Ryan Colquhoun, a broker and partner of Harrisburg Property Management Group, dreamt of a view of the Susquehanna River from his office.
Logistical factors, such as ease of access to his Harrisburg properties and anticipated taxes, were also under consideration during his real estate search. Colquhoun and his team manage 700 to 800 units in the city alone, and that number is growing, with additional properties in the surrounding suburbs.
“We wanted to be on Front Street,” he said. “We loved being along the river, but the property and real estate taxes in Harrisburg are very, very high.”
Eventually, they decided to locate upriver in Susquehanna Township. But that didn’t free them of all Harrisburg taxes. Because they still did business in the city, they remained subject to another tax, one that many new companies are surprised to learn about—the business privilege tax (BPT).
Back in 1965, Pennsylvania passed the Local Tax Enabling Act (LTEA) to raise additional revenue for local government services. This granted second- and third-class cities, boroughs and other municipalities the power to tax for general revenue purposes, including levying taxes on gross receipts for the “privilege” of doing business within a locality—making Pennsylvania one of only a handful of states to have such a tax.
Out of about 2,900 entities that have the power to tax in Pennsylvania, only about 350 levy a mercantile tax or a BPT. Historically, a mercantile tax has been levied on retailers and wholesalers, while businesses that provide services, such as consulting, are responsible for the BPT. Colquhoun happens to do business in two of the municipalities (Harrisburg and Swatara Township) in central Pennsylvania that levy such a tax. Others locally include Paxtang, Penbrook and jurisdictions within York and Adams counties.
“Primarily, it’s a lot of the old third-class cities that still retain a BPT—obviously because we’re all hurting for different revenue sources,” said Michael Hughes, tax and enforcement administrator for Harrisburg. “We’re in a worse spot than a lot of municipalities because the Capitol is here—they don’t pay property taxes on those properties. And we have an array of nonprofits based here because it is the capital city. We have to try and maintain every revenue source we can.”\
In 2018, the BPT is projected to account for 10 percent of the city’s general fund revenue, about the same amount as last year.
“For every new business coming in, another one probably had left,” Hughes said. “There’s really a balance. The market is only going to bear so many restaurants downtown.”
For those providing a service in Harrisburg, the total rate imposed by the BPT is 3 mills or $3 per $1,000 of gross volume of business, up to gross receipts of $3.3 million. For gross receipts in excess of that, the rate imposed is 1 mill or $1 per $1,000.
For retailers, the rate of the similar mercantile tax is 1½ mills or $1.50 per $1,000, up to gross receipts of $3.3 million. For gross receipts above that, the rate is ¼-mill, or 25 cents per $1,000.
“It is a nefarious tax because townships are very aggressive,” said Vito Cosmo, managing director of state and local taxes at accounting firm Grant Thornton in Philadelphia. “The bedroom communities of the 1960s and 1970s are now thriving mini-metropolises of their own.”
Cosmo estimates that, in the past few years, one-third of his clients have sought help due to confusion around LTEA taxes.
Since 1965, the guidelines around the tax have been adjusted multiple times. Some of these adjustments have clarified the law, while others have caused further ambiguity.
“I think smaller- and medium-sized companies get very surprised,” Cosmo said. “Companies are getting whipsawed all over the place.”
For instance, each jurisdiction has its own rules.
“It’s not homogenous,” he said. “Businesses, unless they have a really good CPA, or a large accounting firm like Grant Thornton, they’re going to have a lot of difficulty handling this.”
Hughes and his team realize that the BPT, and taxes in general, can be confusing.
He said that they welcome the opportunity to educate business owners, event organizers and residents on the tax code and do so frequently. He suggests calling the municipality before starting a business, hosting an event, or doing business within that municipality to ensure compliance.
For businesses that operate in more than one of these localities, things can get complicated—and expensive.
For instance, Colquhoun doesn’t pay a BPT in Susquehanna Township, as it doesn’t levy the tax, but he is liable for paying it in Harrisburg and Swatara Township.
“I understand taxes and fees have a purpose,” Colquhoun said. “If the municipality needs funding, they need to get it from somewhere, and businesses are a way to move on that. When you look at it, it can become quite substantial when you’re doing any volume of business. I talk to other business owners, and taxes in the city are certainly something that should be looked at when determining a location.”
Businesses that rely on foot traffic have a different perspective. They need to be where the action is.
Timishia Goodson, co-owner of Raising the Bar in the Broad Street Market, does not find such taxes to be burdensome, viewing them as necessary for calling Harrisburg home for her full-service bakery.
“It’s just a cost of doing business in Harrisburg,” she said. “Anytime in the market, there are probably 300 or 400 people roaming around. So, we definitely rely on foot traffic.”
For professional services that do not rely on foot traffic, is the cost of doing business in Harrisburg too high?
“I definitely think it’s discouraging for businesses, and it’s certainly regressive for those that are purchasing the services of those businesses,” Colquhoun said. “If there’s an additional tax that’s on the business, that’s an additional cost to the end user or consumer.”
Brittany Holtz, founder of Studio B Power Yoga, owns three studios—in Lower Paxton, Derry and Annville townships. These studios are not in places that levy a mercantile or business privilege tax.
She has dreams of one day opening a studio in Harrisburg proper, but said that taxes would need to be taken into consideration. She also questioned if such taxes discourage businesses from setting up in Harrisburg.
“I’m born and raised in this area, and I always found it interesting that we don’t have more progressive businesses here,” she said. “We’re close to big cities, we have great restaurants, and we are the capital. But it seems like people and businesses are moving out of Harrisburg. I want to see them move in.”
Hughes said that he understands that large businesses with substantial gross receipts may need to take the tax and necessary business licenses into consideration.
“A $50 license fee and potentially a couple thousand dollars in taxes, it’s not putting people out of business,” Hughes said. “With a bigger company, sure, sometimes you need to make a financial decision.”
However, Hughes pointed out, moving out of the city may not mean complete alleviation of the BPT, as Harrisburg Property Management Group discovered. For example, attorneys or contractors who are based in the surrounding suburbs are still responsible for Harrisburg’s BPT when completing construction projects in the city or doing business within the city’s courthouses.
“It’s a very labor-intensive tax to collect,” Hughes said. “That’s why no one really wants it.”
Looking ahead, Hughes believes that, with large construction projects on deck, such as the new federal courthouse and Harrisburg University’s high-rise, the city may experience an uptick in BPT revenue.
As far as the future of the BPT itself, Hughes doesn’t see it being removed from the general fund revenue budget anytime soon.
“The legislature attempted to make changes, but got pushback from a lot of third-class cities,” Hughes said.
Without a replacement revenue source, municipalities that levy the tax were unhappy with the idea.
“We can’t afford to take a hit of 10 percent of the budget,” he said. “That’s the bottom line. I don’t see it going away.”