Municipal Business-privilege Tax; Gross Receipts Exemption
S & H Transport, Inc. v. City of York, 174 A.3d 679 (Pa. Cmwlth. 2017), allocatur granted March 21, 2018, appeal docket 8 MAP 2018
This case involves the city of York’s business-privilege tax (BPT), a tax “for general revenue purposes on the privilege of doing business as herein defined in the City.” Slip Op., at 2. The City’s BPT is subject to the limitations of the LTEA, which allows for a BPT, but exempts gross receipts derived from certain transactions. Important to this case, Section 301.1(f) of the LTEA prohibits local authorities from collecting or levying taxes on certain types of goods and transactions, including “charges advanced by a seller for freight, delivery or other transportation for the purchaser in accordance with the terms of a contract of sale.” 53 P.S. § 6924.301.1(f)(12). Section 206(J)(2) of the City’s Regulations contains a similar freight delivery exclusion: excluding “receipts which constitute … [f]reight delivery or transportation charges paid by the seller for the purchaser.” Slip Op., at 3.
The court summarized the background of this case as follows:
S & H is a Pennsylvania corporation headquartered in the City which provides freight brokerage services. Essentially, S & H receives a freight shipment order from a customer, locates a common carrier to transport the freight shipment, and negotiates a contract with the freight carrier on behalf of the customer. S & H invoices its customer for the full balance owed, including the delivery cost charged by the freight carrier plus S & H’s commission for providing the brokerage services. S & H then remits payment to the freight carrier on behalf of the customer and retains the remaining funds as its freight brokerage commission. Because S & H collects the entire balance due from customers, its records reflect gross receipts that include delivery charges despite the fact that S & H is not itself a freight carrier.
Following an audit, the City discovered that for tax years 2007–2011, S & H claimed the public utility services exception to the BPT found in Section 301.1(f)(2) of the LTEA, 53 P.S. § 6924.301.1(f)(2). The City determined that S & H did not qualify for this exception and issued a notice of assessment in the amount of $188,346.88, plus interest and penalties. S & H appealed and the tax assessment appeal hearing officer affirmed the City’s assessment. S & H then appealed to the trial court which held that S & H qualified for the exception, and the City appealed to this Court.
In an opinion issued on October 15, 2014, we held that S & H was not entitled to the exception found in Section 301.1(f)(2) of the LTEA, 53 P.S. § 6924.301.1(f)(2), because S & H was not involved in the rendering of any public utility services. S & H Transport, Inc. v. City of York, 102 A.3d 599 (Pa. Cmwlth. 2014). Our Supreme Court affirmed on appeal, concluding “that the rates of the common motor carriers with whom S & H does business are not fixed and regulated by the PUC, and thus the entire exception is inapplicable.” 636 Pa. 1, 140 A.3d 1, 2 (2016). The case was then remanded to the trial court to determine the amount S & H owes for tax years 2007–2011 pursuant to the BPT.
Slip Op., at 3-5.
On remand, S & H Transport, Inc. argued it was entitled to deduct freight and delivery charges from its gross receipts before calculating the business privilege tax due to the City for tax years 2007 through 2011 because S&H is merely a conduit, and the freight delivery charges completely pass through S&H from its customers to the freight companies. The Court of Common Pleas of York County agreed, finding it “not fair” to include receipts beyond S&H’s profits. Slip Op., at 5.
The City appealed, arguing that S & H does not fall within the freight delivery exception of the LTEA or the Regulations because it is not the seller of goods and the trial court erred in applying a fairness standard to the BPT.
The Commonwealth Court agreed, finding the trial court erred in applying a fairness test to carve out an exception to the BPT, “thereby converting a gross receipts tax to a tax based on gross commissions.” Slip Op., at 6.
To discern legislative intent, the court looked to the broad definition of “business” in the Ordinance, which “specifically includes the provision of services—not merely the sale of tangible goods—and, thus, includes S & H’s freight brokerage services.” Slip Op., at 7. Furthermore, the court found, the broad definition of “gross volume of business” in the Ordinance shows the City intended to impose the BPT on all gross receipts attributable to corporations like S&H. The Pennsylvania Supreme Court previously held “that the similarly broad language of the LTEA evidences the General Assembly’s intention to permit local governments to capture a broad range of commercial activity and advances the underlying policy of allowing for taxation as a quid pro quo for businesses taking advantage of local governmental benefits such as police, fire and other services.” Slip Op., at 8 (citing V.L. Rendina, Inc. v. City of Harrisburg, 938 A.2d 988, 995 (Pa. 2007))
Based on the plain language of the exclusion, the Commonwealth Court reversed the trial court, concluding:
S & H’s argument that it qualifies for the exclusion because it is in the business of selling bills of lading to its customers, while imaginative, does not fall within this exception. S & H is neither the seller nor the purchaser in the transactions at issue but merely a broker of services. S & H also is not a freight carrier, does not transport anything and does not sell anything that is transported. It simply does not fall within the plain language of the exclusion.
As for S & H’s agency argument, neither the Regulations nor the LTEA contain language indicating that the freight delivery exclusion applies to a seller’s agent. The trial court failed to provide any case law supporting such a broad extension of the exclusion, and we are not aware of any.
Moreover, nowhere in the Ordinance or the LTEA is there language carving out an exclusion for funds that merely “pass through” a corporation, and this Court rejected a similar argument in Wightman Health Center v. Office of the Treasurer, City of Pittsburgh, 59 Pa.Cmwlth. 634, 430 A.2d 717 (1981).
Slip Op., at 9.
The Supreme Court granted allocatur on the following issues:
(1) Whether a freight broker is permitted to exclude freight delivery charges, to which the broker has no right to retain but rather utilizes solely for the purposes of purchasing transportation services for its customers, from its taxable gross receipts under the City of York’s Business Privilege and Mercantile Tax Ordinance?
(2) Whether a municipality may rely on more narrowly tailored exclusionary language contained in the Local Tax Enabling Act, 53 P.S. 5924.101 et seq., to interpret and enforce a more broadly worded exclusion contained in the municipalities ordinances?