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In a Pennsylvania Commonwealth Court case a freight broker was taxed on delivery charges even though it didn't provide delivery services. In this article, Cozen O'Connor's Joseph C. Bright and Robert M. Careless discuss the S&H Transport case in which a freight middleman was denied a delivery exception on its business privilege tax.
By Joseph C. Bright and Robert M. Careless
Joseph C. Bright is a member with Cozen O'Connor. Robert M. Careless is an associate with Cozen O'Connor.
A panel of the Commonwealth Court reversed a lower court ruling by holding that a taxpayer that acts as an intermediary between customers purchasing freight and freight companies providing the delivery service does not fall within the freight delivery exception of the Local Tax Enabling Act (LTEA). The court also reaffirmed its position that it does not apply a fairness standard when examining issues of taxation. S & H Transport, Inc. v. City of York, No. 242 C.D. 2017 (Pa. Commw., October 5, 2017) (opinion not reported).
S & H Transport, Inc. (S&H) provides freight brokerage services. S&H receives a freight shipment order from its customer, locates a common carrier to transport the shipment and negotiates a contract with the carrier. S&H bills the customer for the full balance owed, including the delivery cost charged by the freight carrier and S&H's commission for its intermediary services. Since the entire balance is collected from the customer, S&H's record reflects gross receipts that include delivery charges despite the fact that S&H is not itself delivering the freight.
S&H is headquartered in the City of York. For business privilege tax (BPT) purposes, S&H claimed the public utility services exception for tax years 2007-2011. Following an audit, the City determined that S&H did not qualify for the exception and issued a BPT assessment. The hearing officer upheld the assessment. The trial court disagreed with the hearing officer and held that S&H qualified for the exception. The Commonwealth Court reversed the lower court, holding that S&H was not entitled to the exception because it was not involved in the rendering of any public utility services. The Pennsylvania Supreme Court affirmed and remanded for a determination of S&H's BPT for 2007-2011.
The LTEA at Section 301.1(f)(12)(ii) provides that local authorities are prohibited from levying, assessing and collecting BPT on gross receipts which are “charges advanced by a seller for freight, delivery or other transportation for the purchaser in accordance with the terms of a contract of sale.” The city's BPT Regulations contains a similar freight delivery exception. S&H argued on remand, inter alia, that it was entitled to deduct freight delivery charges from its taxable gross receipts pursuant to Section 301.1(f)(12)(ii) because it acts as a middleman between the customers and the freight companies and the customers are invoiced for the freight delivery charges. The trial court on remand agreed with S&H that it was entitled to deduct the charges from its gross receipts before calculating its BPT. The lower court applied a fairness standard to conclude that the city's BPT applied to the gross commissions earned by S&H and not its total gross receipts.
The Commonwealth Court again reversed the lower court. The court held S&H does not fall within the freight delivery exception of the LTEA. The court also found that the trial court erred by applying a fairness standard to the BPT. The court stated that it has repeatedly rejected arguments based on fairness when examining issues of taxation. The court stated further that the BPT Ordinance at issue contained broad language which indicated the city's intent to impose BPT on all gross receipts attributable to corporations conducting business within the city's territorial limits. The court also relied on Rendina where the Pennsylvania Supreme Court held that the broad language of the LTEA evidences the General Assembly's intent to permit local governments to capture a broad range of commercial activity. The court concluded that S&H is merely a broker of services; S&H is not a seller or purchaser in the transactions at issue nor a freight carrier. As such, the court held that S&H does not fall within the plain language of the LTEA's freight delivery exception.
The court's decision could have a significant negative impact on businesses who engage with a third party to perform an intermediary service on behalf of a customer and who then pass the third party's charges to the customer for payment. The court did not discuss in detail S&H's agency argument, except to say that the LTEA does not contain language indicating that the freight delivery exclusion applies to a seller's agent.
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