View Page As PDF
Share Button
Tweet Button

Pennsylvania: The business privilege tax does not apply to the rental real estate business

In Fish, Hrabrick and Briskin v. Township of Lower Merion, the Commonwealth Court of Pennsylvania concluded that the imposition of the business privilege tax (BPT) on the appellants’/lessors’ (Appellants) rental income, defined as gross receipts from lease transactions, violates the Local Tax Enabling Act (LTEA).

The Township’s Municipal Code (Code) containing the BPT requires “every person engaging in a business, trade, occupation or profession in the township” to pay an annual business privilege tax at the rate of 1.5 mills on gross receipts.

The LTEA empowers cities and local authorities to levy taxes for general revenue purposes, among other things, but contains exceptions. The section at issue here, 301.1(f)(1) is one such exception, and provides that local authorities shall not have the authority to levy “any tax” on “leases or lease transactions.”


The three Appellants are owners and lessors of real property within the township, from which they derive rental income. They sued the township challenging the imposition of the BPT itself because Appellants’ business activity qualifies as “lease or lease transactions” that are exempted in the LTEA. Whether the tax is characterized as a local tax on a lease or a lease transaction is irrelevant because either way, they argued, taxes on leases and lease transactions are unauthorized.

Appellants also challenged the imposition of the annual registration and $20.00 fee requirement per place of business set forth in a different section of Code.

On the other hand, the township justified the tax as one on the privilege of doing business therein. In addition, the township argued that the BPT’s prohibition barred only “direct” taxes, or taxes per transaction, on leases or lease transactions.

The court’s analysis and determination

The court agreed with Appellants, holding that their lease income does fall within the statute’s exception of “leases and lease transactions,” even if a local tax on a lease or lease transaction could take several forms. In the end, the court asserted, no matter how the lease or lease transactions are characterized, the taxes on real estate leasing businesses are unauthorized under the restrictive language of the LTEA.

In reaching its conclusion, the court looked to the binding precedent set forth in the 2008 Pennsylvania Supreme Court case Lynnebrook and Woodbrook Associates, L.P. ex rel. Lynnebrook Manor, Inc. v. Borough of Millersville. There, the Supreme Court held that exclusions from the local taxing authority must be interpreted in a way that most restricts the taxing authority. Applying that precedent, the court determined that the BPT violates section 301.1(f)(1) of the LTEA, which bars any tax on leases or lease transactions. For that reason, whether a scheme imposes a tax on a per transaction basis or annually on all receipts is immaterial because it is still a forbidden tax.

Finally, the court recognized that the Code provides no restrictions on the registration and fee requirement. Therefore, it concluded that Appellants’ business activities did fall within the purview of that provision, so they were bound by its mandates.


The township may appeal this decision to the Pennsylvania Supreme Court for a final determination of whether the LTEA prohibits the BPT on real estate leases and lease transactions. In the meantime, taxpayers who believe they may be impacted by this case should consult with their tax advisors to determine if it applies to their business, and whether they should file a tax refund claim for any years open under the statute of limitations. For most jurisdictions, the statute of limitations is three years.

Voters to decide whether recreational marijuana should be legal—and therefore taxable—in three more states

In less than a month, voters in Alaska, Oregon, and the District of Columbia will decide whether to legalize the retail sale of recreational marijuana. According to, voters in 23 states, including these three, have already approved of programs allowing for the sale of medical marijuana; Alaska and Oregon approved medical marijuana sales in 1998, and the District of Columbia in 2010.

Tax revenues raised in Colorado and Washington

Jurisdictions considering marijuana legalization can analyze other states’ experiences in order to see what they might expect to raise in tax revenues. For example, in Colorado and Washington, retail marijuana sales began in January 2014 and July 2014, respectively. According to a report by the Tax Foundation, Colorado collects tax revenue from marijuana sales through the following:

  • 15 percent excise tax on the average market rate of wholesale marijuana;
  • 10 percent excise tax on retail marijuana sales;
  • 2.9 percent state sales tax for medical and retail marijuana; and
  • Local sales taxes that vary by locality.

That same report reveals that in the first six months of 2014, legal retail marijuana sales have generated $21.8 million in tax revenue plus another $10.1 million in taxes on medical marijuana in that time period. For the new fiscal year that began July 1, 2014, state analysts project $30.6 million in revenue. As noted in our Aug. 28, 2014 Multistate Tax Update, this is less than expected. During the campaign, voters were told that they could expect excise tax revenues of $70 million.

This discrepancy is due, at least in part, to the difficulty of estimating the market in light of the fact that marijuana production and consumption had been illegal, and therefore not tracked, according to a report prepared for the Colorado Department of Revenue by the Marijuana Policy Group.

In Colorado, the Marijuana Enforcement Division (MED) is tasked with licensing and regulating the medical and retail marijuana industries in Colorado. According to an article in the Denver Post, marijuana legalization has made police investigations more complicated because it is difficult to know whether a facility has the proper MED-issued license. “Where the margins of legal and illegal cultivation can be blurry,” the article asserts, detectives are increasingly hesitant to “make busts.” Even so, the Drug Policy Alliance reported a 10.1 percent decrease in overall crime from 2013 and a 5.2 percent drop in violent crime, citing the FBI’s Uniform Crime Reporting data.

As for the state of Washington, the Washington Post reported that it taxes marijuana under a different tax regime:

  • 25 percent tax on producer sales to processors;
  • 25 percent tax on processor sales to retailers;
  • 25 percent tax on retailer sales to customers;
  • 6.5 percent state sales tax;
  • Business and occupation taxes; and
  • Local sales taxes that vary by locality.

The trio of taxes on processors, retailers, and consumers translates to an effective rate of 44 percent.

Washington’s tax revenue estimates, like in Colorado, may be low, according to the Tax Foundation. Voters were told that legalization could bring in as much as $1.9 billion over five years. The first month of legalization yielded $3.8 million in sales and about $1 million in tax revenue, and the Washington State Liquor Control Board, in charge of the program, estimates two-year marijuana tax revenue for the 2015-17 biennium will be $122,459,893, and $336,898,396 for the 2017-19 biennium.

November ballot measures related to the legalization of marijuana

Washington is still tweaking its tax system. Among other fiscal issues on the ballot this November is Advisory Note No. 8, which asks voters whether to maintain or repeal the legislature’s elimination of agricultural excise tax preferences for the marijuana industry. This would cost approximately $25 million in the first 10 years.

Measure 2 in Alaska, which would tax and regulate the production, sale, and use of marijuana, would require every marijuana cultivation facility to pay a $50 per ounce excise tax on marijuana sold or transferred to a retail marijuana store or marijuana product manufacturing facility. Marijuana businesses would also be subject to corporate income tax and licensing fees. Though the state has not issued a revenue estimate, the Alaska Dispatch News reported that Alaska’s Department of Commerce, Community and Economic Development predicts that implementation costs would be between $3.7 million and $7 million.

Oregon’s Measure 91, which the Oregon Liquor Control Commission would regulate, would legalize the possession, manufacture, and sale of marijuana by/to adults, subject to state licensing, regulation, and taxation, and would impose excise taxes under the following tax scheme:

  • $35 per ounce on all marijuana flowers;
  • $10 per ounce on all marijuana leaves;
  • $5 per immature marijuana plant.

The Statesman Journal reported that the Oregon State Financial Estimate Committee, which includes the Secretary of State, Treasurer, and Revenue director, projected between $17 million to $40 million in annual tax revenues from the legalization of marijuana. 

Finally, in Washington, D.C., the Board of Elections certified ballot Initiative 71, would repeal all criminal and civil penalties for the personal possession and limited, private cultivation of marijuana. The Marijuana Legalization and Regulation Act of 2013 would impose a six percent tax on the gross receipts from the sale of medical marijuana and a 15 percent tax on the gross receipts of marijuana for all other purposes.

In the end, Nerdwallet projects that if all 50 states were to legalize marijuana, the United States would stand to gain more than $3 billion in state and local taxes from the sale of marijuana.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

Susan Millradt McGlone

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.