Commonwealth Court Unanimously Holds that Local Business Privilege Tax Must be Fairly Apportioned 

Tax Alert

May 11, 2017

A panel of the Commonwealth Court unanimously held that a local Business Privilege Tax (BPT) imposed on fees paid by Pennsylvania 7-Eleven franchisees to 7-Eleven’s regional office in the township was unconstitutional because it was not fairly apportioned. Upper Moreland Township v. 7 Eleven, Inc., No. 144 C.D. 2016 (Pa. Commw. Ct. 2017). 

In the case before the Commonwealth Court, 7-Eleven, Inc. (7-Eleven) was a Texas corporation with stores located throughout the country. Its stores were either corporate stores, which are owned and operated by 7-Eleven directly, or franchise stores, which are licensed to franchisees. The franchisees paid a “7-Eleven charge” for services provided to them by 7-Eleven. The services included advertising services for developing point-of-sale signage for stores and for information technology services, which were provided to the franchisees from Texas and Massachusetts, respectively.

From 2003 through 2011, 7-Eleven had a regional office for the Northeast Division, one corporate store, and one franchise store in the Township of Upper Moreland (township). The Northeast Division included stores in Pennsylvania and New England. 7-Eleven filed BPT returns with the township and reported gross receipts generated by the corporate store in the township. However, it did not include the 7-Eleven charges it collected from franchise stores in the Northeast Division. The township audited 7-Eleven and assessed $1,724,114 of BPT, interest, and penalties.

7-Eleven appealed the assessment. The local tax review board affirmed the assessment, but the trial court invalidated it in its entirety on the grounds that it was unconstitutional because it was not fairly apportioned. The trial court found that the township taxed all of the 7-Eleven charges from franchise stores in Pennsylvania, even though the activity that generated the Pennsylvania 7-Eleven charges resulted from economic activity from both in and outside Pennsylvania. On appeal, the Commonwealth Court affirmed the lower court’s holding that the tax was not fairly apportioned, but reversed in part and remanded the case for a recalculation of tax due by 7-Eleven.

Business Privilege Tax

The township’s BPT is imposed on the gross receipts of “[e]very person engaging in a business, trade, occupation, profession, or vocation in the Township.” Upper Moreland Twp. Code § 310-4. If a taxpayer has places of business in more than one state, its gross receipts from outside the township are apportioned using a formula in the regulations that average three factors: property, payroll, and gross receipts. However, the parties agreed to apportion using only receipts in the township as a percentage of total receipts. Thus 7-Eleven’s BPT apportionment factor was calculated by dividing the gross receipts from the 7-Eleven charges from within the township by the gross receipts from the 7-Eleven charges in the Northeast Division. 

Commerce Clause Arguments

The Supreme Court of the United States has provided a four-part test to determine whether a local tax on interstate commerce is constitutionally permissible. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). One of the four elements of that test requires that a tax on interstate commerce must be “fairly apportioned.” A local tax on interstate commerce is fairly apportioned if it is internally and externally consistent. Goldberg v. Sweet, 488 U.S. 252, 260-61 (1989). The issue, in this case, was whether the township’s BPT was externally consistent. 

The external consistency requirement is a subjective test. The inquiry is whether the tax applies to “only that ‘portion of the revenues from the interstate activity which reasonably reflects the instate component of the activity being taxed.’” 7 Eleven, Inc., No. 144 C.D. 2016 (Pa. Commw. Ct. 2017) (citing Philadelphia Eagles Football Club, Inc. v. City of Philadelphia, 823 A.2d 108, 131 (Pa. 2003) (citing Goldberg, 488 U.S. 252, 262)). To establish that a tax is not externally consistent, the taxpayer must prove that the income attributable to the taxing municipality is disproportionate to the business transacted by the taxpayer in the municipality, has led to a grossly distorted result for the taxpayer, or is inherently arbitrary or produced an unreasonable result. 


The court first addressed the township’s argument that the trial court erred in finding that the Pennsylvania 7-Eleven charges resulted from interstate activities that required apportionment. The trial court held that the 7-Eleven charges consisted of charges for point-of-sale marketing materials and information technology services, which were provided from Texas and Massachusetts, respectively. The court, therefore, determined that the 7-Eleven charges resulted from interstate activity because many services provided by 7-Eleven to Pennsylvania franchise stores are produced by activity from beyond Pennsylvania. The court looked to where those services were performed to determine whether the township was taxing interstate activity. The court also relied on the testimony of the Northeast Division vice president, which it described as substantial evidence that the 7-Eleven charges collected from Pennsylvania franchise stores were the product of interstate commerce.

The court rejected the township’s argument that the receipts did not need to be apportioned because 7-Eleven did not segregate interstate and intrastate activities. The court held that 7-Eleven did not need to prove what specific portion of receipts is derived from interstate commerce versus intrastate commerce in order to prevail if it was even possible to do so because apportionment is the mechanism that performs the segregation function. The court concluded that the 7-Eleven charges constituted interstate commerce, and therefore they must be fairly apportioned.

On its face, the ordinance and regulation as agreed to by the parties could be interpreted as logically circular and meaningless:  by excluding factors for property and payroll, gross receipts are apportioned according to gross receipts. However, the court looked to where the activities were conducted for which the fees were charged, not to where the fees were paid. The gross receipts are to be apportioned from where the activities were performed that generated the receipts. The approach the court took is consistent with the approach in Philadelphia Eagles Football Club, supra, in which the Pennsylvania Supreme Court held that royalties received by the Eagles for broadcasting their football games were apportionable receipts for Philadelphia Business Privilege Tax purposes, since the activity that generated the receipts was the live broadcast of the football games, which took place in Philadelphia and at other teams’ venues outside of Philadelphia.

The court overruled the trial court that the assessment must be stricken, and instead remanded the case to the lower court to apportion the receipts consistent with its opinion. 

It is not clear whether this case will be appealed to the Pennsylvania Supreme Court. 


Joseph C. Bright


(215) 665-2053

Heidi R. Schwartz


(215) 665-2799

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