It is no secret that Philadelphia, Pennsylvania’s tax system is a bit of a mess, and the Business Use and Occupancy Tax (“U&O”) stirs up the most controversy of all. U&O is a tax on the business, trade or other commercial use and occupancy of real estate located in the city. According to the Philadelphia Business Journal, it only exists because it meets the constitutional requirement that “all taxes … be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax…” and because the Pennsylvania Supreme Court, in a 1967 case called Madway v. Board for the Assessment and Revision of Taxes, ruled that all real estate within a taxing jurisdiction constituted a single taxable class. The effect of the Madway ruling was to prohibit taxation of different types of real estate within a jurisdiction at different rates, a common practice in many other jurisdictions.
New York City, for example, utilizes a multi-rate jurisdiction in which real estate is divided into four classes, each with a different tax rate. Small residential properties are in Class 1; larger residential properties are in Class 2. Property owned by utility companies is in Class 3, and everything else is in Class 4. Despite Class 1 having the highest tax rate, only 6 percent of the value is taxed and many exemptions are available. Class 4, on the other hand, has a much smaller tax rate, but 45 percent of the value is taxed and very few exemptions are available. Though Class 4 properties comprise less than 26 percent of the value of New York City realty, their share of the 2013 real estate tax burden is 45 percent. This would be unconstitutional in Philadelphia, although it shares the same goal: to place more of the tax burden on commercial and industrial properties. Instead, U&O was implemented and continues to create a lot of headaches for both owners of multi-tenant commercial properties (who must fill out mounds of paperwork) and city officials (who face difficulties administrating and collecting because U&O is not automatically lien-able like real estate taxes). In addition, because it is imposed on tenants, rather than owners, but is not based on receipts or income, it is effectively just overhead. All of these the issues presented by U&O just gives businesses more incentive to relocate outside of the city and avoid it all together. It would be extremely beneficial to Philadelphia’s tax system if a constitutional amendment was made to allow taxation of different types of property at different rates, which would increase fairness and transparency, while also boosting revenue.
For the full article from the Philadelphia Business Journal, click here.