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The Pennsylvania Commonwealth Court has held in Northeast Oxford Enterprises LP and Shurgard Self-Storage Center Inc. v. City of Philadelphia Tax Review Board that owners of self-storage facilities who lease out storage units of various sizes must pay the Philadelphia Use and Occupancy Tax on those facilities. Because of apparent conflicts in treatment of these facilities under the Use and Occupancy Tax Act on one hand and the Pennsylvania Tax Reform Code on the other, the court characterized the applicable question as “a difficult issue of first impression.” In reaching its decision, the court first analyzed the use and occupancy tax. That tax was passed by the city of Philadelphia by enabling legislation known as the “Tax Anything Act,” which authorizes City Council to levy such taxes within the city as it may determine, except for any “privilege, transaction, subject or occupation or on personal property which is now or may hereafter become subject to a state tax or license fee.” Based on this statutory authority, the city of Philadelphia has imposed the applicable tax for general school purposes on the use or occupancy of real estate within the School District of Philadelphia for the purpose of carrying on any business, trade, occupation, profession, vocation, or any other commercial or industrial activity. The tax is imposed on the “user or occupier of real estate.” But, each landlord or other person authorized to collect rentals on “premises, the use or occupancy of which is subject to tax under this section, shall collect as agent for the School District of Philadelphia, from each user or occupier the proper proportion of the user’s or occupier’s tax.” The ordinance is amplified by substantial regulations, which provide the basis for most of the storage companies’ arguments. The court held: “These regulations define ‘use’ and ‘occupancy’ as ‘interchangeable words that mean actual and physical possession and use of real estate as opposed to constructive or legal possession. One who is “occupying” real estate is physically present in or on the property, either personally or by his agent, or has placed therein personal property belonging to him.’” In addition, the storage companies rely on a definition of “landlord ” as “ [a]ny owner of real estate or any person who grants the right to use or occupy real estate or any part thereof to any lessee.” Because of the way storage companies operate, the storage companies argue that they own tenant-occupied real estate so that the incidence of the tax must fall on the tenants and their use of such property, as in the case of all other commercially leased real estate in Philadelphia. Even though the Commonwealth Court ruled against these owners, it conceded that the language of the city’s regulations supports their construction of the ordinance. The evidence in the case shows that self-storage facilities are individual storage units in which customers can store furniture, vehicles, business records, and other goods in a facility upon payment of rent, and pursuant to a written lease agreement. “The customers may lock and generally have sole access to the storage unit, but they are prohibited from operating a business out of the unit. The lessor, upon reasonable notice, can enter the leased space to inspect, repair, alter or improve the unit, and if a customer defaults on payments, the owner can deny access to the customer after notice, remove the customer’s personal property and enforce a lien for rent by selling the property without the intervention of the courts,” the court said. Statewide Laws Despite the language or the ordinance and regulations that support the storage companies’ arguments, the Commonwealth Court ruled against them. That decision was based on “statewide laws that give context” to the ordinance. It held: “First, it seems apparent that the General Assembly has treated the lease of self-storage space not as a conveyance of an interest in real estate but as the sale of a service. The transaction is subject to Pennsylvania Sales Tax under the heading ‘Purchase at Retail,’ defined as ‘[t]he obtaining for a consideration of those services described in . . . [which clause] is [t]he rendition for a consideration of self-storage service.’ “Moreover, although treating them differently for tax purposes, the Tax Reform Code likens self-storage space to such things as safe-deposit boxes, storage in refrigerator units, and lockers in airports, bus stations” and similar arrangements, the court said. In addition, the court relied on language in the Self-Service Storage Facility Act that characterized the storage facility as “space,” rather than as a parcel or unit of realty. “More significantly, the customer’s rights are so limited that they do not take on most of the usual indicia of an interest in real property. The customer may not physically occupy the space, but may only enter to deposit and remove personal goods. Although he may lock the space to secure his personal property, he has no genuine interest in the structure itself,” the court said. “The owner retains the unrestricted right to inspect, alter or improve the unit as he wishes (obtaining access upon reasonable notice). Upon default of payment, the customer has none of the procedural protections accorded under ordinary landlord-tenant law,” the court said. “Finally, and perhaps more importantly, if the use and occupancy tax were imposed upon the lessees of self-storage space rather than the owners of the facilities as appellants argue, the tax would be invalid. As noted above, the enabling statute that authorizes the use and occupancy tax specifically provides that the city “shall not have authority to levy . . . any tax on . . . a transaction . . . which is now or may hereafter become subject to a state tax,” the court said. “Since the rental on the storage spaces is subject to the Pennsylvania sales tax, any use and occupancy tax directed at appellant’s customers would be invalid,” the court said. “Accordingly, we agree with the board and common pleas that the owners of self-storage facilities, who are using their real estate for business purposes, are the proper subject of the Philadelphia use and occupancy tax.” Based on this case, one wonders whether it would be possible for self-storage companies to avoid the use and occupancy tax by restructuring their customers’ leases. For example, what if they were set up more like the rental of a parking lot or specific parking spaces within a building and less like rental of safe-deposit boxes and lockers in airports? Suppose the storage companies retained no more rights in their leases than is customary among other commercial landlords. Would that have made a difference? How will courts now treat owners of parking garages who provide very few services but in fact simply rent space to tenants who park their own cars in that designated space? Suppose the parking garages only rent out space by the month or the year, and each rented unit is a whole floor or a designated part of a floor in a parking garage? How will that now be treated under the use and occupancy laws? In any event, if landlords of these facilities are now required to pay the use and occupancy tax, they will probably want to add these anticipated sums to the rental charges. (Copies of the 11-page opinion in Northeast Oxford Enterprises LP and Shurgard Self-Storage Center Inc. v. City of Philadelphia Tax Review Board , PICS No. 03-1507, are available from The Legal Intelligencer . Please refer to the order form on Page 10.) Harris Ominsky is with Blank Rome, which has offices in Pennsylvanian, New York, New Jersey, Delaware, the District of Columbia, Maryland, Florida and Ohio. He is a pat president of the Pennsylvania Bar Institute.

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