By Jonathan Liss

When it comes to business taxes, taxpayers and practitioners have much to think about. In complying with a company’s state and local tax (SALT) filing obligations, local taxes can often be overlooked. This blog provides a brief overview of local business taxes imposed on corporations, specifically taxes based on income and gross receipts. I will focus on business taxes imposed by the city of Philadelphia and other Pennsylvania municipalities.

Philadelphia

In most cases, a local business tax is based on income or gross receipts. Philadelphia’s major business tax, the Business Income and Receipts Tax (BIRT), is the exception. The BIRT is paid by individuals, partnerships, and limited liability companies engaged in a business, profession, or other activity for profit within the city. There are two components to the BIRT: a tax on net income and a tax on gross receipts. In response to the U.S. Supreme Court’s Wayfair¹ decision, Philadelphia adopted a “bright line” economic nexus standard for the BIRT. A business with no physical presence (i.e., a remote business) in Philadelphia is considered to have nexus in the city if it generated at least $100,000 in Philadelphia gross receipts during any 12-month period ending in the current year.² As such, is subject to the BIRT.

If a company has nexus in Philadelphia it is still liable for the gross receipts portion of the tax, even if it had a net operating loss for the year. A taxpayer’s net income is apportioned based on receipts alone, using a single sales factor. The net income tax rate for 2024 is 5.81% (same as 2023). Taxable gross receipts generally include receipts from the sale of goods delivered to a location inside Philadelphia and receipts from services performed inside the city. The first $100,000 of taxable receipts is excluded from the tax base. The gross receipts tax rate for 2024 is .001415 (same as 2023).

Currently, Philadelphia uses a cost-of-performance approach to sourcing receipts from sales of services for the BIRT - receipts are sourced based on where the service is performed. A Philadelphia ordinance was passed in June 2022 that adopted market-based sourcing for the sale of both services and intangibles. This legislation will be effective for the tax year immediately following the year authorizing legislation is enacted in Pennsylvania.³

Other Pennsylvania Municipalities

When it comes to other Pennsylvania municipalities, business privilege taxes (BPTs) are imposed by about 270 local jurisdictions in the Commonwealth. These local BPTs are measured by the amount or gross receipts earned by a business from its base of operations inside a township or municipality.

The city of Allentown, which imposes a BPT, has adopted an economic presence test similar to Philadelphia for taxpayers that have no physical presence in the city. Taxpayers are treated as having established taxable nexus with Allentown if they generate at least 15 or more transactions to customer locations within the city totaling at least $500,000 in gross sales in the calendar year.⁴

Pennsylvania courts have repeatedly addressed the “base of operations” standard for determining whether a business could subject to a local BPT.

In response to various Pennsylvania court decisions regarding the appropriate BPT nexus standard, Act 42 was enacted in 2014. Act 42 created a bright-line nexus rule for when a Pennsylvania locality may impose its BPT. The law provides that a business establishes nexus if it conducts transactions in a local jurisdiction for all or part of 15 or more days within the calendar year. Also, the law also codifies the existing “base of operations” test addressed by Pennsylvania courts⁵ to determine whether a business is subject to a local BPT, providing that the base must be an “actual, physical, and permanent place of business” to create nexus within a local jurisdiction.

An important issue that arises in the context of gross receipts taxes imposed by Pennsylvania localities is apportionment. The Pennsylvania Supreme Court has held that the BPT ordinance of a local taxing authority must be fairly apportioned, as required under the Commerce Clause of the U.S. Constitution.⁶ A business that is located in a jurisdiction which imposes a BPT must carefully review the language of the local taxing ordinance. If the basis of the BPT is limited to “business transacted within the territorial limits of the locality,” the taxing jurisdiction cannot tax gross receipts attributable to business transacted outside the territorial limits of the locality. A company that transacts business in interstate commerce (i.e., both in-state and out-of-state) may apportion receipts properly attributable to the locality. To avoid double taxation, a business with a base of operations in the local jurisdiction may exclude from its local tax base any gross receipts subject to tax by another jurisdiction under the “15-day rule.”

Other Local Business Taxes

Corporations that do business, employ capital, own or lease property, or maintain an office in New York City must pay the business corporation tax. New York City has an economic nexus standard for its business corporation tax in which the receipts threshold is adjusted annually. For 2024, a corporation and a unitary group deriving receipts of $1,128,000 or more from New York City sources will be subject to the tax.

Over 600 Ohio municipalities (cities and villages) impose tax on wages, salaries, and other compensation earned by residents and nonresidents who work within that municipality. These local taxes also apply to net profits a business earns within the municipality.

This is just the tip of the local tax iceberg, of course. So, this tax season be sure that you don’t neglect the “L” in SALT when analyzing your state and local business tax filing obligations.

¹ South Dakota v. Wayfair Inc., 585 U.S., 138 S. Ct. 2080 (2018).
² City of Philadelphia Business Income and Receipts Tax Regulations, Section 103(C).
³ Bill No. 220485 - Amending Section 19-2600 of The Philadelphia Code.
⁴ City of Allentown Business Privilege Tax Regulation Section 202(b).
⁵ Gilberti v. City of Pittsburgh, 511 Pa. 100, 511 A.2d 1321 (1986).
⁶ Complete Auto Transit Inc. v. Brady, 430 U.S. 274 (1977).

Jonathan Liss is an adjunct professor at Drexel University and Villanova University School of Law. He can be reached at jal436@drexel.edu.

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^{Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.}