Overlooking Business Privilege Taxes a Costly Misstep

Business privilege and mercantile taxes (BPT) help fund municipal budgets in local taxing jurisdictions throughout Pennsylvania. However, in contrast to earned income taxes that are imposed in nearly 98% of local taxing jurisdictions, BPT is imposed in just over 10%.¹ Due to this unfamiliarity, the BPT can be overlooked and misunderstood by taxpayers and practitioners alike. To help taxpayers meet their filing obligations, capture tax savings opportunities, and avoid missteps, this column looks at the mechanics of the BPT and some of the latest trends.

Background

Through Act 511 of 1965, also known as the Local Tax Enabling Act (LTEA),² the General Assembly authorized Pennsylvania localities outside of Philadelphia to impose a variety of local taxes. Some localities took advantage of this authority and chose to levy gross receipts taxes based on the “privilege” of doing business in their jurisdiction. BPT is levied on the taxable gross receipts earned by a business attributable to its base of operations in a jurisdiction.

The state legislature curtailed the taxing authority granted in the LTEA with the enactment of the Local Tax Reform Act (LTRA) in 1988. The LTRA prohibited any other jurisdiction from adopting a new BPT measured by gross receipts and prevented localities from increasing BPT rates or expanding their tax bases by eliminating exemptions or exclusions.

More recently, the General Assembly enacted Act 42 of 2014 to create a bright-line nexus standard to help taxpayers determine if they are subject to BPT in a particular jurisdiction.³ Under the law, a taxpayer may establish nexus either through a “base of operations” (defined as an “actual, physical, and permanent place of business” in the jurisdiction) or by conducting transactions in the jurisdiction for all or part of 15 days during the calendar year.⁴

Nexus Developments

Since the adoption of Act 42, remote and hybrid work arrangements have increased. Gallup reports 52% of remote-capable employees are working on a hybrid schedule and 29% have fully remote work arrangements.⁵ As a result, an employee working remotely under a hybrid arrangement may conceivably create nexus under Act 42 by working at least 15 days or establishing a “base of operations” in that jurisdiction.

To further complicate matters, BPT jurisdictions do not have uniform nexus rules, leading to varying interpretations of what constitutes a “base of operations” or “transactions.” That means each jurisdiction’s rules must be consulted individually, potentially leading to differences in interpretation. For example, Lower Merion Township informally adopted a two-part test to determine when a remote employee creates nexus:

• There is no reasonably commutable office from which the employee can work.
• The employee must be directly involved in the generation of receipts for the business, meaning that clerical and internal roles would not create nexus.

Lower Merion’s informal standard removes the burden of tracking employees occasionally working remotely in the township. As of the date of the drafting of this article, no other BPT jurisdiction has explicitly adopted Lower Merion’s approach. Without guidance or regulations saying otherwise, other localities may consider any employee who works 15 days inside their jurisdiction as creating nexus under Act 42.

Since the removal of the physical presence standard under the U.S. Supreme Court’s decision in South Dakota v. Wayfair Inc., many state and local taxing jurisdictions have expanded the reach of their economic nexus provisions by adopting bright-line factor presence standards for income tax purposes. For example, Pennsylvania has adopted a bright-line sales nexus threshold of $500,000 for corporate net income tax purposes and $100,000 for sales and use taxes, while Philadelphia has adopted $100,000 sales threshold for its business income and receipts tax (BIRT).⁶ At the local BPT level, only Allentown had adopted an economic nexus standard as of October 2023, under which a business must have 15 or more transactions within the city totaling at least $500,000 of gross sales during the calendar year to create nexus.⁷ Applying economic nexus principles to the BPT raises the question of whether such an expansion of taxing authority violates Act 42 or the LTRA.

Sourcing and Apportionment Opportunities

Remote or hybrid work should spur businesses to conduct a detailed receipts-sourcing analysis for purposes of apportioning gross receipts. For example, a business that traditionally reported all receipts to one primary location but now has remote workers in various localities may consider adjusting its payroll factor and receipts sourcing by reflecting the new geographic and economic reality.

Practical Considerations

Often considered a hybrid tax, the BPT may not clearly fall under the purview of a tax department’s income/franchise tax team or indirect tax team. For some, BPT may resemble an income or franchise tax because it is not transaction-based; for others, it may resemble other state gross receipts or excise taxes because there are no deductions for losses or expenses. It is important that there is clarity within an organization as to who is responsible for the filing of BPT returns.

Compared to corporate income or sales tax rates, BPT rates are comparatively low, with the most common rates being 0.1% for wholesale to 0.15% for retail, though some impose higher rates for services.⁸ Several BPT jurisdictions offer statutory gross receipts exclusions to minimize filing obligations for smaller taxpayers with de minimis taxable receipts.⁹ As a tax that does not fall into a clear category and has a relatively low rate, BPT is often viewed as an afterthought by some taxpayers. For businesses that earn a large amount of receipts – even if filing in a loss position on federal and state income tax returns – a large local tax bill may come as an unpleasant surprise.

For the localities that levy a BPT, many are heavily reliant on the tax as a revenue source and vigilantly monitor for noncompliance. If selected for audit or otherwise assessed, a noncompliant taxpayer could be charged penalties and interest on underpayments. For those taxpayers that have never filed in a particular jurisdiction, the locality could potentially assess tax, interest, and penalties going back to the date when the taxpayer began doing business in the locality. In practice, many jurisdictions provide some form of interest and penalty relief for reasonable cause.

Taxpayers with potentially large BPT exposure going back several years should explore the possibility of pursuing voluntary disclosure agreements (VDAs). Unlike the states, most BPT localities do not have formal VDA programs that provide noncompliant taxpayers with incentives to come forward and disclose delinquent taxes in exchange for a limited look-back period and abatement of penalties and interest. Still, in our experience, most jurisdictions will work with taxpayers to provide some form of relief.

Taxpayers with longtime BPT filing obligations may be in the habit of sourcing receipts as they had done in past years. However, given recent considerations associated with remote work and ever-evolving nexus standards, BPT filing positions warrant a closer look. A review of a taxpayer’s BPT obligations may uncover additional filing requirements, opportunities to reduce tax, or exposures that warrant action to resolve. 

¹ A Tax Foundation 2019 article indicates that 2,506 of 2,560 Pennsylvania localities impose a local EIT, and we counted 270 municipalities with a BPT based upon 2021 data from the Department of Community and Economic Development.
² 53 Pa. Stat. Section 6901 et seq.
³ Act of May 6, 2014, P.L. 642, No. 42, 53 Pa. Stat. Section 6924.301.1.
⁴ 53 Pa. Stat. Section 6924.301.1(a.1).
⁵ Gallup, Work Locations for U.S. Employees with Remote-Capable Jobs. 
⁶ Phila. Bus. Income & Receipts Tax Regs. Section 103(b).
⁷ City of Allentown Business Privilege Tax Regs. Section 202(b).
⁸ For example, Radnor Township imposes a 0.3% rate on all receipts, while Monroeville Borough imposes a 0.4% rate on service receipts. Radnor Township Ord. Section 260-42; Monroeville Borough Ord. Section 334-24(A).
⁹ For example, Radnor Township offers an exclusion on the first $25,000 of gross receipts, as compared with Philadelphia’s $100,000 exclusion for the BIRT. Radnor Township Business Privilege and Mercantile Tax Regs. Section 206(G); Phila. BIRT Regs. Section 302(X).

Matthew D. Melinson, CPA, is a state and local tax partner at Grant Thornton LLP in Philadelphia, and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at matthew.melinson@us.gt.com.

Patrick K. Skeehan, JD, is a state and local tax senior manager in Grant Thornton LLP’s national tax office and can be reached at patrick.skeehan@us.gt.com.

Thomas D. Boyle, JD, is a state and local tax senior associate at Grant Thornton LLP in Philadelphia and can be reached at tom.boyle@us.gt.com.