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 The Commonwealth Court affirmed the lower court’s ruling in an unpublished disposition, saying, that on its face, the ordinance imposes a flat tax.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.
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