Double Taxation Threat - How Senate Bill 405 Can Stop It

CPAs Want to Restore Fairness and Sanity to the Local Tax System

“Local Tax Measure Is about Fairness” by Cheri Freeh, CPA, President of PICPA

Pennsylvania’s system of local government is a complex maze of almost 3,000 boroughs, townships, cities, counties, and school districts. That is more than all other 49 states combined. Each taxing jurisdiction has its own rules and regulations, and is authorized to impose a variety of local taxes, such as the earned income tax, property tax, local services tax, and business privilege tax. The costs for businesses to comply with this hodgepodge of local taxing systems will become even more cumbersome than it was unless the General Assembly acts promptly to restore fairness and sanity to the system.   

Local governments are using misinformation and scare tactics in an attempt to influence legislators to oppose Senate Bill 405 (SB 405). The measure will not, as some commentators have misleadingly stated, impose new restrictions on the ability of local governments to collect the tax, nor is SB 405 a tax cut. In fact, there is a very real threat of double taxation for businesses due to the court decisions in V.L. Rendina Inc. v. Harrisburg and A&L Inc. v. Township of Rostraver, and SB 405 is simply an effort to restore fairness, predictability, and balance to the taxation equation.

The Guiding Principles of Good Tax Policy was developed by CPAs to provide lawmakers, the general public and anyone with an interest in public policy with guidance in evaluating tax legislation. All ten principles are of equal importance, but two standout as critical in the fight for good tax policy—fairness and certainty. SB 405 would restore these two principles in the area of local taxation and prevent the possibility of a business being double taxed. Shortsighted opposition from local governments is delaying the bill’s consideration.

SB 405 simply would restore the bright-line “base of operations” test that existed for nearly 40 years before the 2007 Rendina decision eviscerated that standard and before A&L opened the door for double taxation by allowing multiple jurisdictions to tax the same stream of income without allowing for a proper credit. SB 405 clarifies that the act of engaging in individual transactions within a jurisdiction, without more presence, should not rise to the level of “doing business.” The bill only returns the local taxation procedures to the original application of the Local Tax Enabling Act (Act 511) which had been the well-established standard.

Through their objections, municipalities are essentially arguing that they want to be treated like separate states with the ability to tax any entity that enters their jurisdictions. That would mean that wherever an entity engages in a transaction – and not limited to where they have a place of operations as was the previous bright-line test – that entity would be forced to pay for a business license and be subject to the local business privilege tax for that transaction. So, if a company does business in 50 municipalities that impose a business privilege tax, that entity would be required to file for 50 licenses, file 50 business privilege tax returns, and pay 50 sets of business privilege taxes. This Byzantine local tax structure was never contemplated by Act 511.  

Trying to articulate a viable reason to oppose the bill, McKeesport Mayor Michael E. Cherepko stated, “Our residents … are inconvenienced with traffic and the large trucks and dirt.” This justification for double taxation is shortsighted and counterproductive to good and fair tax policy. It also completely ignores the economic impact that would be left behind in these communities if businesses choose not to conduct business there due to the burden of double taxation. Moreover, local governments are not limiting the Rendina decision to contractors; they are expanding the reach of the business privilege tax to anyone entering the jurisdiction to conduct any business whatsoever. This holds frightening implications for business in Pennsylvania. 

The nearly 21,000 members of the Pennsylvania Institute of CPAs (PICPA) support Senate Bill 405 because it would restore fairness and certainty to local taxation. We are hoping that the General Assembly will vote against double taxation and pass the legislation immediately upon its return to Harrisburg in May.

*To speak with a local CPA who can detail the bill and explain how it would benefit the business climate of Pennsylvania, please contact PICPA – Maureen Renzi, 215-972-6185 or mrenzi@picpa.org, Jim DeLuccia at 267-675-6261 or jdeluccia@ipcpa.org.