Among the severe business consequences of COVID-19 has been the government-mandated closure of non-essential businesses to better prevent the spread of the virus. Such closures have affected many retail establishments and service providers. In addition to the obvious fiscal impact of such closures on the shuttered businesses, there can also be unintended negative local tax consequences. One potential consequence relates to local use and occupancy taxes imposed on tenants of commercial premises that are prohibited by law or executive mandate from operating during the crisis. The approaches being taken by two major cities—the cities of New York and Philadelphia, both of which impose a commercial use or occupancy tax on tenants—illustrate two potentially divergent policies.

New York City. New York City imposes an annual commercial rent tax on rent paid or required to be paid by commercial tenants for the right to use or occupy taxable premises, unless exempt or where the base rent is below a prescribed annual threshold.1 Taxable premises are premises used or occupied to carry on a trade, business, profession, or commercial activity in Manhattan south of the center line of 96th Street. The tax, imposed at an effective rate of 3.9 percent of a tenant's base rent, applies to most medium to larger-sized businesses that lease space in Manhattan for the operation of, for instance, retail stores, restaurants, gyms, and movie theaters, as well as professional offices and bank branches, to name a few. Commercial tenants are responsible for filing and paying the commercial rent tax.

Philadelphia. The City of Philadelphia's use and occupancy tax is a monthly tax imposed on commercial tenants at the rate of 1.21 percent of the assessed value of real property located in Philadelphia, for the use or occupancy of the premises for business purposes.2 Use or occupancy means actual and physical possession of the premises, whether or not rent is paid. Similar to a sales tax, the owner or landlord must collect the tax from tenants and remit it to the City of Philadelphia.

Divergent Approaches. In an Executive Order, New York Governor Cuomo directed the mandatory closure of all non-essential businesses throughout the State, including in New York City. City of Philadelphia Mayor Kenney has also ordered the closure of all non-essential businesses in Philadelphia.

On March 31, 2020, the Philadelphia Department of Revenue issued a pronouncement that businesses ordered to close will not be subject to the Philadelphia use and occupancy tax. This is because those businesses are being denied access to their places of business. Businesses that have employees on site or that maintain employee access to the premises, however, will continue to be subject to the tax. The pronouncement reflects the reasonable view that a tax on use and occupancy should not apply where use and occupancy is denied by government mandate.

In contrast, the New York City Department of Finance has not issued guidance as to the applicability of the New York City commercial rent tax under similar circumstances. According to reliable sources, the Department of Finance does not intend to issue broad-based guidance to provide relief from the commercial rent tax. Instead, it intends to make decisions as to taxability under the specific facts of each case.

As a result, commercial tenants in New York City are left with the uncertainty of whether in addition to having to pay rent for premises that they are prohibited from occupying, they may also be required to pay commercial rent tax on those rental payments. The commercial rent tax law would seem to support an interpretation that allows the exclusion from the tax of rental payments made for any period where the government denies the tenant the right to use or occupy those premises. The next New York City commercial rent tax return—the annual return for the period from June 1, 2019 to May 31, 2020—is due June 20, 2020.


1. N.Y.C. Admin. Code §§ 11-701, 11-702, 11-704.

2. Phila. Code § 19-1806.

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