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S & H Transport, Inc. v. City of York

Supreme Court of Pennsylvania

July 17, 2019

S & H TRANSPORT, INC., Appellant
CITY OF YORK, Appellee

          ARGUED: December 5, 2018

          Appeal from the Order of the Commonwealth Court entered October 5, 2017 at No. 242 CD 2017 reversing the Order of the Court of Common Pleas of York County, Civil Division, dated February 7, 2017, entered February 9, 2017 at No. 2012-SU-4143-54



          TODD JUSTICE.

         In this appeal, we are asked to consider whether the Business Privilege and Mercantile Tax ("BPT") imposed by Appellee the City of York ("City"), must be paid by Appellant, S & H Transport, Inc. ("S & H"), a freight broker, on the total yearly amount of money S & H receives from its customers for arranging shipping of commercial goods with freight carriers on their behalf, where, after deducting its commission, S & H remits the remaining money to the freight carriers as payment of their shipping fees. After careful review, we find that the amount of money S & H collects and passes on to freight carriers for their fees is excluded from taxation under the City's BPT. We therefore reverse the order of the Commonwealth Court.

         I. Background and Procedural History

         S & H is a freight brokerage company which arranges freight delivery for sellers of commercial goods, via a common carrier.[1] Freight brokers do not directly ship or transport freight; rather, they function as intermediaries which facilitate the shipment of goods. Reiter v. Cooper, 507 U.S. 258, 261 (1993); cf. 49 U.S.C. § 13102(2) (defining "[b]roker" as "a person, other than a motor carrier or an employee or agent of a motor carrier, that as a principal or agent sells, offers for sale, negotiates for, or holds itself out by solicitation, advertisement, or otherwise as selling, providing, or arranging for, transportation by motor carrier for compensation."). They are the "connecting link between shippers and carriers, uniting shippers who have cargo to deliver with carriers who have available motor transportation." Jeffrey S. Kinsler, Motor Freight Brokers: A Tale of Federal Regulatory Pandemonium, 14 Northwestern Journal of International Law and Business 289 (1994).

         As explained by the Commonwealth Court in its opinion in this matter, freight brokerage is a process in which a freight broker such as S & H receives an order from a customer ("seller") who desires to ship commercial goods to a buyer. The broker then contracts with a common carrier to perform this task. Once the goods have been delivered to the buyer, the broker will invoice the seller for the amount of the shipping fee charged by the common carrier, as well as its broker's commission. When the seller pays the amount of the invoice to the broker, the broker remits the shipping fee to the common carrier, while retaining its commission. S & H Transport, Inc. v. City of York, 174 A.3d 679, 680 (Pa. Cmwlth. 2017).

         S & H is headquartered in York, Pennsylvania, and, thus, like all businesses within that City, it is obligated to pay that City's BPT, which was created by an ordinance passed by York City Council, pursuant to the authorization of the Local Tax Enabling Act ("LTEA").[2]

         Briefly, by way of background, the LTEA is the means by which the General Assembly has conferred on local municipalities the authority to impose a broad range of taxes other than just real estate taxes, which were, historically, the means by which their governments derived revenue to provide necessary public services to their residents. Joseph C. Bright, Summary of Pennsylvania Jurisprudence, Taxation § 17:1 (2018). As a general matter, the LTEA authorized local municipalities to enact taxes on tangible objects or activities which the Commonwealth does not itself tax, subject to certain legislatively specified restrictions. After the LTEA became law in 1966, various municipalities utilized the authority granted to them by this enactment to levy taxes on the gross receipts of businesses within their jurisdiction for "the privilege of doing business." 53 P.S. § 6924.301.1(a.1)(1). As our Court has explained, the LTEA allowed such local taxation "as a quid pro quo for businesses advantaging themselves of local governmental benefits, including the availability of police, fire, and other services." V.L. Rendina, Incorporated v. City of Harrisburg, 938 A.2d 988, 995 (Pa. 2007).[3]

         Although municipalities were authorized to impose such "business privilege" taxes, the General Assembly also excluded from this taxing power certain enumerated objects or activities. See generally 53 P.S. § 6924.301.1. Pertinent to the issues we are considering in the case at bar, municipalities are forbidden "[t]o levy, assess and collect a mercantile or business privilege tax on gross receipts or part thereof which are: . . . (ii) charges advanced by a seller for freight, delivery or other transportation for the purchaser in accordance with the terms of a contract of sale." Id. § 6924.301.1(f)(12)(ii).

         As noted, York enacted its BPT via ordinance ("BPT Ordinance"), which provides, in pertinent part:

LEVY; RATE; EXEMPTIONS; BUSINESS VOLUME. There is hereby levied . . . a tax for general revenue purposes on the privilege of doing business as herein defined in the City.

BPT Ordinance, § 343.02. The tax is imposed on "the whole or gross volume of business transacted within the territorial limits of the City." Id. § 343.02(a). The BPT Ordinance further defines these terms in the following fashion:

(a) "Business" means any activity carried on or exercised for gain or profit in the City, including but not limited to, the sale of merchandise or other tangible personalty or the performance of services. As to those taxpayers having a place of business within the City, "business" includes all activities carried on within the City and those carried on outside the City attributable to the place of business within the City.
(f) "Gross volume of business" means the money or money's worth received by any vendor in, or by reason of, the sale of goods, wares, merchandise, or services rendered.
(g) "Service" means any act or instance of helping or benefitting another for consideration.

Id. § 343.01.

         In 2004, pursuant to the BPT Ordinance, the City promulgated an interpretative regulation ("BPT Regulation") to "provide a formal interpretation" of the BPT Ordinance, and to establish criteria for its administration. See BPT Ordinance, Introduction. The section of the BPT Regulation applicable to the instant matter defines the "gross receipts" of a business subject to taxation as:

Cash, credits or property of any kind received in exchange for merchandise sold or services performed or other business activity conducted within or attributable to the City, without deduction there from [sic] on account for costs of property or merchandise sold; materials, labor or services furnished or used; interest or discount paid; or any other business related expense, as permitted by regulation.

BPT Regulation § 201. The Regulation further describes "sale" as: "[t]he passing of ownership from a seller to a buyer for a price, or for a consideration," and "service" to mean "any act or instance of helping or benefiting another for consideration." Id. Of particular relevance here, the Regulation also excludes from taxation of a business's gross receipts any "[f]reight delivery or transportation charges paid by the seller for the purchaser." Id. § 206(j)(2).[4]

         In 2011, an audit of S & H's business privilege tax returns conducted by the City revealed that, for the tax years 2007-2011, S & H claimed that, under the "public utility service" exemption of the LTEA, [5] it was entitled to deduct from its gross receipts the shipping fees it collected. The City took the position that S & H was not entitled to claim this exemption and, consequently, issued a tax assessment against S & H in the amount of $118, 346.88, plus interest and penalties. S & H appealed to the Court of Common Pleas of York County, arguing that it was entitled to claim this exemption, and raising other arguments as to why it was not subject to the BPT. The trial court concluded that S & H qualified for the "public utility service" exemption of the LTEA, and vacated the assessment order on that basis.[6]

         The City next appealed to the Commonwealth Court, which reversed the trial court based on its finding that S & H was ineligible for the exemption because it was not rendering a public utility service through its business activities. S & H Transport, Inc. v. City of York, 102 A.3d 599 (Pa. Cmwlth. 2014). S & H further appealed that decision to our Court, and we unanimously upheld the Commonwealth Court's decision. S & H Transport, Inc. v. City of York, 140 A.3d 1 (Pa. 2016). However, we remanded the matter to the trial court for it to rule on S & H's other challenges to the imposition of the BPT, which it had not previously addressed.

         One of these challenges, which is the subject of the present appeal, was S & H's claim that the City improperly included in its calculation of S & H's gross receipts the amount of shipping fees it was paid by sellers utilizing its services, which it then remitted to the carriers it hired to deliver the sellers' products, in addition to the commissions it earned for arranging the transactions. S & H maintained that it was only responsible for paying the gross receipts tax on the portion of the total sum paid to it by the seller of the products that S & H retained as its commission. The City, by contrast, contended that S & H was a middleman which arranged transportation for sellers of goods and, as such, all money it received as a result of performing this service was taxable as gross receipts, regardless of the fact that S & H passed the shipping fees it collected on to the carrier.

         The trial court ruled in favor of S & H.[7] It interpreted the BPT Ordinance as applying solely to the gross revenue earned by S & H for acting as an agent of the seller - its commissions. The court viewed S & H as merely a "conduit" of the shipping fees charged by the carrier and paid by the seller. Trial Court Opinion, 2/9/17, at 6. The court analogized this arrangement to one where a real estate closing company acts as a conduit of monies related to the sale of the property, like mortgage proceeds and down payment funds, which it merely passes through to other parties to the sale, but does not itself retain. The court considered it "patently unfair" to impose the BPT on such monies which merely passed through S & H's accounts. Id.

         The trial court also noted that the BPT Regulation "specifically provides for delivery or transportation charges paid by a seller for a buyer to be excluded." Id. In the court's view, it was immaterial for purposes of this exclusion whether the seller paid the charges directly or "by an agent of the seller, i.e., S & H, acting as a conduit for the seller." Id.

         The City appealed to the Commonwealth Court, which reversed in a unanimous published opinion authored by Senior Judge Dante Pellegrini.[8] S & H Transport, Inc. v. City of York, 174 A.3d 679 (Pa. Cmwlth. 2017). First, the Commonwealth Court emphasized that it has repeatedly held that fairness is not the standard utilized in interpreting tax statutes; rather, only the legislative intent to include or exclude the proceeds of particular business activities from a BPT is relevant. Thus, the Commonwealth Court found that the trial court erred in evaluating the tax for fairness or reasonableness.

         In order to ascertain the legislative intent regarding the taxability of the monies at issue under the BPT, the Commonwealth Court examined what it considered to be the governing provisions of the Ordinance and the Regulation. The court observed that, under the BPT Ordinance, the tax is levied on all "business" occurring within the City, including "any activity carried on, or exercised for gain or profit, in the City, including . . . the provision of services," and, thus, encompassed S & H's freight brokerage services. Id. at 682 (quoting BPT Ordinance § 343.01(a)).

         Next, the Commonwealth Court noted that the BPT is assessed on the "gross volume of business," which is further defined by the BPT Ordinance as "the money or money's worth received by any vendor in, or by reason of, the sale of goods, wares, merchandise, or services rendered." Id. (quoting BPT Ordinance § 343.01(f)). The court found that "[t]his broad language indicates that the City intended to impose the BPT on all gross receipts attributable to corporations such as S & H conducting business within the City, not just to gross profits as was held by the trial court." Id. (emphasis original).

         The Commonwealth Court further determined that the shipping fees received by S & H were not excludable under the BPT Regulation's exclusion for "[f]reight delivery or transportation charges paid by the seller for the purchaser." BPT Regulation § 206(j)(2). Likewise, the court concluded that the shipping fees were not barred from taxation under Section 6924.301.1(f)(12) of the LTEA, which, as noted above, prohibits local municipalities like the City from taxing gross receipts comprised of "charges advanced by a seller for freight, delivery or other transportation for the purchaser in accordance with the terms of a contract of sale." S & H Transport, 174 A.3d at 683 (quoting 53 P.S. § 6924.301.1(f)(12)).

         With respect to both the BPT Regulation and the LTEA, the court observed that, in the transactions at issue, S & H, acting in its capacity as a broker, was neither the seller nor purchaser of the goods which were the subject of the transactions, nor did it transport those goods; hence, the court reasoned that neither the plain text of the LTEA, nor the BPT Regulation, permitted S & H to exclude the shipping fees it received. Additionally, the court found no legal authority to support the trial court's ...

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