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Nonresident employers that routinely serve Philadelphia clients must withhold city wage taxes from nonresident employees over work they performed in the city, a Philadelphia judge has ruled. In so holding, Judge Annette M. Rizzo noted that the language of Philadelphia’s tax ordinance addressing nonresident employers confers virtual residency upon such a business if it maintains an office within city limits “or is otherwise subject to service of legal process.” Rizzo rejected the argument that not reading the words “in Philadelphia” into the latter clause leads to an absurd result. Gold Elevator Services Inc. v. Tax Review Board involves roughly $33,500 the city claims the Voorhees, N.J.-based business owes it in conjunction with work performed by its nonresident employees between 1999 and 2002. “The Tax Review Board clearly heard substantial evidence that [Gold Elevator] has more than minimum contacts with the City of Philadelphia,” Rizzo wrote. “[Gold] reported on its Business Privilege Tax returns that 80-97 percent of its revenue is derived from its work in Philadelphia. While revenue does not specifically reveal the number of visits by [Gold's] employees to Philadelphia, it clearly establishes [Gold's] connections to the forum state. [Gold] maintains contacts with clients located in Philadelphia. [Gold] also admittedly pays Philadelphia Business Privilege Tax. In addition, [Gold] deducts Philadelphia Wage Tax from the paychecks of its employees who are Philadelphia residents. Therefore, as demonstrated by [Gold's] own actions in operating its business, the board properly determined [Gold] to be an ‘employer’ under [Philadelphia Revenue Regulation 404].” According to the opinion, Gold did not withhold any money in wage taxes from its non-Philadelphia employees from December 1999 to December 2002. In January 2004, the city’s Department of Revenue billed the company for $27,557 in unpaid taxes and $23,491 in interest and penalties. The board held that Gold was responsible for the actual taxes owed, but reduced the interest and penalties bill by 75 percent. Gold appealed at the common pleas level. The company argued before Rizzo that it should be understood that when Regulation 404 refers to businesses “subject to service of legal process,” it means companies that are subject to service “in Philadelphia.” “[Gold] asserts that without the words ‘in Philadelphia,’” Rizzo wrote, “the regulation would ‘create an absurd, impossible or unreasonable result’, by subjecting employers without any connections to Philadelphia to the wage withholding requirement for its nonresident employees.” But Rizzo found that under Philadelphia Tax Review Board case precedent, a nonresident company is subject to service if they are subject to jurisdiction in Philadelphia. Rizzo also rejected the argument that the city should have had to explicitly state in Regulation 404 which businesses and/or employees it intended to be subject to that ordinance. Gold had called attention to the fact that the “savings clause” found in §7359 of Pennsylvania’s Tax Reform Code deals with the taxation of nonresident employees of nonresident businesses that do work in the city. Rizzo concluded that the ability to tax non-resident businesses performing work in Philadelphia is a key public policy concern for the city. “[Gold's] assertions skirt the true issue involved in this case — that [Gold], a company which gains at least 80 percent of its revenue from services its employees perform within Philadelphia, has an obligation to withhold wages from its non-resident employees,” she wrote. “[Gold] cannot avoid the wage withholding requirement merely because it does not maintain a physical location within the city, when in reality its financial survival depends upon the revenue generated from its Philadelphia business activities. As it conducts nearly all of its business within the city, [Gold] is dependent on the health of the economy of Philadelphia. “Exempting [Gold], as a service provider with a routine presence within the city, from the wage withholding requirement would leave all non-resident service sector businesses doing business within the city free to operate outside of the local tax structure and ignore their duty to withhold.” Gold’s attorney, Eric Wilenzik of Elliott Greenleaf & Siedzikowski in Blue Bell, Pa., said both sides are preparing briefs for review by the Commonwealth Court. He said that while the General Assembly’s savings clause does not call for municipalities to amend their ordinances so as to conform to its provisions, the statute does provide an example of one way the city could make Regulation 404 more clear. “I would say it’s virtually a pure legal issue, and it comes down to what level of detail the courts are going to require of legislative bodies when they enact taxing statutes,” Wilenzik said. Calls to the city law department seeking comment were not immediately returned.

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