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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).

 

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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.”


Background


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.


Implications


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.

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