Pennsylvania high court hears case regarding ‘business privilege tax’

December 14, 2018

Tyson Fisher


The Pennsylvania Supreme Court recently heard oral arguments in case between S&H Transport and the city of York. The trucking company claims it qualifies for an exemption for the city’s “business privilege tax.”

On Dec. 5, S&H Transport and the city of York stated their case before the Pennsylvania Supreme Court. In October, an appellate court reversed a trial court’s decision that found the trucking company exempt from what is known as a business privilege tax.

According to court documents, the Local Tax Enabling Act allows York to impose a business privilege tax, which is “a tax on the privilege of doing business in the jurisdiction of the local taxing authority.” In this case, the local taxing authority is the city of York.

However, that tax exempts certain types of goods and transactions, including “charges advanced by a seller for freight, delivery or other transportation for the purchaser in accordance with the terms of a contract of sale.”

S&H, based in York, receives a freight shipment order from a customer, locates a common carrier to transport the freight shipment, and negotiates a contract with the freight carrier on behalf of the customer, according to the lawsuit. Because S&H collects the entire balance due from customers, its records reflect gross receipts that include delivery charges despite the fact that S&H is not itself a freight carrier.

York auditors discovered during an audit that S&H claimed a public utility services exemption to the business privilege tax for tax years 2007-11. City officials determined that S&H did not qualify for the exemption and charged the company nearly $200,000. S&H disagreed and took its appeal to court.

In October 2014, an appellate court sided with city, stating that S&H was not involved in any public utility services. In 2016, the state Supreme Court affirmed that decision and remanded the case back to the trial court to determine the amount owed.

During the remanded trial, S&H argued that it is entitled to deduct freight delivery charges from its taxable gross receipts because it is merely a middleman, and the freight delivery charges completely pass through S&H from its customers to the freight companies. Although the city agreed that S&H is a middleman, the city argued that S&H should be taxed not just on its gross earnings but on the gross receipts as reflected in its records. Essentially, S&H should also be taxed on monies it receives from its customers and passes directly onto freight carriers.

The trial court disagreed with the city’s assessment and ruled that the business privilege tax could only reasonably be interpreted as applying to the gross commissions earned by S&H, not its total gross receipts. According to court documents, the court also held that because freight delivery or transportation charges paid by a seller for a purchaser are to be excluded from the tax, it does not matter if those charges are paid by the seller itself or, as here, by an agent of the seller. Accordingly, S&H was entitled to deduct freight delivery charges from its gross receipts before calculating the tax due to the city.

The city of York appealed the decision, arguing that S&H does not fall within the freight delivery exception because it is not the seller of goods.

The appellate court determined that the trial court erred by relying on a reasonableness or fairness test.

“As to the fairness issue, this court has repeatedly rejected arguments based on ‘fairness’ when examining issues of taxation,” the court opined. “Specifically, in dealing with the (business privilege tax), we have stated, ‘We do not deal here with a matter which may be reconciled by reference to principles of fairness. What tax consequences should flow in the instant case is a matter of legislative intent.’”

In the matter of S&H’s argument regarding agency, the appellate court noted that neither the regulations nor the act itself contain language that would indicate a freight delivery exclusion applies to a seller’s agent. Furthermore, no case law exists suggesting as much.

“Moreover, nowhere in the ordinance or the (Local Tax Enabling Act) is there language carving out an exclusion for funds that merely ‘pass through’ a corporation,” the court determined.

Consequently, the appellate court sided with the city and again reversed the trial court order. S&H’s petition to the Supreme Court was granted. Now that oral arguments have concluded, the parties await a final decision from the high court.