Court rules township cannot impose business privilege tax on leases

Lower Merion Township does not have the authority to impose a 1.5 mill business

privilege tax (BPT) on lease agreements, according to  5-2 decision by the Commonwealth Court last week.

The high court reversed a decision from the Montgomery County Court of Common Pleas, which agreed with township officials that they were in their rights to tax the total gross income of all agreements a lessor made in a year, as opposed to a per contract fee.

This opinion "differentiated the BPT from the lease tax that the Pennsylvania Supreme Court found invalid in Lynnebrook and Woodbrook Associates, L.P. ex rel. Lynnebrook Manor, Inc. v. Borough of Millersville," wrote Judge Kevin Brobson.

According to the opinion authored by Brobson, taxing rental income violated section 301.1 of the Local Tax Enabling Act (LTEA). As a first class township, Lower Merion has the ability to levy a business privilege tax under the LTEA.

The township's code says that every person engaging in a business, trade, occupation or profession shall pay an annual privilege tax of 1.5 mills. However, the same legislation bars a municipality from imposing any tax on leases or lease transactions.

The affirming Commonwealth Court judges agreed that regardless of what Lower Merion called the tax, it was prohibited by the LTEA.

"Regardless of title, there is no material difference between a tax scheme that imposes a 1.5 mill tax upon the receipt of each rent payment (arguably a transactional tax), and a scheme that imposes a 1.5 mill tax payment annually based on all rent receipts," says Brobson. "The only differences are title and timing."