It Better Be Fixed

Attorney Donald B. Hoyt and Assistant York City Solicitor Jason Sabol recently obtained a legal victory from the Pennsylvania Supreme Court concerning whether freight brokerage services are taxable under the York City’s Business Privilege tax [BP tax], or whether they fall within the “public utility” exception of the Local Tax Enabling Act [LTEA]. S&H Transport, Inc. v. City of York, 17 MAP 2015 (decided May 25, 2016).

The LTEA states that a local authority shall not have authority to:

“Levy, assess or collect a tax on the gross receipts from utility services of any person or company whose rates and service are fixed and regulated by the Pennsylvania Public Utility Commission or on any public utility services rendered by an such person or company or on any privilege or transaction involving the rendering of any such public utility.”

It is important to keep in mind that while a common carrier of property is regulated by the Public Utility Commission [PUC] for safety and insurance requirements, a common carrier is not required to file a tariff, and its rates are not fixed and regulated by the PUC.

From 2007 to 2011, S&H filed BP tax returns but did not report any income to the City because it believed that its gross receipts fell within the “public utility” exception under the LTEA. The City conducted an audit, and determined that S&H owed the City $118,346.88 for the years 2007-2011. S&H appealed the tax assessment to the trial court. The trial court held that S&H was exempt from the BP tax under the LTEA because S&H collected gross receipts on transactions involving the “rendering” of a public utility service since the property carriers S&H used to transport freight are public utilities.

On appeal, the Pennsylvania Commonwealth Court in a 2-1 ruling reversed the trial court. The Commonwealth Court found that since S&H is not involved in the actual transportation of goods, it is not involved in the “rendering” of a public utility service. Therefore, its receipts are taxable.

S&H then appealed to the Pennsylvania Supreme Court. The Supreme Court addressed two issues: (1) whether the City can tax gross receipts from freight-brokerage services provided to entities engaged in public utility services that are excepted from the BP tax because the entities are regulated by the PUC; and (2) whether entities whose rates were once, but are no longer, regulated by the PUC still enjoy the PUC exception to taxation?

As to the first issue, the Supreme Court dissected the PUC exception on the LTEA and unanimously concluded that the entire exception applies only to entities whose rates and services are fixed and regulated by the PUC. Since the rates of common carriers of property are no longer regulated by the PUC, S&H cannot benefit from the exception regardless of whether or not it is “involved in the rendering” of such service. The Supreme Court dismissed the second issue as lacking merit. There is nothing in the LTEA that suggests that an entity whose rates were once regulated by the PUC is forever shielded from local taxation.

The bottom line is that only an entity whose rates are fixed and regulated by the PUC are excepted from local taxation, along with the services of such public utility and the transactions and privileges involving such public utility service. If the PUC no longer fixes rates and regulates the entity’s rates, then the entity is not entitled to the benefit of the exception from local taxation.