OUR THOUGHTS ON:

Pennsylvania Supreme Court Strikes Downs Local Flat Tax Ordinance

State and Local Tax

By Jack Stewart

In Shelly Funeral Home, Inc. v. Warrington Township, the Pennsylvania Supreme Court ruled that a municipality’s ordinance imposing a flat tax upon businesses with gross receipts in excess of $1 million is in violation of a state statute prohibiting the levying, assessment or collection of a mercantile or business privilege tax on gross receipts or parts thereof.

In an effort to close a $400,000 budget shortfall, Warrington Township passed an ordinance that imposed a flat mercantile and business privilege tax of $2,600 on all businesses in the Township that have annual gross receipts in excess of $1 million. In doing so, the Township’s Board of Directors (“Board”) was trying to limit the tax to larger businesses in the jurisdiction under the premise that these businesses are consuming more municipal services and, therefore, should absorb a larger share of the tax burden.

The Common Pleas Court upheld the ordinance ruling because the tax, which is not levied as a percentage of a business’s gross receipts, does not violate the statute. The Commonwealth Court affirmed the lower court’s ruling in an unpublished disposition, saying, that on its face, the ordinance imposes a flat tax.

On appeal to the Pennsylvania Supreme Court, the Appellants argued that, in reaching its conclusion, the Commonwealth Court failed to recognize the difference between a tax that is imposed on all businesses in a municipality and one that is imposed on only those meeting a certain annual threshold of gross receipts. Furthermore, the Appellants claim that the Common Pleas Court erred by limiting the scope of the statute to taxes calculated as a percentage of gross receipts.

The Pennsylvania Supreme Court held that the specific method used by the Township to calculate both the tax and the threshold was based upon a portion of the gross receipts in excess of $1 million. The Court concluded that irrespective of how taxes are described, it is how they operate in practice that assesses their validity. In this case, even though the tax was described as a flat tax, it operated as a tax based upon a portion of gross receipts and, therefore, violated the state statute.

© 2013 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

comments