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Saving the Baby

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Baby on Board.jpgEverything you need to know about the city's attitude towards business can be encapsulated in the name of the taxes and fees it applies to them: business privilege.

It sends the message that doing business in Philadelphia is like being invited to join a swank private club - and we're going to soak you for the privilege of joining.

Before you even open your doors, you must first get a business privilege license (at $300) and then pay the city's business privilege taxes, both on your gross receipts and your net profits.  Oh, and in that crucial first year, you must not only pay taxes on your net income, you must also estimate how much income you expect to have next year and pay those taxes in advance as well.

Obviously, the time when doing business in Philadelphia was a privilege is long gone, but the sting of these taxes remains.  And they are particularly injurious to start-up businesses who are struggling to make a go of it. 

I have been involved in several startups.  While writing those checks to the Revenue Department you can't help get the feeling that the city is trying to kill your baby while still in the crib.

The worst was the gross receipts tax.  In the 90's, when my wife and a partner started up a small publishing business (using their life savings), they lost money in the first three years. So, they avoided the net profits tax by not having any profits.  Still, they had to pay a sizeable tax on their gross receipts.

During the Rendell years, the city reduced the rate of the gross receipts tax, removing the sting a bit.

Now, Council and the Nutter administration appear ready to take a second step and remove the stinger from the net profits tax for small startups.

One bill approved by the Council Finance Committee yesterday (Monday, Oct. 24) would exempt the first $100,000 from the gross receipts and net profits tax. Another bill would exempt startups from paying any taxes for the first two years if they employ three city residents in the first year and six by the second year.

The Council people who spearheaded this legislation are Bill Green, Maria

Quinones-Sanchez and Jim Kenney, who deserve our thanks for forward thinking

The Nutter administration, originally reluctant to support the changes - fearing its impact on the city budget - went along after the sponsors agreed to delay or phase in implementation until 2015.

The package also includes a provision to switch to a system called a single sales factor apportionment, whereby companies will only have to pay the sales tax on sales made in the city, as opposed to all locations. That switch could be a lure for larger companies looking to relocate in the area.

This is not the stuff of drama - tax policy rarely is - but it could have a major impact on the future of the city. It has the potential of turning Philadelphia from an inhibitor to an incubator for small businesses. No more smothering the baby in the crib.

And while it would be great for the city to nab a few big businesses with the sales tax adjustment, it helps to remember the power of entrepreneurship -- even in its smallest manifestations.

And it may be the time to recall that both Apple and Microsoft were started by entrepreneurs -- in their garages.

-- Tom Ferrick

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