State and Local Taxation: Business Privilege Taxes and the Utility Exception in Pennsylvania

logistics, taxation, pennsylvaniaThe Local Tax Enabling Act authorizes municipalities in Pennsylvania to enact business privilege taxes; it applies throughout the Commonwealth, with the exception of Philadelphia, which is governed by separate legislation. While the scope of the act is quite broad, it does include an exclusion associated with utilities. The exclusion bars the following types of taxes:

  • “a tax on the gross receipts from utility service of any person or company whose rates and services are fixed and regulated by the Pennsylvania Public Utility Commission” (PUC); or
  • a tax on the gross receipts from “any public utility services rendered by any such person or company”; or
  • a tax on the gross receipts from “any privilege or transaction involving the rendering of any such public utility service.” See 53 P.S. § 6924.301.1(f)(2).

A recent opinion of the Supreme Court of Pennsylvania construed the scope of this exclusion, holding that it did not shield a freight broker from a local business privilege tax. S & H Transp., Inc. v. City of York, No. 17 MAP 2015, 2016 Pa. LEXIS 1078, *19-*22 (May 25, 2015).

The taxpayer was a freight broker based in York, Pennsylvania. It did business with licensed common carriers that were regulated by the PUC, serving as a middleman between its customers and the carriers. Id. at *2-*3. While it filed business privilege tax returns, S & H reported no revenues because it believed it came within the utility exclusion. Id. at *5.

Following an audit, S & H was assessed; it challenged the assessment and prevailed, as the trial court concluded that its gross receipts came from transactions that involved “the rendering of any such public utility service,” the third clause of the exclusion. Id. at *7-*8. A divided panel of the Commonwealth Court reversed, and the Supreme Court granted allocatur.

The Supreme Court unanimously concluded that the freight broker did not qualify for the exclusion. The court commenced its analysis by noting that all common carriers are regulated, but to different degrees; the trucking companies that S & H dealt with as a broker were not subject to rate regulation. Id. at *18-*19. Against that background, the court deemed the utility exclusion to be “clear and unambiguous” despite the divided views of the lower courts. Id. at*19.

  • Initially, the court noted that the first clause expressly provided that the exclusion only applied to a utility if its rates and services were regulated by the PUC. Id. at *19-*20.
  • Next, the court concluded that the second clause of the exclusion, covering “services rendered by any such person or company,” plainly related back to the first clause and therefore only applied to services that were subject to PUC rate regulation. Id. at *20-*21 (quoting 53 P.S. § 6924.301.1(f)(2)) (emphasis by the court).
  • The court then concluded that the final clause of the exclusion, by referencing “any such public utility service,” applied to services of persons and companies subject to rate regulation. Id. at *21-*22 (quoting 53 P.S. § 6924.301.1(f)(2)) (emphasis by the court).

Since S & H did not deal with carriers subject to rate regulation, it did not qualify for the exclusion. Id. at *22. The court also emphasized that the exclusion was designed to assure that utilities that were subject to rate regulation actually received the amount that the PUC had concluded was appropriate. Id. at *22-*24. Given that policy, extending the exclusion to cover services that were not subject to rate regulation was not consistent with its purpose.

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