Business taxpayers operating in Pennsylvania may be responsible for local business privilege and/or mercantile taxes (BPT) depending on the localities on which they conduct business. Three recent developments involving the BPT present potential traps for unwary taxpayers. First, the proliferation of remote work may subject businesses to additional BPT filing obligations based on the activities of teleworking employees. Second, certain taxing jurisdictions are seeking to expand the reach of their BPT by adopting bright-line economic nexus standards to reach taxpayers operating outside their borders. Finally, localities have become more aggressive in pursuing nonprofit entities doing business in their jurisdictions, but the Pennsylvania Commonwealth Court has concluded in several decisions that such nonprofits were not doing business due to their status as purely public charities.
Pennsylvania local BPT background
The BPT originates from Act 511 of 1965, known as the Local Tax Enabling Act (LTEA).1 Under the LTEA, the General Assembly gave local jurisdictions, except for Philadelphia, the authority to impose certain taxes.2 One of the more prominent taxes included in the LTEA was the BPT, a tax on the “privilege” of doing business in a local jurisdiction. Unlike corporate income taxes, which generally allow deductions for losses and expenses, the BPT is measured by the amount or gross receipts earned by a business from its base of operations inside a township or municipality. Many jurisdictions took advantage of this authority and enacted a BPT to increase tax revenues.
Over 20 years later, in an effort to reconfigure Pennsylvania’s local tax structure, the Pennsylvania legislature enacted the Local Tax Reform Act (LTRA) in 1988.3 The LTRA removed the authority of any local jurisdiction to adopt a new BPT measured by gross receipts and prevented jurisdictions from increasing their BPT rates or expanding their tax bases by eliminating certain exemptions or exclusions.
Presently, approximately 270 local jurisdictions in Pennsylvania currently impose a BPT.4 In recent years, these jurisdictions have moved to aggressively impose BPT on businesses operating within their boundaries based on their interpretation of existing ordinances and regulations. In 2019, statewide BPT collections totaled approximately $205 million, with the townships of Lower Merion and Upper Merion collecting over $10 million each in revenues.5 The reach of the BPT has been frequently contested, and Pennsylvania courts have issued decisions establishing important but sometimes contradictory rules.
A frequent area of controversy has been the evolution of BPT nexus standards, with municipalities imposing historically different rules regarding whether a business is subject to BPT in their jurisdiction. In response to conflicting court decisions concerning when a taxpayer has established nexus in a particular jurisdiction,6 Pennsylvania enacted Act 42 of 2014, which created a bright-line rule for when localities may impose a BPT.7 The law clarifies that a taxpayer may establish nexus in one of two ways: (i) through a “base of operations,” defined as an “actual, physical, and permanent place of business” in the jurisdiction; or (ii) by conducting transactions in the jurisdiction for all or part of 15 days during the calendar year.8 While the law was intended to provide a clear nexus standard for taxpayers, Act 42 also exposed taxpayers to additional filing requirements in new jurisdictions under the 15-day rule.
BPT nexus standards and teleworking employees
Considering the nexus standard established under Act 42, the rise of remote work resulting from the COVID-19 pandemic creates new complications for businesses, which may now be subject to additional BPT filing requirements depending on the jurisdiction. An employee working from home for an extended period may create nexus under Act 42 by working at least 15 days in the jurisdiction or by establishing a “base of operations” in the jurisdiction. However, each jurisdiction’s BPT ordinance and regulations are different, leading to varying interpretations of what constitutes a “base of operations” depending on the jurisdiction.
Before the onset of widespread remote work, certain jurisdictions provided guidance on whether a home office establishes a base of operations for BPT purposes. For example, Lower Merion Township provides that a home office used for the convenience of the employee is not a “base of operations.”9 A home office will be deemed to be for the convenience of the employee if there is another business office where the same services are performed.10 Radnor Township provides a “home office” exception, but their regulations specify that while no “base of operations” may be established by a teleworking employee, the taxpayer may still establish nexus if the employee works at least 15 days in the township.11
While not explicitly stated in its code or regulations, Lower Merion Township unofficially applies a two-part test to determine if a teleworking employee creates nexus in the jurisdiction. First, in line with the township’s regulations regarding the nature of the employee’s home office arrangement, an employee is not presumed to be working remotely for their own convenience if there is no reasonably commutable office from which the employee could perform services.12 Second, the employee must be directly involved in the generation of receipts for the business, meaning that the company derives a direct economic benefit from the remote employee. This prong of the test is intended to eliminate the taxation of employees that perform clerical support or other internal-facing roles. Despite the guidance offered by Lower Merion and Radnor Townships, other jurisdictions may interpret remote working arrangements differently depending on the nature of their BPT ordinances and regulations.
BPT and economic nexus
Since the U.S. Supreme Court overturned the physical presence standard for sales and use tax purposes in the Wayfair decision,13 states and localities have continued to formally expand the reach of economic nexus provisions. As of 2021, all states imposing a sales and use tax have adopted an economic nexus standard,14 and several states have also adopted a bright-line economic nexus standard for corporate income tax purposes. Pennsylvania relied on Wayfair to adopt a sales tax economic nexus threshold of $100,000 in sales, and a $500,000 bright-line sales threshold for corporate net income tax (CNIT) purposes. On the local level, Philadelphia adopted an economic nexus threshold of $100,000 for purposes of its Business Income and Receipts Tax.15
In 2021, the city of Allentown became the first local jurisdiction outside of Philadelphia to extend an economic nexus concept to the BPT. Effective Jan. 1, 2021, taxpayers with no physical presence in the city are considered to establish economic nexus and taxable nexus with Allentown if they generate at least 15 or more transactions to customer locations in the city totaling at least $500,000 in gross sales during the calendar year.16 Allentown’s BPT regulations further provide that a business does not have economic nexus with the city if the business is not subject to tax in Pennsylvania or does not otherwise have nexus with the state.17
Nonprofit entities and subjectivity to BPT
Under the LTEA, local taxing jurisdictions are permitted to levy BPT on anyone conducting business within a jurisdiction. However, entities qualifying as purely public charities are generally exempt from BPT to the extent their receipts are received in connection with a charitable purpose. Under Pennsylvania law, non-profit entities seeking tax-exempt status must qualify as a purely public charity. A business that is qualified as a tax-exempt organization for federal income tax purposes does not automatically qualify for tax-exempt status in Pennsylvania. Taxpayers are required to meet specific statutory and court-established tests to determine whether they qualify as a purely public charity.18
In recent years, local taxing jurisdictions have taken more aggressive positions in efforts to tax non-profit organizations operating in their jurisdictions by arguing that the business is not a purely public charity or is otherwise engaged in a private profit motive that does not advance the organization’s charitable purpose. Notably, Allentown sought to impose BPT on several different nonprofit organizations that were recognized as purely public charities for Pennsylvania tax purposes. The nonprofits provided management services to their nonprofit subsidiaries and/or affiliates and received revenue as a result. Allentown argued that these nonprofits were engaged in business in the city as defined under the city’s BPT ordinance because the management functions did not advance a charitable purpose.
In two recent decisions, however, the Pennsylvania Commonwealth Court found that two different nonprofits did not meet the definition of a business under Allentown’s BPT ordinance because the city expressly excludes purely public charities from the definition for BPT purposes.19 The court further determined that the compensation and organizational structures of the entities did not demonstrate a private profit motive. For these reasons, the court concluded that Allentown could not impose BPT on these nonprofits, without examining the separate question of whether they qualified as purely public charities. Despite taxpayer victories at the appellate court level, Allentown has appealed these cases to the Pennsylvania Supreme Court.
Constrained by their ability to increase BPT tax rates, local jurisdictions are looking for new ways to raise revenue as they continue to adjust to the effects of the pandemic. Most commonly, localities will attempt to revise their ordinances and/or regulations or their interpretation of these provisions to expand the list of nexus-creating activities and increase their tax bases. With remote work becoming more commonplace, local taxing jurisdictions have been slow to address how remote employees may affect base of operations determinations and create nexus in their jurisdictions. With the expiration of temporary nexus relief at the state level, local jurisdictions are more likely to take employee activities into consideration for nexus purposes. Under a plain reading of Act 42, an employee working from a jurisdiction for at least 15 days during the year arguably has the potential to trigger nexus and create a BPT filing obligation.
Businesses with remote workers should be mindful of their employee work locations due to the varying and often conflicting BPT rules and regulations of each locality. Lower Merion and Radnor Township’s home office exceptions for remote employees provide a useful example. Unlike Radnor Township, which may consider the presence of employees working remotely in their jurisdiction to create nexus if they exceed Act 42’s 15-day threshold, Lower Merion’s approach provides a reasonable exception depending on the nature of the remote work arrangement and the employee’s function.
From an economic nexus perspective, other local jurisdictions are closely observing whether Allentown is successful in enforcing its new nexus standard. An important question is whether Allentown’s revised BPT regulations comply with the LTEA and Act 42. Although the city drafted the regulations to be consistent with the language of Act 42, the regulations rely on a 15-transaction threshold rather than a 15-day threshold for conducting transactions in the jurisdiction as required by Act 42. As a result, a hypothetical taxpayer with $500,000 of sales in 15 transactions, all of which were conducted in the same day, would have economic nexus under the regulations. However, that taxpayer technically would not have nexus under Act 42 because they would not have satisfied the 15-day requirement. As a result, it will be interesting to see whether Allentown’s economic nexus policy will invite prospective legal challenges. The city’s experience in defending the policy will likely determine whether other BPT jurisdictions also adopt economic nexus rules.
Some of the largest employers across Pennsylvania are nonprofit entities including hospitals and educational institutions. Having a large nonprofit presence in a jurisdiction can be enticing for taxing jurisdictions looking to expand their BPT tax bases. The recent Allentown cases highlight an aggressive trend by local taxing authorities seeking to tax nonprofits based on the theory that they are “doing business” in their jurisdictions regardless of their purely public charity status. On appeal, the Pennsylvania Supreme Court may consider the important question of whether the nonprofits are nonetheless subject to BPT because their activities would upset their status as a purely public charity. The developments highlighted above illustrate certain areas in which local jurisdictions imposing a BPT are focused with the goals of expanding their tax bases and increasing revenue collections. While localities such as Allentown have taken particularly aggressive actions by adopting an economic nexus standard and pursing nonprofit entities, other localities are likely to follow. Such areas of focus add to an already complex local tax regime for businesses operating in Pennsylvania, based on the significant variation in the rules and regulations of each jurisdiction. Given the evolving nexus standards and the desire to expand the BPT tax base, businesses can better understand their BPT obligations by consulting the relevant ordinances and regulations, tracking employee locations and evaluating whether their specific activities subject them to BPT.
2 The Sterling Act of 1932 and the First City Business Tax Reform Act governs Philadelphia’s taxing authority.
3 Act of Dec. 31, 1988, P.L. 1121, 72 PA. STAT. §§ 4740.101 et seq.
4 Pennsylvania Department of Community & Economic Development, 2019 Annual Financial Report.
6 See Gilberti v. City of Pittsburgh, 511 A.2d 1321 (Pa. 1986) and V.L. Rendina, Inc. v. City of Harrisburg, 938 A.2d 988 (Pa. 2007).
7 Act of May 6, 2014, P.L. 642, No. 42, 53 PA. CONS. STAT. § 6924.301.1.
8 53 PA. CONS. STAT. § 6924.301.1 (a.1).
9 Lower Merion Township Bus. Privilege & Mercantile License Tax Reg. § 103.
11 Radnor Township Bus. Privileges & Mercantile Tax Reg. § 201.
12 In this instance, the employee is presumed to be working remotely for the convenience of the employer.
13 South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).
14 Missouri was the latest state to enact a sales tax economic nexus standard, but the legislation is not effective until January 1, 2023. Mo. S.B. 153, Laws 2021, amending MO. REV. STAT. § 144.605(2)(e).
15 Phila. Bus. Income & Receipts Tax Reg. 103(b).
16 City of Allentown Business Privilege Tax Reg. § 202(b).
18 See Hosp. Utilization Project v. Commonwealth, 487 A.2d 1306, 1317 (Pa. 1985) and Act 55 of 1997, 10 PA. STAT. § 371 et seq.
19 See Good Shepherd Rehabilitation Network Inc. v. City of Allentown, No. 1646 C.D. 2019 (Pa. Commw. Ct. Mar. 19, 2021); Phoebe Services v. Allentown, No. 706 C.D. 2020 (Pa. Commw. Ct. Aug. 12, 2021). For further discussion of the Good Shepherd decision, see GT SALT Alert: Pennsylvania rules nonprofit corp not a business.
17 City of Allentown Business Privilege Tax Reg. § 202(b).
Matthew D. Melinson
Matthew Melinson is a partner in Grant Thornton's Philadelphia office and the national leader of the SALT practice's indirect tax services. Melinson is responsible for all aspects of multistate tax consulting and planning and compliance related to income tax, franchise tax, sales and use tax, credits and incentives, real estate tax, and personal property tax.
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Jamie C. Yesnowitz
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
Washington DC, Washington DC
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