Refunding a business privilege tax

Business privilege taxes seem to be gaining notoriety these days.

On December 21, the Pennsylvania Supreme Court decided whether a Philadelphia taxpayer that overpaid its business privilege taxes was entitled to a refund of the taxes paid, a credit to offset future taxes owed, or if the taxpayer was simply out of luck because too much time had passed between paying the taxes and requesting some offset against the overpayment.

In this case, the taxpayer paid its business privilege taxes for 2003 and 2004 in April of 2004 and 2005, respectively. However, the taxpayer had filed for extensions of time in which to file its tax returns, and each tax return was filed in September of 2004 and 2005, respectively. In 2008, the Internal Revenue Service (“IRS”) audited the taxpayer. The results of the IRS audit demonstrated that the taxpayer had overpaid its taxes. When the taxpayer prepared its amended Business Privilege Tax (“BPT”) returns, it learned that it had overpaid its 2003 and 2004 taxes by approximately $6.5 million.

Shortly after filing its amended returns, the taxpayer requested a $6.5 million refund, but the city denied the request. The city based its denial on the fact that the requests for refunds, which were filed in 2009, were beyond the three-year time period in which, according to the BPT ordinance, refunds could be requested. Specifically, the BPT ordinance provides that requests for refunds must be filed within three years of the date that the income tax was paid, or within three years of the date on which the income tax payment was due, whichever is later. The BPT payments were due on April 15, 2004 and 2005; thus, under the city’s analysis, any request for tax refunds had to be filed by 2007 and 2008, respectively. Therefore, because the requests for a tax refund were filed after 2009, the requests were untimely and properly denied.

The taxpayer appealed the decision to the Philadelphia Tax Review Board, which agreed that the request for the tax refund was filed too late. However, of its own volition, the Tax Review Board decided that the taxpayer was entitled to a credit against future taxes in an amount equal to the requested refund. Both parties appealed first to the trial court, then to the Commonwealth Court, and finally to the Supreme Court.

Both the trial court and the Commonwealth Court affirmed the decision of the Tax Review Board. On its appeal to the Supreme Court, the taxpayer argued that the three-year time limit for requesting tax refunds should be “reset” once the taxpayer had an obligation to file an amended tax return. The Supreme Court quickly dismissed this argument. The court observed that the three-year time limit was based upon the latter of the date the income tax was paid or the date on which the income taxes were due. Because the BPT ordinance did not tie the right of filing for a refund to the tax returns, the court determined that the date on which returns or amended returns were ultimately filed was irrelevant. The court further observed that the BPT language was not ambiguous; both the date on which payment was made and the date on which payment was due were dates that could be ascertained with certainty. Because the request for the refund was filed more than three years after both the date on which the taxes were paid and the date on which the taxes were due, the taxpayer was not entitled to a refund of the taxes.

The city argued that the three-year limitation on requesting refunds should equally be applied to awarding credits for overpaying taxes. The Supreme Court referred to the language of the BPT ordinance in rejecting this argument. The court observed that the three-year limitation was specifically tied to requesting a refund. Elsewhere, the BPT ordinance allows for overpayments to be applied as a credit, unless the taxpayer requests a refund. Since the section limiting the time in which a taxpayer could request a refund did not specifically include applying for a credit, the court refused to extend the three-year limitation to credits. The court further noted that it was not bothered by treating credits differently from refunds. A refund is an immediate obligation owed by the city to the taxpayer; the credit is an offset against the taxpayer’s future liabilities. The Court observed that while a refund was to be paid promptly, a credit allows the city to budget prospectively; this was a material distinction for the court to consider.

The taxpayer argued that limiting its remedy to a credit against future taxes was not sufficient because it was dependent upon the taxpayer continuing to work within the city’s limits. The court did not address this argument, primarily because there were no facts to suggest that the taxpayer was no longer operating within the city. Therefore, the taxpayer was able to benefit from the tax credit.

Business privilege taxes are becoming more widely used to generate streams of revenue for various taxing municipalities. It is important for both brokers and agents to understand the obligations, limitations, and remedies that exist under such taxes so that they know how to best operate within those parameters. If you are unsure whether you work in an area subject to the business privilege tax, and, if so, how it might affect you, please contact your local association of Realtors® or, of course, your counsel.