Mayor Cherelle Parker’s administration has decided to eliminate a tax break that has been beneficial for tens of thousands of small businesses in Philadelphia, citing significant legal risks.
The Business Income and Reception Tax (BIRT) exemption has allowed smaller enterprises to exclude the first $100,000 of their sales from taxation.
Officials warn that the exemption could face legal challenges, particularly after a lawsuit filed last year claimed it violates Pennsylvania’s uniformity clause, which mandates flat tax rates across the state.
City Solicitor Renee Garcia elaborated on the situation during a news conference, stating, “It does not matter that everybody gets the exemption. What matters is the effective tax rate.”
The ongoing legal dispute poses a threat to the BIRT framework, which generates over $700 million annually, accounting for about 12% of the city’s total revenue.
A court ruling against the BIRT exemption could result in cost liabilities for the city, including the possibility of needing to repay tax amounts from the last three years.
“We are on notice, so the longer we keep doing this, the more at risk we are of a court doing something that could be devastating,” Garcia warned.
The lawsuit challenging the tax exemption and other facets of the city’s tax policies was brought forth by ZOLL, a medical device company based in Massachusetts.
While a settlement is expected soon, the decision to eliminate the exemption was made independently of the lawsuit, according to Garcia.
The decision drew criticism from members of the City Council, particularly from the Working Families Party contingent of Kendra Brooks and Nicolas O’Rourke.
They expressed disappointment that the Parker administration chose not to contest the lawsuit legally, stating in a joint statement, “Their fears are overblown, and we do not understand why they would choose to undermine their legal case publicly.”
Garcia defended the administration’s decision, pointing out that shifts in case law over the last decade could render the BIRT exemption unconstitutional.
Administration officials underscored the necessity of safeguarding the city’s finances from potential legal ramifications.
Garcia added that there seems to be some public confusion regarding the implementation of this tax break, especially since Parker announced its termination as part of her budget proposal last month.
Unlike property tax benefits such as the Homestead Exemption and Longtime Owner Occupants Program, which are explicitly allowed by state constitutional amendments, the BIRT exemption lacks such legal backing, officials noted.
In response to the impending changes, Parker’s administration is lobbying state government in Harrisburg for similar legislation to replace the exemption.
City Finance Director Rob Dubow mentioned that discussions are still in the early stages, and that significant legislative changes involve a time-consuming process requiring multiple approvals, a ballot referendum, and additional laws.
He emphasized that passing an amendment could take years.
Furthermore, Dubow and Garcia highlighted the history of cautious actions to mitigate legal risks related to taxation, referencing how the implementation of Mayor Jim Kenney’s soda tax was slowed down due to ongoing court challenges.
The upcoming changes to the BIRT exemption are expected to impact around 75,000 small businesses that currently do not pay the tax or, in some cases, do not even file a tax return.
A recent report from Pew Research found that only a quarter of businesses in the city made enough revenue to be subject to the BIRT.
Jennifer Rodriguez, president and CEO of the Greater Philadelphia Hispanic Chamber of Commerce, highlighted the disproportionate impact of BIRT on Latino-owned businesses, stating that only 3% reach $1 million or more in sales.
“We do know that the BIRT has an outsized impact on our businesses,” she remarked.
Rodriguez praised the Parker administration for allocating resources to assist entrepreneurs in navigating the complexities of the BIRT process.
Mayor Parker has proposed a budget allocation of $30 million, designed to cushion the effects of ceasing the tax break, corresponding to the expected revenue generated from the change.
A portion of this fund is earmarked for providing free multilingual tax preparation services for businesses making under $100,000 in revenue.
In the coming weeks, the city’s revenue department plans to send out notifications to all business owners and tax professionals informing them of the forthcoming changes.
Business community leaders have long contended that BIRT, alongside the wage tax on both residents and non-residents, has impeded economic growth in Philadelphia and prompted businesses to relocate to suburban areas.
Unlike most municipalities, Philadelphia imposes taxation on both business revenue and profits through the BIRT framework.
As part of her budget proposal, Parker has indicated intentions to reduce both BIRT and the wage tax by approximately $17 million for the 2026 fiscal year commencing July 1.
Moreover, her long-term goal is to phase out the gross receipts part of BIRT and halve the net income rate by the year 2039.
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