A Tax on Leases? No Way!

In 2006, the Commonwealth Court upheld the decision of a Lancaster County trial judge holding that the Borough of Millersville could impose a $30 tax on residential leases lasting one year or less. On December 17, 2008, our Supreme Court unanimously overruled the Commonwealth Court's decision of Lynnebrook and Woodbrook Associates v. Borough of Millersville.

At issue was the scope of the taxing authority granted by the Local Tax Enabling Act ("LTEA"). Often referred to as the "Tax Anything" act, the LTEA provides, in part:

The duly constituted authorities of the following subdivisions...may, in their discretion, by ordinance or resolution, for general revenue purposes, levy, assess and collect or provide for the levy, assessment and collection of such taxes as they shall determine on persons, transactions, occupations, privileges, subjects and personal property within the limits of such political subdivisions, and upon the transfer of real property, or of any interest in real property, ...

53 P.S. §6924.301.1(a).

You get the idea. But what the legislature giveth, it can also taketh away. Section 2 of the LTEA imposes limits upon what transactions a municipality may levy a tax, including leases. As is so often the instance with cases and statutes, two differing sides proposed different interpretations of the LTEA. Specifically, the language at issue is as follows: "Such local authorities shall not have authority by virtue of this act: (1) To levy, assess and collect or provide for the levying, assessment or collection of any tax on the transfer of real property when the transfer is by . . . leases . . ." 53 P.S. §6924.301.1(f)(1) (emphasis added). Millersville (the borough) argued that the appropriate way to read the statute is as recited here, and argued that because a lease is not a transfer of real property, the tax is appropriate. Contrarily, Lynnebrook (the property manager) argued that the appropriate way to read the statute is to preclude Millersville from "levying, assessment or collection of any tax on . . . leases;" which would invalidate the tax.

The Court acknowledged that each party offered a "plausible" interpretation for the limiting language in question. However, the Court also observed that either proposal, when read in conjunction with the rest of Section 2, would render the entire section to be grammatically incoherent. Reciting the Court's language in this article would add unnecessary length without substance. Suffice it to say, the Court was correct - the interpretations provided by both Millersville and Lynnebrook rendered Section 2 grammatically unsound.

The focus for the Court's decision was whether the language of Section 2 was an exception (benefiting the taxpayer) or an exemption (benefiting the borough). Because the legislative intent was not clear from the statute itself, the Supreme Court analyzed the statute and determined that Section 2 was necessary to restrict the grant of authority to impose taxes; the object of Section 2 was to restrict the municipal taxation authority; and the purpose of Section 2 was to reign in municipalities that impose taxes beyond that which are permitted by the LTEA. Thus, the Court held that the appropriate interpretation of Section 2 is an exception to the local municipality's taxing authority and that there is an "unqualified prohibition on the taxation of leases." While this decision may limit a college town's ability to generate additional revenue, it is consistent with the intended limitations on taxation.

The Court noted that the LTEA was amended effective July 2, 2008, but that the pertinent section was substantially the same, thus not affecting the Court's analysis. On October 15, 2008, the LTEA was again amended, and "leases" was amended to read "leases or lease transactions." It is unlikely this amendment would alter the Court's analysis.