Among the severe business consequences of COVID-19 has been the government-mandated closure of non-essential businesses to better prevent the spread of the virus. Such closures have affected many retail establishments and service providers. In addition to the obvious fiscal impact of such closures on the shuttered businesses, there can also be unintended negative local tax consequences. One potential consequence relates to local use and occupancy taxes imposed on tenants of commercial premises that are prohibited by law or executive mandate from operating during the crisis. The approaches being taken by two major cities—the cities of New York and Philadelphia, both of which impose a commercial use or occupancy tax on tenants—illustrate two potentially divergent policies.

Philadelphia. The City of Philadelphia’s use and occupancy tax is a monthly tax imposed on commercial tenants at the rate of 1.21 percent of the assessed value of real property located in Philadelphia, for the use or occupancy of the premises for business purposes.2 Use or occupancy means actual and physical possession of the premises, whether or not rent is paid. Similar to a sales tax, the owner or landlord must collect the tax from tenants and remit it to the City of Philadelphia.

Divergent Approaches. In an Executive Order, New York Governor Cuomo directed the mandatory closure of all non-essential businesses throughout the State, including in New York City. City of Philadelphia Mayor Kenney has also ordered the closure of all non-essential businesses in Philadelphia.

On March 31, 2020, the Philadelphia Department of Revenue issued a pronouncement that businesses ordered to close will not be subject to the Philadelphia use and occupancy tax. This is because those businesses are being denied access to their places of business. Businesses that have employees on site or that maintain employee access to the premises, however, will continue to be subject to the tax. The pronouncement reflects the reasonable view that a tax on use and occupancy should not apply where use and occupancy is denied by government mandate.

(reprinted permission from Blank Rome)