Small Business in a Big City

By Aaron Kase
Add Comment Add Comment | Comments: 0 | Posted May. 10, 2010

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The gross-receipts tax is a business killer. Right? Right?!
 
That’s the conventional wisdom. Mayor Nutter ran for office pledging do away with the tax.
 
Currently, the business-privilege tax includes two parts: The gross-receipts portion, which collects .14% of all sales before taking into account expenses and other loses, and the net-profit tax, which charges 6.45% tax on reported profits.
 
Nutter came to power planning to gradually phase out the gross-receipts portion over eight years while lowering the net profit tax to 6%. The recession and accompanying drop in city revenues put a hold on the plans.
 
In the meantime, Council members Bill Green and Maria Quiñones-Sánchez have been working on a proposal that would turn conventional wisdom on its head. They want to raise the gross-receipts tax while reducing and possibly eliminating net profit entirely.
 
For an entrepreneur starting a small business who might expect to operate at a loss for a year or two before turning a profit, the gross-receipts tax looks prohibitive and is a good reason to not open shop within city limits.
 
No so, says Quiñones-Sánchez. Close inspection of the numbers reveals that the majority of the tax burden for small businesses in Philadelphia comes from the net income tax. Meanwhile, big corporations headquartered outside the city find corporate loopholes to write off profits and get away without paying net income taxes at all.
 
 “One of the things we’ve done is to step back and ask, who pays?” she said. “The big multinational companies, all they pay are gross receipts. Budweiser, Coors, they have no workers in the city, pay no wage tax. If we eliminate gross receipts, they pay nothing.”
 
“It’s net income that’s the killer of businesses in Philadelphia,” Green says.
 
The councilman says that among other loopholes, large corporations charge licensing fees to local storefronts and allocate overhead to locations within the city to avoid claiming any profits. “It’s a whole industry that’s come up to avoid state and local taxes,” he said.
 
Despite a recent Econsult suggestion that the city could raise an extra $20 million by changing the gross-receipts ratio, the Council proposal is more likely to be deficit neutral, a means to shift the tax burden from small businesses to large rather than collecting additional revenues.
 
A bill will hit Council floor with more precise numbers in coming weeks, but isn’t expected to affect this budget cycle.
 
Budget Commissioner Keith Richardson said the city has moved to close some tax loopholes, including a complex real-estate investment rule. Currently they are looking at a non-profit loophole. In addition, the city has collected an extra million dollars by traveling to company’s headquarters and auditing their books in person.
 
“By going out there and looking over their financing, we uncover liability they have with the city on various taxes,” Richardson said.
 
The Mayor’s Office is not on board with Green and Quiñones-Sánchez’s plan. “The idea that you’re going to sharply increase the gross-receipts tax is something we have severe concerns about,” spokesman Doug Oliver said. “It’s a job-killing tax.”
 
“We’re excited about getting on track again to reduce and or eliminate the gross-receipts portion of the business privilege tax.”
 
“It won’t be the first time the mayor is wrong,” Green said in his typical blunt fashion.
 
More will become clear in coming weeks as the numbers start trickling out. Regardless of who’s right, this is an important conversation to have. We want to encourage more businesses to locate to Philadelphia by whatever means works best.

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