In Shelly Funeral Home, Inc. v. Warrington Township, 30 MAP 2010 (December 18, 2012), the Pennsylvania Supreme Court reversed a 2010 decision of the Commonwealth Court and held that a business privilege “flat tax” ordinance passed by Warrington Township, limited to businesses with gross receipts in excess of $1 million, violated the Local Tax Reform Act (“LTRA”). The Supreme Court held that the tax ordinance imposed a prohibited business privilege tax “on gross receipts or part thereof” even though the ordinance imposed a fixed tax, and not a tax based on a percentage of receipts.
The disputed tax ordinance imposed a $2,600 annual business privilege tax on all businesses with gross receipts over $1 million and exempted from liability all businesses with gross receipts of $1 million or less. (The Township had determined that businesses that generate more than $1 million in gross receipts tend to be larger and require more municipal resources than smaller businesses and had enacted the ordinance on these businesses at a level required to close a $400,000 budget shortfall.) The Commonwealth Court had upheld the disputed tax on the basis that it constituted a “flat tax,” and flat taxes had previously been deemed permissible in Smith and McMaster, P.C. v. Newtown Borough, 669 A.2d 452 (Pa. Cmwlth. 1995). In Smith and McMaster, the court had rejected the taxpayer’s argument that the tax was invalid because it was inevitably paid out of each business’s gross receipts. Rather, the court held that a flat tax was permissible under the LTRA because it was in no way dependent on the amount of a business’s gross receipts. In the instant case, the lower courts had accepted the Township’s argument that, based on Smith and McMaster, only percentage-based liability schemes are prohibited by the LTRA.
The Supreme Court determined that the LTRA’s prohibition against new taxes “on” gross receipts or a part thereof is not limited to taxes “measured by” gross receipts or otherwise restricted in its meaning to percentage-based taxes. The Court held that the disputed ordinance violated the LTRA because, in effect, it imposed a tax on that portion of a business’s gross receipts in excess of $1 million. In holding that the Township’s tax violated the LTRA, the Court did not go so far as to invalidate all flat taxes containing an exemption based on a threshold level of gross receipts. Rather, the Court specifically suggested that a “very modest” gross receipts threshold might be acceptable.
Please contact a member of the McNees SALT Group if you have questions concerning Business Privilege or other local taxes.
