PA Rules in Favor of Taxpayer in LTEA Case

On September 19, 2014, the Pennsylvania Commonwealth Court ruled in favor of the taxpayer and overturned the decision by the Montgomery County Court of Common Pleas, which agreed with the local municipality’s right to impose tax on rental income under the Local Tax Enabling Act (LTEA).

According to the LTEA, the municipality may levy a tax on the privilege of doing business for taxpayers who conduct business transactions or maintain an actual, physical, and permanent place of business within its jurisdiction. However, the LTEA prohibits municipalities from imposing a tax on “leases or lease transactions.”

The municipality imposed its BPT on rental receipts from properties the taxpayer owned and leased. Although this is prohibited by the LTEA, the Montgomery County Court of Common Pleas sided with the municipality and allowed the imposition of tax because the BPT is imposed on a taxpayer's aggregate annual income/proceeds from the lease, and not on each individual lease transaction.

Although the Pennsylvania Commonwealth Court ruled in favor of the taxpayer, the court noted that taxpayers are still required to register for the tax at each location which generates rental revenue because the taxpayer’s rental activities fall within the definition of “a business, trade, occupation or profession.” Generally, all lessors of property are required to register for the BPT within each municipality where it holds property.

If you own leased property and have paid Business Privilege Tax to a Pennsylvania municipality other than Philadelphia, you may be eligible for a refund.  Contact your tax professional for more information.