Fish v. Twp. of Lower Merion

128 A.3d 764

George D. FISH, Stephen Hrabrick and Jonathan A. Briskin, Appellees,

v.TOWNSHIP OF LOWER MERION, Appellant.

No. 29 MAP 2015

Supreme Court of Pennsylvania.

Argued Sept. 10, 2015.

Decided Dec. 21, 2015.

Kathleen Marie Thomas, Esq., Hladik, Onorato & Pearlstine, LLP, Ambler, for Township of Lower Merion.

Jennifer Walters Brown, Esq., Christopher Michael Curci, Esq., Flamm Walton PC, Allentown, for Radnor Township et al.

Robert Michael Careless, Esq., Sean Patrick Kilkenny, Esq., Law Office of Sean Kilkenny LLC, David Jonathan Sander, Esq., Friedman Shuman P.C., for Mun. of Norristown, Whitemarsh Twp., East Norriton Twp., and Boro. of Jenkintown.

Frances Ann Fruhwirth, Esq., City of Allentown Solicitor's Office, Susan Ellis Wild, Esq., Allentown, for City of Allentown.

Allan Hyman Freedman, Esq., Pamela E. Lewis, Esq., Briskin & Lewis, Bryn Mawr, for George D. Fish, Stephen Hrabrick and Jonathan A. Briskin.

SAYLOR, C.J., EAKIN, BAER, TODD, STEVENS, JJ.

OPINION

Chief Justice SAYLOR.

In this appeal by allowance, we address whether the Local Tax Enabling Act's prohibition on taxing leases precludes a municipality from applying its business privilege tax to businesses whose sole income consists of rent payments on leased real property.

Appellant Lower Merion Township is a township of the first class. Article IV of its municipal code requires every person—defined generally as an individual or a for-profit business entity—engaging in a business, trade, occupation, or profession in the Township to pay an annual business privilege tax calculated as a percentage of gross receipts. See LOWER MERION TWP., PA., MUN. CODE art. IV, §§ 138–40, 138–42 (1976). Each such person must also purchase and display a business registration certificate and file an annual tax return. See id. §§ 138–41, 138–45, 138–46.

Appellees Fish, Hrabrick, and Briskin ("Lessors") each own one or more parcels of real estate in the Township that they rent to tenants pursuant to lease agreements. The Township notified Lessors that, for every such parcel, they were obligated to purchase a separate business registration certificate and pay the business privilege tax based on all rental proceeds. In this regard, the Township adopted the position that: (a) the leasing of real property constitutes a business, trade, occupation, or profession for purposes of Article IV of its code; and (b) each parcel was a discrete business location subject to registration, tax-return, and tax-payment requirements.

Lessors filed a complaint in the county court, naming the Township as defendant and seeking a declaratory judgment stating that, pursuant to the Local Tax Enabling Act (the "LTEA"),¹ the Township's business privilege tax could not be applied to rental proceeds from leases and lease transactions. Lessors did not challenge the validity of Article IV generally, as the LTEA authorizes the taxing authorities of various political subdivisions, including first-class townships, to "levy, assess and collect ... taxes ... on persons, transactions, occupations, privileges, subjects and personal property" within the subdivision's jurisdictional limits. 53 P.S. § 6924.301.1(a). Rather, they observed that the LTEA's general grant of power in this regard is subject to an exception stating that such local authorities lack the ability to "levy, assess, or collect ... any tax on ... leases or lease transactions[.]" Id. § 6924.301.1(f)(1). Lessors argued their real-property rental activities fall within the scope of this exception.²

The parties eventually filed cross-motions for judgment on the pleadings. The court granted the Township's motion, denied Lessors' motion, and dismissed the complaint. The court issued an opinion explaining that it viewed the challenged tax as a gross-receipts tax and not a transactional tax such as the one disapproved in Lynnebrook & Woodbrook Associates, L.P. v. Borough of Millersville, 600 Pa. 108, 963 A.2d 1261 (2008) (holding that an ordinance imposing a flat $30.00 tax on the consummation of residential leases was prohibited by the LTEA). See Fish v. Twp. of Lower Merion, No. 2012–02530, slip op. at 3–4, 2013 WL 11033452 (C.P.Montgomery Dec. 26, 2013).

A divided en banc panel of the Commonwealth Court reversed in relevant part. As pertains to the issue involved in this appeal, the court initially stated that Section 301.1(f)(1) of the LTEA, 53 P.S. § 6924.301.1(f)(1), does not reflect a tax exemption, but carves out an exclusion or exception from the Township's taxing authority, meaning that any doubt about its reach should be resolved in the taxpayer's favor.See Fish v. Twp. of Lower Merion, 100 A.3d 746, 750 (Pa.Cmwlth.2014) (en banc ) (citing Lynnebrook, 600 Pa. at 117, 963 A.2d at 1266 (indicating that the statutory language in Section 301.1(f)(1) "should be construed as a tax exception—not a tax exemption—and thus construed against the taxing authority")). Applying this precept, and observing that the exception bars "any" tax on leases or lease transactions, the court concluded:

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 (characterized by the Township as a business privilege tax). The only differences are title and timing. ... Because the Township's [business privilege tax] would tax Lessors' lease revenue at a rate of 1.5 mills, it is a tax on leases or lease transactions and, thus, prohibited under the [Pennsylvania] Supreme Court's interpretation of Section 301.1(f)(1) of the LTEA in Lynnebrook.

Id. at 751 (footnote omitted).

President Judge Pellegrini authored a dissenting opinion, joined by Judge Leadbetter. The dissent distinguished Lynnebrook on the grounds that the tax in that matter was a flat tax expressly levied on lease transactions. The dissent indicated that the present tax, as it applies to Lessors, is imposed on the privilege of leasing property and not on leases or lease transactions themselves. In the dissent's view, the majority should have accorded this distinction controlling significance, as Pennsylvania courts have viewed privileges and transactions as distinct subjects of taxation, see, e.g., Gilberti v. City of Pittsburgh, 511 Pa. 100, 106, 511 A.2d 1321, 1324 (1986), and the LTEA authorizes the Township to tax privileges. In support of its position, the dissent highlighted School District of Scranton v. Dale & Dale Design & Development, Inc., 559 Pa. 398, 741 A.2d 186 (1999), in which this Court upheld the application of a business privilege tax to a contractor that built residences notwithstanding that the LTEA prohibited localities from taxing the construction of, or improvements to, residential dwellings. See Fish, 100 A.3d at 753–54 (Pellegrini, P.J., dissenting).

We allowed further review to consider whether the Commonwealth Court erred in holding that the Township's "business privilege tax could not apply to a business receiving gross receipts from the business of leasing real estate [.]" Fish v. Twp. of Lower Merion, ––– Pa. ––––, 112 A.3d 1209 (2015) (per curiam ).

The Township's position largely echoes that of the Commonwealth Court dissent. It argues that: Lynnebrook is distinguishable as the tax there was levied directly on leases or lease transactions, and not on a privilege; this Court clarified in Gilberti that privileges and transactions are distinct subjects of taxation; and Dale should control the outcome here. The Township also maintains that the Commonwealth Court erred by failing to consider early decisions in which a city sales tax was held not to impermissibly duplicate a state-imposed mercantile tax, although the mercantile tax was calculated based on the taxpayer's business volume. See, e.g., Blauner's, Inc. v. City of Phila., 330 Pa. 342, 346, 198 A. 889, 892 (1938) ("The city tax is a levy on sales, the state tax is a levy imposed for the privilege of conducting a particular kind of business, albeit the amount of the tax is measured by gross sales."). Finally, the Township contends that the Legislature understands "the distinction between a tax on something and a tax on privileges or uses related to that thing," Brief for Appellant at 13, as illustrated by the LTEA's manufacturing exception pursuant to which political subdivisions are precluded from imposing taxes on manufactured goods "or on any privilege, act or transaction related to the business of manufacturing." 53 P.S. § 6924.301.1(f)(4). Since this same "privilege" prohibition does not appear in subsection (f)(1), the Township suggests that this Court should not read such provision as barring application of a general business privilege tax to a business whose revenue consists of rental income.³

Several municipalities have submitted amicus briefs supporting the Township's position. Their arguments are generally duplicative of those advanced by the Township, albeit they focus primarily on the distinction between taxing transactions and taxing privileges—or, alternatively, between direct and indirect taxation of lease income. They assert this Court's case precedent clarifies that the LTEA permits indirect taxation, via a business privilege tax, of otherwise untaxable transactions or activities.

Lessors argue, first, that subsection 301.1(f)(1) should be read to expressly bar the tax in issue. They highlight Lynnebrook's explanation that subsection (f)(1) represents an "unqualified prohibition on the taxation of leases." Brief for Appellees at 3 (quoting Lynnebrook, 600 Pa. at 119, 963 A.2d at 1267 ). Quoting dictionary definitions of "lease," Lessors submit that consideration is an essential and elemental component of a lease. Thus, they forward that a tax measured by such consideration is, in fact, a tax on leases. Lessors argue, moreover, that this premise is supported by Lynnebrook insofar as it held that a flat tax on lease transact...