United States

Pennsylvania: Township’s Unapportioned Tax on Pennsylvania Franchise Fees was Unconstitutional

Jun 05, 2017
From KPMG TaxWatch

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The Pennsylvania Commonwealth Court recently ruled that a Township’s business privilege tax (BPT) assessment violated the Commerce Clause of the U.S. Constitution because the tax was not fairly apportioned. The taxpayer, a Texas-based corporation, owned and operated convenience stores throughout the United States. Certain of the stores were “corporate stores” owned and operated by the taxpayer. So-called “franchise stores,” on the other hand, were owned by franchisees that paid franchise fees to the taxpayer. The taxpayer maintained a regional office for its Northeast Division, which included stores in Pennsylvania and New England, in the Township. There were also two convenience stores in the Township—one owned by the taxpayer and the other owned by a franchisee.  The taxpayer reported and paid BPT based on the receipts generated at the one corporate store within the township. However, the taxpayer did not pay BPT on the franchise fees paid by the stores in the Northeast Division. The Township’s BPT ordinance specifically addresses how to calculate the gross receipts of businesses with multistate offices engaged in interstate commerce. Under this ordinance, the taxpayer’s gross receipts included 1) 100 percent of the franchise fees paid by stores in Pennsylvania, and 2) the franchise fees paid by franchise stores in other Northeast Division states after application of an apportionment factor. The taxpayer challenged the assessment on the basis that 100 percent of the franchise fees from Pennsylvania stores were subject to the BPT, although activities that generated these receipts occurred, at least in part, outside the Commonwealth.

After a trial court ruled that the assessment was unconstitutional, the taxpayer appealed. The Commonwealth Court upheld the trial court’s ruling, noting that the franchise fees were paid in exchange for various services provided at the company’s Texas headquarters and elsewhere. As such, the fees collected from the Pennsylvania stores were the product of interstate commerce and must be apportioned. The court rejected the Township’s argument that the taxpayer bore the burden of proving what portion of the Pennsylvania franchise fee receipts resulted from interstate commerce. Furthermore, the very purpose of apportionment was to distinguish between interstate and intrastate receipts. Although the court agreed with the trial court on the constitutional issue, it held that the trial court should not have invalidated the assessment. As such, the matter was remanded so that the BPT could be recalculated based on the court’s holding. For more information on Upper Moreland Township v. 7 Eleven, Inc., please contact Howard Sklaroff at 267-256-2891.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.