In the state statute authorizing the BIRT, the General Assembly delegated responsibility to the City of Philadelphia’s Revenue Commissioner to develop apportionment rules. In doing so, the General Assembly specified that the Revenue Commissioner should give “due regard” to a taxpayer’s property, wages, and receipts.1 And for three decades the Commissioner did just that—for three decades the Commissioner’s apportionment formula followed the statutory specifications and thus contained property, payroll, and sales factors. Then, without any change in the enabling act, that changed in 2015.
In 2015, the Revenue Commissioner adopted a regulation which required taxpayers to apportion their net income to Philadelphia using a sales-factor-only apportionment formula instead of the three-factor formula (property, payroll, and double-weighted sales) adopted in 1985.2 As a result, many taxpayers that are primarily located outside the city are now paying significantly more BIRT than prior to the apportionment change. In fact, in many instances the apportionment change has nearly doubled their tax liability.
In our view, the Revenue Commissioner’s switch to sales-factor-only apportionment was unlawful, and taxpayers who would benefit from including a property factor or a payroll factor (or both) in their apportionment formula should consider filing refund claims to do so.
We believe the Revenue Commissioner’s action was unlawful because the state enabling act should be read as requiring the apportionment rule to take into account (i.e., give “due regard” to) the property, payroll, and sales of a taxpayer. Alternatively, if the state law is not read as a requirement, then we believe the General Assembly’s delegation of this authority to the Revenue Commissioner is invalid because it violates non-delegation principles under the state constitution because the General Assembly did not “make the basic policy choices” and did not include “adequate standards which will guide and restrain” the Commissioner’s exercise of the delegated authority.3
Several of our clients have filed Philadelphia BIRT refund claims on this basis, and challenges are pending. If your company is primarily located outside Philadelphia and it paid BIRT on its net income, this is relevant to you and you should consider filing a protective refund claim. A refund claim for the 2018 tax year is due by April 15, 2022.
Download our quick and easy way to file a claim. Instructions for filing are available on the website for the City’s Department of Revenue, in applicable regulations, and in applicable laws and ordinances. If you have any questions or would like assistance, please contact one of the authors of this Alert or another member of Reed Smith’s State Tax Group.
- 53 P.S. § 16182 (“Net Income”)(3). See also Phila. Code § 19-2601(“Net Income”)(c).
- City of Philadelphia, BIRT Regs. § 408.
- Protz v. Workers’ Comp. Appeal Bd., 161 A.3d 827, 834 (Pa. 2017).
Client Alert 2022-039
