provisions and therefore subject to tax on this revenue.
The court found that the nonprofit did not meet the definition of business within the jurisdiction’s BPT ordinance because the city had expressly excluded purely public charities from the definition. Further, the city had stipulated that both the nonprofit and its three subsidiaries were purely public charities. The court held that because the city could not prove that the nonprofit was not a purely public charity, it could not impose its BPT on the nonprofit.
Given the increased strain placed on municipal budgets by the coronavirus pandemic, it is possible that other taxing jurisdictions will similarly seek to expand revenues by more closely examining the receipts of exempt entities. It is therefore important for taxpayers to pay close attention to the limitations placed on the taxing power of jurisdictions by existing ordinances and regulations.
The Pennsylvania Supreme Court has held that a taxing authority’s BPT ordinance must be fairly apportioned under the standard set by the U.S. Supreme Court’s decision in Complete Auto. This means that to pass muster, the tax must be both internally and externally consistent. The internal consistency test asks whether, if the taxing scheme at issue were adopted by all 50 states, interstate commerce would be taxed more heavily than purely intrastate commerce. The external consistency test asks whether the state can lay a legitimate claim to the value it seeks to tax — whether the economic activity giving rise to that value can be fairly attributed to the state.
In Northwood Construction Co. v. Township of Upper Moreland, the Pennsylvania Supreme Court determined that for a construction contractor that had its principal place of business in Upper Moreland Township but worked on construction projects throughout Pennsylvania and surrounding states, the receipts attributable to activities in other states could not be included in the receipts subject to tax in the township. Upper Moreland’s BPT excluded from its base any gross receipts that had been subject to a BPT or similar taxes in another jurisdiction. The company challenged the taxation of 100 percent of its receipts generated from sites outside Pennsylvania as violating Complete Auto’s fair apportionment requirement. The court found that the exclusion of gross receipts similarly taxed by another jurisdiction eliminated the risks of multiple taxation and satisfied the internal consistency test. However, the court found that the tax failed the external consistency test, reasoning that the tax was not externally consistent because the income subject to tax was “out of all appropriate proportion to the business transacted in the Township” and had no “rational relationship to the Taxpayer’s business in the Township.” The court explained the activities that generate gross receipts are determinative in the apportionment analysis. It is only the receipts generated from the in-state component of the underlying activity that may be properly subject to tax. The court held that because a significant portion of the gross receipts from out-of-state projects were generated by activities outside the township, they could not be subjected to tax.
In Upper Moreland Township v. 7 Eleven Inc., the commonwealth court found that franchise payments received by the taxpayer were unconstitutionally apportioned by the locality, which resulted in an excessive tax determination. The court explained that a taxpayer challenging the external consistency of a local tax must prove that the tax: is disproportionate to business transacted by the taxpayer in the municipality; resulted in a grossly distorted assessment; or is inherently arbitrary or produced an unreasonable result. In this case, the court found that the taxpayer had shown that the township’s assessment was disproportionate because it failed to fairly apportion the Pennsylvania 7-Eleven charges when those charges reflected both intrastate and interstate activities. The township argued that the taxpayer’s gross receipts should include the full amount of franchise tax payments received by the taxpayer from 7-Eleven franchise stores in the jurisdiction because these payments were made for services, such as signage and advertising in the state. However, the court found that a portion of these services could be attributed to economic activity that occurred in Texas and Massachusetts and that they must be apportioned as such, or the tax would fail the external consistency test and violate the commerce clause. The court also held that the taxpayer was not responsible for segregating receipts from interstate and intrastate commerce, as the apportionment rules should be responsible for that.
BPT apportionment is generally not an issue for taxpayers that have revenues that are clearly attributed to a locality, such as revenues from sales of tangible personal property delivered to customers located in the local jurisdiction. However, apportionment will be an issue for taxpayers, like 7-Eleven in the case discussed above, that have revenues that are not so clearly delineated. As the 7-Eleven case illustrates, the U.S. Constitution requires that BPT be applied in a way that satisfies the external consistency test. Although Pennsylvania courts have not provided precise rules for the apportionment of the BPT, the requirement that the receipts subject to tax be in proportion to the in-state activities may provide an opportunity for taxpayers with limited Pennsylvania operations to minimize their subjectivity to tax. Taxpayers should exercise caution so that they do not pay tax on non- Pennsylvania receipts that should not be included in the tax base of a particular BPT. To the extent that a business has paid BPT on out-of-state receipts that are not properly apportionable to the jurisdiction, they can obtain a refund for the last three years that tax had been paid.
Under LTEA, some types of transactions are exempt from the imposition of a BPT, while others are subject to rate caps. LTEA section 301.1(f) of LTEA provides the limitations on the taxing power of localities for the BPT. Generally, the most significant exemption is for manufacturing — specifically to sales by manufacturers. The exemption limits the power of municipalities to tax products or byproducts of manufacturing, as well as minerals, timber, natural resources, and farm products produced within the jurisdiction. The exemption also prevents the taxation of the processing or preparation of any of those products. Any resales by third parties are still subject to the BPT.
The LTEA allowed BPT jurisdictions to impose a tax at a rate limit of up to 1 mill (0.1 percent) on wholesale vendors and 1-½ mills (0.15 percent) on retailers and restaurants. The LTEA rate caps do not apply to service businesses, though the rate freeze imposed by the Tax Reform Act of 1988 does apply and prevents any further rate increases. The actual rate imposed varies by jurisdiction. If a municipality and a local school district both impose a BPT, the LTEA rate cap applies to the combined tax rate for taxpayers that are wholesale vendors, retailers, and restaurants. Further, to avoid a pyramid of taxation, taxes imposed on wholesalers, retailers, and other businesses cannot overlap.
The Tax Reform Act of 1988 prevents jurisdictions that impose BPT from taxing new products or services. Therefore, taxing jurisdictions looking for additional revenue in the wake of the coronavirus pandemic may look to revise their ordinances or their interpretation of the ordinances to expand the list of nexus-creating activities. They could revise the apportionment rules so that more revenues are subject to BPT. As a result, there is significant variation in the taxing jurisdictions’ BPT ordinances and regulations regarding the nexus rules and apportionment/attributions rules for receipts in interstate commerce.
The regime for the local BPT in Pennsylvania is extremely complex. Taxpayers must not only be aware of which jurisdictions have imposed a BPT, but even among those jurisdictions with a BPT, there is significant variation based on their published regulations. Also, attempts to provide certainty, such as Act 42, have created increased filing obligations for some businesses in exchange for predictability.
Facing a difficult audit or an assessment, taxpayers and practitioners are encouraged to closely examine the language of the ordinance supporting a locality’s position. It is possible that the auditor’s position is not supported by the language in an ordinance, regulation, or policy, or an ordinance, regulation, or policy is being improperly interpreted and applied. As we are dealing with 272 taxing localities, it is possible that a jurisdiction is grounding its position on case law that is not supported by the language in its own ordinance, or a previously enacted ordinance was not updated to reflect the latest case law developments.
In conclusion, the complexity of the commonwealth’s BPT framework means that businesses operating in Pennsylvania must be alert to the possibility that they may be subject to tax in any of the localities that do impose BPT based on evolving nexus standards and apportionment rules, as taxing jurisdictions attempt to grapple with the budgetary crisis caused by the coronavirus pandemic.
 Act of Dec. 13, 1988, P.L. 1121, 72 Pa. Stat. section 4740.101 et seq. Philadelphia’s business and income receipts tax is not discussed in this article.
 Act of Dec. 31, 1965, P.L. 1257, 53 Pa. Stat. section 8401 et seq.
 S&H Transport Inc. v. City of New York, 174 A.3d 679, 682 (Pa. Commw. Ct. 2017).
 Robert J. Butera and Leonard C. Staisey et al., “The Final Report and Recommendations of the Pennsylvania Local Tax Reform Commission as Presented to Robert P. Casey, Governor of Pennsylvania” (1987 Local Tax Reform Commission Report), at 17.
 The Local Reform Commission Report recommended to “abolish the mercantile and business privilege under Act 511 except for those jurisdictions which have imposed this tax as of January 1, 1987; freeze current tax rates of the mercantile and business privilege for those jurisdictions with the lax in effect as of January 1, 1987 under Act 511 and the Sterling Act; and, amend Act 511’s definition of taxable gross receipts under the mercantile and business privilege tax to limit the geographic reach of such taxes to only those business activities occurring primarily within the taxing jurisdiction.”
 Pennsylvania Department of Community and Economic Development, “Municipal Statistics.”
 Pennsylvania Department of Community and Economic Development, “Statewide Municipal Annual Financial Reports” (2018).
 511 Pa. 100, 511 A.2d 1321 (1986).
 738 A.2d 1066 (Pa. Commw. Ct. 1999).
 938 A.2d 988 (Pa. 2007).
 Id. at 996.
 Id. at 993-995.
 Giles & Ransome Inc. v. Whitehall Township, 645 C.D. 2012 (Pa. Commw. Ct., Feb. 11, 2013).
 Act of May 6, 2014, P.L. 642, No. 42, 53 Pa. Stat. section 6924, et seq.
 53 Pa. Stat. section 6924.301.1(a.1)(1)(i) and (ii).
 Radnor Twnship. bus. privilege and mercantile tax reg. section 201; and Lower Merion Twnship. bus. privilege and mercantile tax reg. section 103.
 South Dakota v. Wayfair Inc., 585 U.S. , 138 S. Ct. 2080 (2018).
 City of Allentown bus. privilege tax reg. section 202(b).
 Philadelphia has also enacted an economic nexus standard for its business and income receipts tax.
 Act of Nov. 26, 1997, P.L. 508, No. 55, 10 P.S. section 371. et seq.
 Good Shepherd Rehabilitation Network Inc. v. City of Allentown, No. 1646 C.D. 2019 (Pa. Commw. Ct. Mar. 19, 2021).
 Complete Auto Transit Inc. v. Brady, 430 U.S. 274 (1977); and Northwood Construction Co. v. Township of Upper Moreland, 856 A.2d 789 (Pa. 2004).
 856 A.2d 789 (Pa. 2004).
 No. 144 C.D. 2016 (Pa. Commw. Ct. 2017).
 53 Pa. Stat. section 6924.301.1(f)(4).
 53 Pa. Stat. section 8411; 53 Pa. Stat. section 6924.311(2).
 Id at 49. Act of Dec. 13, 1988, P.L. 1121, 72 Pa. Stat. section 4740.101 et seq.
 Pennsylvania Department of Community and Economic Development, “Taxation Manual,” at 46 (2019).