(A) Any person claiming exemption from tax or claiming an exclusion of gross receipts has the burden to demonstrate his or her legal right to such exemption or exclusion.
(B) As a condition to claiming any exemptions or exclusions, a taxpayer must disclose on his or her tax return its total gross receipts and then itemize any claimed exclusions and exemptions on a separate schedule that should be attached to and submitted with the tax return.
(1) State preemption.
(a) Generally. Persons with activity which has been judicially determined to be preempted by the Commonwealth may exclude receipts from such activity from taxable receipts. To date, local taxation has been preempted by the Commonwealth only as to the banking industry, the sale of insurance contracts subject to the state gross premiums tax, the alcoholic beverage industry and harness racing. Preemption has been judicially determined not to exist as to attorneys, the real estate industry, nursing homes and the securities industry.
(b) Important note. Preemption does not relieve a taxpayer from all municipal taxation. Gross receipts which are unrelated to the aspect of business operations the taxation and regulation of which has been preempted by the Commonwealth remain subject to tax by the borough. Taxable activity does not lose its character as such merely through association with preempted activity.
(2) Duplicate state tax. In the event the Commonwealth imposes a tax on the same subject matter as is taxed by the borough, and the state tax is measured by the same gross receipts sought to be taxed by the borough, the state tax shall prevail, and the same subject shall not also be taxed by the borough.
(3) Governmental entities. Agencies of the government of the United States, the various states and the Commonwealth, and any political subdivision thereof, are not subject to the tax.
(4) Utilities. Receipts from utility services provided by any person whose rates of service are fixed and regulated by the Pennsylvania Public Utility Commission are excluded from taxable receipts. Receipts from ancillary activities not governed by rate regulation are subject to tax.
(5) Tax exempt nonprofit corporations or associations.
(a) A tax exempt nonprofit corporation or organization is an institution that qualifies as a Pennsylvania Purely Public Charity. To quality, an organization must pass all parts of the following five part test.
(b) An institution must:
1. Advance a charitable purpose (requires I.R.C. § 501(c)(3) status);
2. Operate entirely free from private profit motive;
3. Donate or render gratuitously a substantial portion of its services;
4. Benefit legitimate subjects of charity; and
5. Relieve the government of some of its burden.
(c) The exemption for such purely public charities is limited to activities connected to the organization’s charitable purpose. The exemption does not extend to activities competing commercially with any person subject to the tax.
1. Example: a church meets the five-part test of a purely public charity and is exempt from the business privilege tax. However, this church has a large hall that is rented to parishioners and/or to non-parishioners for wedding receptions and parties.
2. The gross receipts from the rental activity are subject to tax because it is unrelated to the church’s charitable purpose. Also the rental activity competes with other businesses that are subject to the tax.
(d) Receipts generated from sales to religious, charitable, educational, governmental or other entities not themselves subject to the tax, are not excluded from taxable gross receipts.
(6) Manufacturers, producers and processors of by-products of manufacture.
(a) Generally. Receipts generated by engaging in the following activities (described more fully below) are not subject to the tax:
1. Manufacturing;
2. Producing; and
3. Processing of by-products of manufacturing.
(b) Manufacturing.
1. Manufacturing consists of the application of labor and skill to material whereby the original article is changed into a new, different and useful article. Whether or not an article is a manufactured product depends upon whether or not it has gone through a substantial transformation in form, qualities and adaptability in use from the original material, so that a new article or creation has emerged.
2. Whether an activity constitutes manufacturing for purposes of the business privilege or mercantile tax depends on the facts involved and each question is reviewed on a case-by-case basis. State courts have held that manufacturing includes commercial bookbinding, production of apparel, lithography, commercial printing, oil refining and steel milling. The courts have determined that manufacturing does not include: radio and television broadcasting; steel annealing and galvanizing; commercial illustration; work product which is primarily intellectual or clerical in nature (e.g., work of an attorney, architect, computer software engineer and the like); scrap metal bundling; dyeing and finishing of cloth; purification through pasteurization, filtration and testing for bacteria and impurities; the preparation of potato salad, coleslaw, bread filling and like examples of “cooking;” adding water to concentrated juice slurry or powdered drink mix to make a finished product; and printing designs and wording on ready-made clothing.
3. Whether a particular activity qualifies as “manufacturing” or “processing” under the provisions of the Pennsylvania Capital Stock and Franchise Tax is not dispositive in determining whether receipts are excludable for purposes of the borough tax.
(c) Producers.
1. The production, preparation or processing of natural resources or farm products (by manufacturers, producers and farmers with respect to the goods, articles and products of their own manufacture, production or growth) is not subject to the tax.
2. Example: taxpayer owns an organically grown vegetable farm and sells to a specialty grocery store. Taxpayer’s receipts are excluded from the tax.
(d) Processing by-products of manufacturing.
1. By-products of manufacturing consist of secondary or additional products produced in addition to a principal product. Processing of by-products is not taxable activity, whether performed by the original manufacturer or by others.
a. Example 1:
i. Taxpayer takes molten slag, a waste product discarded by a steel manufacturer, and subjects it to a process which enables the iron component to be separated and sold back to the steel manufacturer.
ii. Taxpayer’s activity of processing by-products of manufacturing is not subject to the tax.
b. Example 2:
i. Taxpayer is in the business of annealing and galvanizing rolls of steel thereby making the steel more malleable.
ii. Taxpayer’s activity is not manufacturing since no “new” product is created; nor is it “processing of a by-product of manufacturing” because rolls of steel are not secondary or additional products, but are themselves the principal product of the original manufacturer.
2. Receipts excludable under this division (B)(6)(d)2. are excluded whether the product is manufactured, produced or processed within or outside of the borough.
a. Example:
i. Taxpayer manufactures computer equipment in New York. It then leases or sells the equipment to customers within the borough.
ii. Receipts from sale or lease of equipment by the manufacturer thereof are not subject to the tax.
b. Receipts excludable under this division (B)(6)(d)2.b. are excluded whether the product is sold to others or used by the taxpayer in its own operation. Example:
i. Taxpayer produces asphalt both for sale to others and for its own use in fulfillment of paving contracts.
ii. Taxpayer is entitled to exclude receipts from sale of product to others, plus an additional amount equal to the cost of producing product for its own use.
c. A manufacturer’s receipts from activities other than manufacturing are not excluded. Example:
i. Twenty percent of the gross receipts realized by taxpayer, a manufacturer of small engine parts, are generated by providing maintenance services for products not manufactured by taxpayer.
ii. Receipts from such unrelated activity are not excluded.
(7) Receipts excluded from gross receipts (exclusions). State law or the tax provisions provide that the following specified receipts are excluded in the computation of tax:
(a) Freight delivery or transportation charges paid by the seller for the purchaser;
(b) Sales of trade-ins, up to the amount given the prior owner as a trade-in allowance;
(c) Refunds, credits or allowances given customers for defective goods returned;
(d) Taxes collected as agent for the United States of America or the Commonwealth or the borough other than for the payment of the borough business privilege or mercantile tax;
(e) Exchanges between sellers of identical goods, but not to the extent of any additional cash payment accompanying the exchange;
(f) Sales to other sellers in the same line of business at the same price for which the seller acquired the merchandise;
(g) Transfers between one department, branch or division of a business entity and another, recorded as interdepartmental transfers;
(h) In the case of a financial business, the costs of securities and other property sold, exchanged, paid at maturity or redeemed and moneys or credits received in repayment of advances, credits and loans (not to exceed the principal amount of such advances, credits and loans) and deposits; and
(i) Payments received by an agent for the account of his or her principal are excluded by the agent. The exclusion is limited to the amount subsequently remitted to such principal. See § 36.076.
(8) Important note. Section 300-39 of the borough business privilege tax provisions excludes from gross receipts certain commissions and fees between brokers. It has been judicially determined that this type of broker exclusion violates the uniformity requirement, and is therefore unconstitutional in the state. Consequently, the invalid provision is severed and the broker exclusion is no longer allowed.
(Ord. 2015-5, passed 4-28-2015)