The Pennsylvania Commonwealth Court, in a 5-2 decision, held that the Local Tax Enabling Act ("LTEA") bars taxing jurisdictions from imposing business privilege taxes, on leases or lease transactions. Fish, Hrabick and Briskin v. Township of Lower Merion, No. 1940 C.D. 2013 (September 19, 2014). This holding applies to both transaction-based and privileged-based taxes, and has created refund opportunities for businesses.
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 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..."
As a result, receipts from leases (whether for real property or personal property) may not be taxed. Refund opportunities now exist for all businesses that have included these receipts in its tax base for prior periods. The township is expected to request the Pennsylvania Supreme Court to hear an appeal of the decision. If an appeal is granted, a final decision will be many months away. In the meantime, businesses should watch this litigation closely. If the Pennsylvania Supreme Court agrees to hear the appeal, protective refund claims should be filed for all expiring periods. (Generally, the statute of limitations for business privilege tax appeals is three years pursuant to the Local Taxpayer Bill of Rights; however, it is necessary to review the ordinance and any regulations of the taxing jurisdiction to confirm timing questions). If the Pennsylvania Supreme Court denies the appeal, refund claims for all open periods should be filed.
Scranton "Commuter Tax" Stricken
On September 30, 2014, the Lackawanna County Court of Common Pleas struck down an Ordinance adopted by the City of Scranton which imposed an earned income tax solely on nonresident workers in the City. In re: City of Scranton Ordinance No. 36 of 2014 Imposing an Additional Seventy-Five Hundreds (.75) Earned Income [Tax] on Non-Resident Taxpayers, No. 2104 CIV 4799 (Lackawanna County Court of Common Pleas, September 30, 2014). A group of taxpayers had challenged the Ordinance on a number of grounds. Among other things, the challengers had contended that the public advertising and notice requirements were not properly satisfied, that the Ordinance was unlawful due to the lack of a valid "foundational" earned income tax prior to passage of the Ordinance, and that the Ordinance was unlawful for imposing a tax solely on nonresidents.
The court rejected the first two contentions raised by the taxpayers, but ultimately struck down the Ordinance because it imposed a tax solely on nonresidents without also taxing residents equally. The Court noted that it was improper to read the Municipal Funding Standard and Recovery Act ("Act 205"), which provides remedies to municipalities with distressed pension programs, as allowing an unlimited ability to tax nonresidents. Rather, since Act 205 does not contain any authority for exclusively taxing nonresidents, the court found it necessary to look to other statutory provisions governing the City's taxing authority. After examining provisions of the Local Tax Enabling Act, 53 P.S. § 6924.311, the Home Rule Charter and Optional Plans Law, 53 Pa. C.S.A. § 2962, and the Municipalities Financial Recovery Act, 53 P.S. § 11701.123(c)(3), each of which contains restrictive language regarding the imposition of taxes on nonresidents, the court determined that the City had no authority to impose an earned income tax exclusively on nonresidents and struck down the City's Ordinance.
Department Issues Natural Gas Mining Notice
On September 22, 2014, the Pennsylvania Department of Revenue issued Sales and Use Tax Information Notice 2014-2. This notice is directed to the natural gas mining industry and related activities. The notice attempts to address issues that arise during natural gas mining, with special emphasis on mining activities involving hydraulic fracturing. While notices from the Department of Revenue are useful guides in understanding how the Department views certain situations, it is important to remember that the notice does not have the force and effect of a statute or regulation. Taxpayers do have the ability to challenge positions stated in notices that are contrary to statute or regulation.
We are in the process of carefully reviewing the notice and will have a full analysis in our next newsletter.
