What is itÖ? What does it mean?
A Layman's Perspective
by: Steve Jurash, President & CEO. Urban Industry Initiative
Faced with the continuing devolution of resources from the federal government to
the states and cities and the widespread decline of manufacturing across the country,
state governments over the last twenty years have repeatedly changed their tax systems
to encourage employment and investment. In addition to enterprise zones, tax concessions
and more general tax cutting, one of the means that states have commonly used in
the last two dec-ades has been to increase the sales factor in the corporate income
tax apportionment formula (our Business Privilege Tax). Many do as is done in Philadelphia
and double weight- the sales factor (see examples below). By doing this, states
have effectively reduced the tax cost of instate employment and payroll, making it
more attractive for business to produce instate. This simple process is the same
within the City of Philadelphia, because the challenges remain the same. The City
too must find ways to reduce the cost of being here, which will in turn, stimulates
companies to stay, while attracting new companies, new employment and new tax dollars.
When a corporation produces and/or sells goods and services outside the city, those
other juris-dictions require the business to pay tax on a portion of its profit.
The current tax laws here de-termine the portion of the corporation's profit that
is subject to Business Privilege Tax in relation to the shares of the corporation's
total property, payroll, and sales located within the City of Philadelphia. The ultimate
amount paid is apportioned, or divided by these factors.
The "typical" apportion-ment formula for multi-state or multi-city corpora-tions
includes three fac-tors: gross receipts/sales, payroll and property. The ratio of
each item in a par-ticular state to its every-where totals contributes to an overall
apportionment factor. This approach is often referred to as "the Massachusetts
Apportionment - definition
n: the act of distributing by allotting or appor-tioning; a dividing into just proportions
or shares; "the apportionment of seats in the House of Representatives is based
on the rela-tive population of each state".
Ironically, the Massachusetts legislature recently departed from the formula that
bears its name. The new law will phase in a single-factor (sales) apportionment formula
for defense contractors and manufacturers, but not for wholesalers, retailers or
service corporations. The rationale for Massachusetts's policy decision was fairly
simple: to lower the Massachusetts tax burden on cor-porations investing in property
and personnel in Massachusetts while increasing the burden of out-of-state taxpayers
who gain economic advantages in the state without making an investment in property
or personnel in the state. In the City of Philadelphia, when we talk about apportion-ment,
we are referring to how the Business Privilege Tax (BPT) is calculated. For BPT,
two types of categories are subject to tax, both having to do with a company's in
city sales or services — Gross Receipts and Net Income.
The first is based upon Gross Receipts, which is the total amount of dollars generated
by a sale. For example, a company makes coffee mugs and sells them for $5 each. If
they sell 10 mugs, their gross receipts are $50, ($5 x 10 mugs). For our purposes,
we are only concerned with what is sold within the city. So, in this example, let's
say that of the $50 the company sells, $30 (or 6 mugs) are sold within the city.
This $30 represents their gross receipts as far as Philadelphia is concerned. Philadelphia
doesn't tax sales or services delivered outside the City. There is a very small tax
on Gross Receipts, but knowing the amount of Gross Receipts resulting from sales
within the City is most important because it becomes part of the formula to calculate
the Net Income portion of the BPT.
The second category is Net Income, which is what a com-pany really makes from a sale,
after its costs are sub-tracted. For example, our coffee mug company sells their
mugs for $5 each, but it costs them $1 to make each mug. The net income from the
sale of each coffee mug is $4. They sell 10 mugs - their net income is $40 (10 x
$4). This is the real focus of the BPT tax. The city looks to apportion or distribute
the tax across several factors: weighted gross receipts-, a company's total payroll
and total property value. Unlike gross receipts however, BPT looks at total net income
from sales, both in and out of the City (it's simply too difficult to distinguish
net sales and costs with multi-city, multi-jurisdictional operations). So:
The current calculation looks to apportion across three factors (sales x 2, payroll
and property), to determine what percent of the $40 is subject to tax, using the
The problem with this method of apportionment — in spite of the odd- double weighted
gross re-ceipts factor which is designed to help - companies with a substantial investment
in the city, in terms of property and payroll, are actually penalized. This is especially
burdensome for manufac-turing, where firms typically have a substantial investment
in plant and equipment.
Below are two examples, using our same mug company. One example, where our company
has all of its property and payroll in the city and one where they have all of their
property and payroll outside the city. The difference in the resulting tax will be
These examples and calculations represent how BPT is calculated now in the City of
Philadelphia. In example one, the company with all of its resources, payroll and
property in the city will pay over two and a half times more in BPT than the company
in example two, with none of its re-sources in the city.
Single Factor Apportionment
Makes the calculation easier and provides the potential for economic stimulusÖ
In single factor apportionment as a means of calculating BPT, we are simply eliminating
the other factors used in apportioning net income. Gone are property and payroll,
which have their own tax anyway through wage and real estate taxes and gone is the
double weighting method. Under this method, the BPT calculation for our company is
the same- in both examples:
By simplifying the formula and removing the impact of a taxpayer's property and payroll
from the apportionment factor calculation, we level the playing field. Under the
double weighted method, our sample company, with significant investment in the City,
paid tax on $32 of net sales while an out of City company, with no investment here,
pays tax on $12 of net sales, according to our example. Hardly fair. The simplified
formula has each company paying the same. More for the out-of-City company and less
for the in-City company when compared with the current method used. Although we believe
it's unlikely that new companies will select Philadelphia as home sim-ply because
it has a single-factor formula, it is reasonable to expect our existing companies,
manufacturing in particular, to be more willing to invest in both people and equipment
as a result.
Thus, it responds to a consideration that has become an important issue in Philadelphia,
where tax incentives have often seemed to focus on attraction rather than retention.
And it does not give tax benefits to those who promise to put their assets and employment
in the city, but rather to those who actually do so.
Single Factor Apportionment for manufacturing firms.
The Challenges Are Daunting.
- Global competition is so intense that manufacturers can't raise prices even though
costs keep rising. Manufacturing cannot raise its prices in response to increase
costs, as other types of businesses can.
- The costs of doing business in the United States, in the Commonwealth and in
the City due to externally imposed costs – taxes, legal, regulatory, energy, health
care – keep rising. A recent study shows that these costs add about 22 percent to
the cost of doing business here, almost equal to the total cost of production in
- Some foreign competitors are engaging in unfair trade practices, such as currency
manipula-tion, dumping and counterfeiting.
For more information please contact, Steve Jurash, Urban Industry Initiative (215) 948-9285
Manufacturing has a greater effect on economic growth than any other sector: Making
a dollar's worth of goods generates an additional $1.50 in other economic activities.