United States: Statutory Construction: What Did The General Assembly Intend? Is A "Prohibited" Tax On A Lease Distinguishable From A Tax Imposed On The Gross Receipts Relating To Rental Income Derived From A Lease?

In an opinion issued on September 19, 2014, the Commonwealth Court in George D. Fish, Stephen Hrabrick and Jonathan A. Briskin v. Township of Lower Merion, No. 1940 C.D. 2013, concluded that the Township of Lower Merion was prohibited from imposing its Business Privilege Tax (BPT) on the rental income derived by the three taxpayers who were owners and lessors of real estate in the township. For the reasons stated in its opinion, the court concluded that it was bound by the decision of the Pennsylvania Supreme Court in Lynnebrook and Woodbrook Associates, L.P. ex rel. Lynnebrook Manor, Inc. v. Borough of Millersville, 600 Pa. 108 (2008), 963 2nd 1261 (Pa. 2008).

The issues before the Commonwealth Court were:

  1. Is a landlord and lessor of rental property located in Lower Merion Township subject to its BPT?
  2. Is a landlord and lessor of rental property located in Lower Merion Township subject to the township's annual registration requirement?

In its decision and opinion as to the first issue, the court, based on what it believes is "binding guidance" from the Pennsylvania Supreme Court in Lynnebrook, stated it was "compelled to conclude that the township's BPT violated the limitation on the township's taxing authority in Section 301.1(f)(1) of the Local Tax Enabling Act (LTEA) if the BPT was applied to the lease revenue. As pertinent, the cited section of the LTEA prohibits a taxing authority from imposing a tax on a "lease or lease transactions." In its judgment, the court determined that the fact that the tax is characterized as a tax on the privilege of engaging in a business and not on a particular transaction did not change the result. In this regard, since the Lynnebrook decision concluded that the prohibition to tax a "lease or lease transactions" represented an "exclusion" rather than an "exemption," the exclusion from the local authority to tax must be interpreted in a manner "that most restricts the taxing authority" and any doubt must be resolved in favor of the taxpayer.

In reviewing the Supreme Court's decision in Lynnebrook, at issue was a $30 tax imposed on the consummation of residential lease transactions. In reaching its decision, the court found that the issue posed a question of statutory construction. On the one hand, the LTEA provides broad authority to impose a tax on persons, transactions, occupations, privileges and subjects, including any interest in real property situate within the political subdivision. At the same, the LTEA imposed the limitation on the authority to tax a" lease or lease transactions." Taking into account the determination that the limitation represents an "exception (exclusion)," that limitation must be construed strictly against the taxing authority. Accordingly, since the intent of the General Assembly cannot be determined, the court construed that intention by applying various factors.  In determining that the transaction tax ($30) imposed on the consummation of residential lease transactions was prohibited by Section 301.1(f)(1) of the LTEA, the court concluded the limitation represented an "exception (exclusion)" rather than an " exemption" and any doubt had to be resolved in favor of the taxpayer.

On the second issue that was before the court, it concluded the taxpayers were subject to the township's annual registration requirement.

Caveat: The township can be expected to appeal the decision of the Commonwealth Court to the Pennsylvania Supreme Court. The decision of the Commonwealth Court impacts landlords/lessors of rental properties throughout the state where a township has a similar gross receipts tax that is imposed on rental income derived from a lease or lease transaction within the jurisdiction of the taxing authority. At this point, it is difficult to predict the ultimate decision on the instant issue and when that decision will occur. Landlord/lessors who are paying a BPT authorized by the LTEA that is imposed on gross receipts derived from rental income received under a lease under the LTEA should consider filing a protective refund claim of the BPT for all years not barred by the statute of limitations. In Lower Merion Township (and likely other townships as well), a refund claim must be filed within three years of the due date for filing the return as extended or one year after actual payment of the eligible tax, whichever is later. For future years, it may be prudent to continue paying the tax and filing a protective claim for refund for that year until the issue is ultimately resolved. The implications of the decision and the period within which a refund claim may be filed and the process for future filings until the issue is ultimately resolved should be discussed with your tax adviser and/or the township within which the lease property is located.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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