The Pennsylvania Supreme Court recently reversed a 2014 Commonwealth Court decision in which the Commonwealth Court had ruled that the Local Tax Enabling Act (“LTEA”) bars local taxing jurisdictions from imposing business privilege taxes on receipts from leases or lease transactions. See Fish, Hrabrick and Briskin v. Township of Lower Merion, 29 MAP 2015 (Pa., December 21, 2015). Many taxpayers had filed protective refund claims for business privilege taxes paid on lease receipts pending final disposition of the appeal in the Fish case. Unfortunately, those refund claims are no longer viable.
The LTEA provides the authority and limitations for all taxing jurisdictions other than the City of Philadelphia to impose taxes. While the LTEA allows for the imposition of business privilege taxes, the LTEA expressly excludes the power to impose tax “on . . . leases or lease transactions.” In Fish, the township argued that its tax was actually imposed on the privilege of doing business in the township and was not a direct tax on leases. The Commonwealth Court flatly rejected this argument and held that the LTEA prohibits “any tax—i.e. privilege, transactional, or otherwise—on leases and lease transactions.” In reaching its conclusion, the Court stated that the LTEA must be read in a way “that most restricts the taxing authority….”
The Supreme Court applied prior precedent establishing that business privileges and transactions are separate and distinct subjects of taxation. Therefore, a business privilege tax that encompasses all businesses offering services within a local taxing jurisdiction may be imposed on receipts derived from leases, even though a tax directed specifically to lease transactions would constitute a prohibited tax. The Court further clarified that this rule applies even if a taxpayer’s revenues are derived exclusively from “untaxable transactions,” such as lease transactions.