United States: City Of Philadelphia's BIRT: Is 3-Factor Apportionment Still An Option For Your 2015 Return?

Philadelphia's business income and receipts tax—the so-called "BIRT"—is imposed at a whopping 6.41% rate.1 Add that to the state-level corporate net income tax of 9.99%, and the combined tax rate on corporate income subject to the BIRT is more than 16%. On top of that, the city's Revenue Commissioner recently adopted a regulation switching to sales-factor-only apportionment. For a taxpayer outside the city, with zero property and payroll in the city, that apportionment change may triple its tax for the 2015 year. (For years before 2015, the city used a three-factor apportionment formula.)

This change impacts your returns due this coming April. What can you do about that? In this alert, we argue that taxpayers should consider continuing to use a three-factor formula using property, payroll and sales. We argue that the city's switch to a single sales factor was unlawfully done by administrative fiat. It is a switch that is required to be made by the legislature—either by ordinance (by City Council) or by statute (by the Pennsylvania General Assembly).


Last year, just before Christmas, during Mayor Nutter's last few days in office, his outgoing Revenue Commissioner promulgated a major change in business tax policy that will impact the revenue collected under current Mayor Kenney's administration. Specifically, right before she left office, former Revenue Commissioner Tolson promulgated, by regulation, single sales factor apportionment for the net-income portion of the BIRT, effective for the 2015 tax year (that is, the return to be filed in April 2016). That change to single-factor-only apportionment is, in our view, an unlawful exercise of lawmaking power by the Revenue Commissioner. Taxpayers—especially those outside the city—who are unfavorably impacted by the change should consider continuing to use three-factor apportionment, either on their original returns, or in refund claims.

For decades, the city of Philadelphia has imposed a business tax that includes an income tax. The apportionment rules, however, are not statutory rules. Instead, in 1984, the state General Assembly, when it authorized the city to impose the tax, delegated responsibility to the city's Revenue Commissioner to develop an apportionment policy so that "only that part of such net income...which is properly attributable...to the doing of business in the city...shall be taxed...."2 Likewise, City Council, following the state law, delegated apportionment policy-making authority to the Revenue Commissioner.3

The state and city legislatures did, however, suggest that the city Revenue Commissioner take "due regard to the nature of the business conducted," and specified that the Revenue Commissioner consider property, payroll, mileage, etc., in promulgating the apportionment formula. Further, the legislatures carved out an exception to the general apportionment rules for regulated businesses, such as banks. For those industries, the legislatures specified that their net income must be apportioned using a single sales factor.4 This carve-out suggested that the legislatures expected that the Revenue Commissioner's method applicable to non-regulated businesses would not be a single sales factor method.

Now, without any change in state legislation, and without any act of City Council, the former mayor and his outgoing Revenue Commissioner changed 30 years of tax policy. They decided, on behalf of the incoming administration, that an entirely different amount of "net income...is properly attributable...to the doing of business in the city." After 30 years of giving "due regard" to property and payroll, they have decided to give it no regard whatsoever.

Choosing an apportionment method is a policy choice that must be left to the legislature

Ordinarily, the choice of apportionment method is the subject of legislative debate and compromise. After all, the method of apportionment is often as important as the tax rate in determining how much revenue is generated by a tax. In fact, the choice of apportionment factors in an apportionment formula is more important than the choice of tax rate in determining who pays the tax. After all, choosing apportionment factors is a choice between imposing tax on those who invest and operate in the taxing jurisdiction (property and payroll) and those who take advantage of the jurisdiction as a marketplace (sales). No one would allow a taxing agency to set a tax rate. That is a choice for the legislature. Likewise, deciding who the tax burden falls on (by setting the apportionment formula) is a quintessential legislative policy choice.

Indeed, one noted commentator has questioned whether a legislature could delegate even narrow apportionment authority to an agency. For example, in some states, where the legislature has adopted a generally applicable apportionment formula for most industries, the taxing agency has adopted special regulations that apply to certain industries, like transportation. The commentator questioned whether it was appropriate for the legislature to delegate even that narrowly focused administrative authority.5 Surely, if an agency cannot set special apportionment rules for a few industries, it also cannot set general apportionment rules for all industries.

Because choosing apportionment factors is an exercise of fundamentally legislative power, that choice must be made by the legislature—the General Assembly,6 or at least City Council.7 Delegating that policy choice to the Revenue Commissioner is impermissible. Indeed, at the state level, apportionment has always been a legislative prerogative. More than 80 years ago, Pennsylvania's state legislature adopted the state-level corporate income tax and provided for a three-factor apportionment formula using property, payroll and sales.8 Forty years later, when the corporate net income tax was reenacted as part of the Tax Reform Code of 1971, the apportionment method was fully laid out by the legislature.9 More recently, in 2013, a single sales factor was adopted at the state level by the General Assembly under Act 52 of 2013. Indeed, for more than 80 years, apportionment of income at the state level has been an important matter of legislative debate and compromise.

Therefore, there is a threshold question of whether the original, expansive delegation of apportionment authority by the legislature in 1984 to the city Revenue Commissioner was an unlawful delegation of legislative authority.10 Indeed, "basic policy choices [must] actually be made by the Legislature."11 Thus, in delegating rulemaking authority to an agency, in Pennsylvania "the legislative body must surround such authority with definite standards, policies and limitations to which such administrative officers, boards or commissions, must strictly adhere and by which they are strictly governed."12 After making the "basic policy choices"13 and establishing "definite standards, policies and limitations,"14 the General Assembly may entrust the agency to "fill up the details under the general provisions made by the Legislature."15

Here, there was little in the way of "definite standards, policies and limitations" established by the General Assembly to the Revenue Commissioner. True, the legislature articulated an objective: Under state law, the apportionment method adopted by the Revenue Commissioner must reflect "net income [that is]...properly attributable and allocable to the doing of business in the city...."16 But as the Pennsylvania Supreme Court recently made clear in the recent West Philadelphia Achievement Charter case, it is not enough for the legislature to merely articulate a "generalized legislative objective."17 It must offer "definite standards and limitations."18 Here, the legislature's choice of the word "proper" offers no real standard or limitation whatsoever. Of course the apportionment must be "proper." Would it be permissible for the apportionment to be "improper"? The important policy choice—mainly, between imposing tax on those with investment in the city (property and payroll) versus imposing tax on those who use the city's market (sales) was not made by any legislature, but was delegated to the agency.

One generous view is that the General Assembly and City Council, by listing "property" and "wages," etc., as variables to which the Revenue Commissioner should give "due regard," was establishing the required "definite standards." If so, then the original three-factor apportionment adopted by the city in the 1980s was valid because the original three-factor apportionment "adhere[d]" to those "definite standards." The change to a single sales factor, however, is inconsistent with those definitive standards.

In the end, apportionment is an important policy choice that must be made by a legislature. Here, an outgoing mayor and his outgoing Revenue Commissioner have made that policy choice themselves. Under Pennsylvania law, the Revenue Commissioner either: (1) never had the authority to establish apportionment rules; or (2) had the authority to establish apportionment rules—provided those rules took wages and property into account. Either way, a single sales factor apportionment method exceeds the Revenue Commissioner's authority. Taxpayers should consider taking a position that single sales factor apportionment is not mandatory in the city of Philadelphia.


1. Phila. Code § 19-2604(1).

2. 53 P.S § 16182 ("Net Income")(3).

3. The city ordinance enacting the tax likewise provides the same delegation of authority to the Revenue Commissioner to establish apportionment rules. Phila. Code § 19-2601 ("Net Income")(c) (same text as the state enabling law).

4. 53 P.S. § 16182 ("Net Income")(3).

5. See Hellerstein, State Taxation, ¶9.20[1]("as a matter of policy there is room for criticism of so broad a delegation of power to the tax administrator. The legislature has a proper role in prescribing at least the outlines of provisions for dividing the income of the major nonmanufacturing or nonmercantile businesses....after all, the representatives of the people elected to make policy and those to whom the various constituent and conflicting interests throughout the state have access.").

6. The Pennsylvania Constitution provides that the "legislative power of this Commonwealth shall be vested in the General Assembly...." Pa. Const. Art. II, § 1.

7. At the city level, "[t]he legislative power of the City, including any such power which may hereafter be conferred on the City by amendment of the Constitution or by the laws of the Commonwealth of Pennsylvania, shall be exclusively vested in and exercised by a Council, subject only to the provisions of this charter." City of Philadelphia, Home Rule Charter, § 1-101; see also Pa. Const. Art. IX, §2 ("A municipality which has a home rule charter may exercise any power or perform any function not denied by this Constitution, by its home rule charter or by the General Assembly at any time.").

8. Act 91 of 1935, P.L. 208, 209-210, § 2 enacting 72 P.S. § 3420b(2)(c) (establishing three-factor formula for corporate net income tax).

9. Act 2 of 1971, P.L. 6, § 401 (codified at 72 P.S § 7401).

10. The rule that prohibits delegation of legislative authority to an agency is a "natural corollary" to the text of Article II, § 1 of the constitution. See Chartiers Val. Joint Schools v. Cty. Bd. of School Directors of Allegheny Cty., 418 Pa. 520, 529 (1965).

11. W. Mifflin Area Sch. Dist. v. Zahorchak, 607 Pa. 153, 158 n. 5 (2010) (quoting Chartiers, 418 Pa. at 529).

12. See Holgate Bros. v. Bashore, 331 Pa. 255, 260 (1938).

13. Zahorchak, 607 Pa. at 158 n. 5.

14. Holgate Bros., 331 Pa. at 260.

15. Bell Tel. v. Driscoll, 343 Pa. 109, 114 (1941) (internal quotations and citations omitted).

16. 53 P.S. § 16182 ("Net Income")(2).

17. West Philadelphia Achievement Charter Elementary Sch. v. School Dist. of Philadelphia, No. 31 EM 2014, 2016 WL 616748 at *9 (Feb. 16, 2016).

18. Id. at *4.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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