United Tavern Owners v. Philadelphia School District

Opinion by

Mr. Justice O’Brien,

On June 4, 1970, the City of Philadelphia enacted an . ordinance amending §19-1800 of The Philadelphia Code by adding a new section authorizing the Board of Education of the School District of Philadelphia to impose a tax of ten percent on the retail sales of liquor and malt and brewed beverages in hotels, restaurants, taverns or clubs within the City of Philadelphia.

On June 8,1970, pursuant to the enabling ordinance, the Board of Education of the School District of Philadelphia adopted a resolution imposing and levying the ten percent tax.

On June 18, 1970, the restaurant, hotel and tavern associations, two restaurants, one .tavern, and an officer of the tavern association, who together are the appellees, brought an action in equity requesting that the appellants be enjoined from imposing, levying, assessing or collecting the tax. On July 9, 1970, Judge Hirsh filed his adjudication and decree nisi, permanently enjoining collection of the tax. The appellants filed exceptions, and on July 17, 1970, after hearing arguments, the court en banc directed that the decree be made final. The case now comes to us on appeal.

The case presents only one question: May the City of Philadelphia validly enact an ordinance taxing the retail sales of liquor, malt and brewed beverages?

The court below and the parties to this action have sought to discuss the doctrine of preemption as it applies to this case as two separate questions. First, has the state preempted the field through the enactment of the Liquor Code, Act of April 12, 1951, P. L. 90, Art. I, §101, as amended, 47 P.S. §1-101 et seq.? Second, has the state preempted the field through the enactment of the Commonwealth sales tax, Act of March 6, 1956, P. L. (1955) 1228, Art. I, §1, as amended, 72 P.S. 3408-201 (a), which imposed a six percent sales tax on liquor, and the enactment of the emergency act of June 9, 1936, Ex. Sess., P. L. 13, §2, as amended, 47 P. S. §795, which imposed an eighteen percent tax on liquor sold by the liquor control board?

The chancellor concluded against the validity of the tax on both issues, finding that the Commonwealth had totally preempted the field of legislation pertaining to liquor by its enactment of the comprehensive state Liquor Code, 47 P.S. 1-101 et seq., and had also specifically preempted the area of taxation on the sales of liquor by the specific wording of the Sterling Act.

The court en banc agreed with the chancellor insofar as the preemptive effects of the Liquor Code were concerned, but the court en banc did not believe that the Sterling Act had preempted the field of taxation on the sales of liquor.

Although we agree with both the chancellor and the court en banc in their final conclusion that the City of Philadelphia is barred from authorizing the imposition of the tax, we disagree with their analysis of the issues involved. In our view, in light of the doctrine of preemption which has developed in Pennsylvania jurisprudence, the state Liquor Code alone is not a sufficient indication of the Commonwealth’s intention to preempt the entire field of legislation affecting liquor. Only when consideration is given to the two taxes which exist on liquor and the specific preemption doctrine enacted as part of the Sterling Act, as well as to the Liquor Code, can the conclusion be reached that the City of Philadelphia is barred from authorizing the imposition of a tax on the retail sales of liquor in hotels, restaurants, taverns or clubs.

At this point, it would be well to restate the general principles involved in determining when local governments in Pennsylvania have the power to act and when they are barred from acting, despite otherwise having the power, because the Commonwealth has preempted the field.

In Pennsylvania, cities have no power to act unless that power has been granted to them by the state legislative body by an enabling act. Moreover, even when cities have been given powers to act, if the state has preempted the field in a specific area, then in that area cities have no power despite the wording of the enabling act on which they rely.

Our most recent statement on this general subject of preemption appears in Harris-Walsh, Inc. v. Dickson City Boro., 420 Pa. 259, 268-9, 216 A. 2d 329, 333-4 (1966). There, we quoted at length from our opinion in the landmark case of West. Pa. Restaurant Assn. v. Pittsburgh, 366 Pa. 374, 380-1, 77 A. 2d 616 (1951) : “ ‘(1) There are statutes which expressly provide that nothing contained therein should be construed as prohibiting municipalities from adopting appropriate ordinances, not inconsistent with the provisions of the act or the rules and regulations adopted thereunder, as might be deemed necessary to promote the purpose of the legislation. On the other hand there are statutes which expressly provide that municipal legislation in regard to the subject covered by the State act is forbidden. Then there is a third class of statutes which, regulating some industry or occupation, are silent as to whether municipalities are or are not permitted to enact supplementary legislation or to impinge in any manner upon the field entered upon by the State; in such cases the question whether municipal action is permissible must be determined by an analysis of the provisions of the act itself in order to ascertain the probable intention of the legislature in that regard. It is, of course, self-evident that a municipal ordinance cannot be sustained to the extent that it is contradictory to, or inconsistent with, a state statute: [citing an authority] . . . municipalities in the exercise of the police power may regulate certain occupations by imposing restrictions which are in addition to, and not in conflict with, statutory regulations: [citing authorities], But if the general tenor of the statute indicates an intention on the part of the legislature that it should not be supplemented by municipal bodies, that intention must be given effect and the attempted local legislation held invalid: [citing authorities].’”

Insofar as the Liquor Code is concerned, it is in the third class of statutes. The statute itself is silent as to whether municipalities are or are not permitted to enact taxation legislation relating specifically to the sales of liquor. The appellees disagree with this, emphasizing Section 1-104(a) of the statute, which specifically sets forth the following standard when interpreting the statute: “(a) This act . . . shall be deemed an exercise of the police power of the Commonwealth for the protection of the public welfare, health, peace and morals of the people of the Commonwealth and to prohibit forever the open saloon, and all of the provisions of this act shall be liberally construed for the accomplishment of this purpose.” They further remind us of our opinion in the Tahiti Bar, Inc. Liquor License Case, 395 Pa. 355, 360, 150 A. 2d 112, 115 (1959), where we said: “There is perhaps no other area of permissible state action within which the exercise of the police power of a state is more plenary than in the regulation and control of the use and sale of alcoholic beverages.” However, to concede plenary and exclusive control under the police power is not to concede the same under the taxation power.

In determining whether, by the enactment of the specific statute, the Commonwealth completely barred a municipality’s enactment of an ordinance relating to the same field, we will refrain from striking down the local ordinance unless the Commonwealth has explicitly claimed the authority itself, or unless there is such actual, material conflict between the state and local powers that only by striking down the local power can the power of the wider constituency be protected.

As we said in Retail Master Bakers A. v. Allegheny Co., 400 Pa. 1, 3, 161 A. 2d 36 (1960) : “. . . [In such cases] the ordinance will not be stricken down unless it be clearly shown that the Legislature intended to pre-empt the field or unless the ordinance conflicts with the statute. . . .”

The appellees argue that there is irreconcilable conflict between the state Liquor Code and the ordinance. Arguing that “the power to tax involves the power to destroy,” McCulloch v. Maryland, 4 Wheat. 316 (1819), appellees emphasize that there is no limit to the amount of tax the City could have authorized and that the regulatory effect of a special tax increases as the amount of the tax increases. Although that maxim is true, it is not applicable to our present situation. We are not dealing with an attempt on the part of Philadelphia to tax liquor so excessively that total prohibition is achieved. We are instead dealing with a specific ordinance seeking to raise revenue from a ten percent tax on the retail sales of liquor by restaurants and bars.

For this reason, the Sawdey Liquor License Case, 369 Pa. 19, 85 A. 2d 28 (1951), and Hilovsky Liquor Case, 379 Pa. 118, 108 A. 2d 705 (1954), which were emphasized by the appellees, the chancellor and the court en banc, are not applicable to the present case. Both Sawdey and Hilovslcy concerned zoning ordinances which attempted to bar operations by liquor licensees in commercially-zoned areas merely because of their liquor sales. In this way the ordinances were attempts to “establish prohibition within the borders of the municipality without a vote of the electors on the question of local option as provided in Section 472 of the Liquor Code.” Hilovsky, supra, at page 121. Consequently, the ordinances were in direct conflict with the Liquor Code and were invalid.

There is no showing that prohibition would result or that the holders of liquor licenses would be prevented from operating in Philadelphia. In fact, such a result was clearly not intended because if the sale of liquor by the drink were in fact curtailed in Philadelphia by the enactment of this ordinance, the Philadelphia School System would not obtain the revenues that this ordinance intended.

Consequently, if we were to examine the proposed taxation ordinance only in the light of the Liquor Code, we could not conclude that the legislature had clearly indicated that its statewide regulation of liquor was intended to preempt the field as to local taxation as well as regulation.

However, the enactment of the Liquor Code is not the only indication of the legislature’s intent on this question. The state has entered the tax field by virtue of two acts, now effective, that impose taxes on the sale of liquor. One act specifically imposes an eighteen percent tax on all liquors as follows: “An emergency State tax is hereby imposed and assessed at the rate of eighteen percentum of the net price of all liquors sold by the board. The tax herein imposed shall be collected by the board from the purchasers of the liquor from the board. The amount of such eighteen percentum so collected by the board, under the provisions of this act, shall be paid into the State Treasury, through the department, in the manner and within the times herein specified, and shall be credited to the General Fund.” Act of June 9,1936, Ex. Sess., P. L. 13, §2, as amended, 47 P.S. 795.

The other act is the general statewide six percent sales and use tax which is applicable to many items in addition to liquor. However, liquor is treated differently from other items the sale of which is taxed under the sales tax. As to liquor, every sale, whether or not for resale, is taxed when made by the Pennsylvania liquor store and is not taxed when resold by a dispenser. The tax on the sale of a liquor store is imposed as a result of the following definition of a “sale at retail” (Act of March 6, 1956, P. L. (1955) 1228, Art. I, §2, as amended, 72 P.S. 3403-2(j) (7) (d), Paragraph 6): “The term ‘sale at . . . retail’ with respect to ‘liquor’ and ‘malt or brewed beverages’ shall include the sale of ‘liquor’ by any ‘Pennsylvania liquor store’ to any person for any purpose, and the sale of ‘malt or brewed beverages’ by a ‘manufacturer of malt or brewed beverages’, ‘distributor’ or ‘importing distributor’ to any person for any purpose, except sales by a ‘manufacturer of malt or brewed beverages’ to a ‘distributor’ or ‘importing distributor’ or sales by an ‘importing distributor’ to a ‘distributor’ within the meaning of the ‘Liquor Code’. The term ‘sale at retail’ shall not include any sale of ‘malt or brewed beverages’ by a ‘retail dispenser’ or any sale of ‘liquor’ or ‘malt or brewed beverages’ by a person holding a ‘retail liquor license’ within the meaning of and pursuant to the provisions of the ‘Liquor Code’, but shall include any sale of ‘liquor’ or ‘malt or brewed beverages’ other than pursuant to the provisions of the ‘Liquor Code’.”

The real question presented by this case is whether, by the enactment of these two statutes, the legislature has intended to preempt the field of taxation specially imposed on the sale of liquor.

In the specific area of taxation, the legislature has given us further guidance to the solution of the difficult problem of reconciling the governmental relationship between state and local authorities by enacting a specific preemption provision in the enabling statute on which the local authority must rely for the validity of this tax.

The Sterling Act, on which Philadelphia must rely for authority validating this enactment, provides as follows: “From and after the effective date of this act . . . tbe council of any city of tbe first or second class shall have the authority by ordinance, for general revenue purposes, to levy, assess and collect, or provide for the levying, assessment and collection of, such taxes on persons, transactions, occupations, privileges, subjects and personal property, within the limits of such city of the first or second class, as it shall determine, except that such council shall not have authority to levy, assess and collect, or provide for the levying, assessment and collection of, any tax on a privilege, transaction, subject or occupation or on personal property which is now or may hereafter become subject to a State tax or license fee. (Emphasis supplied.) Act of August 5,1932, Ex. Sess., P. L. 45, §1, 53 P.S. 15971.

We hold today that because the sales of liquor are already subject to two state taxes, the state has preempted the specific field of liquor sales for taxation purposes and Philadelphia is barred from enacting the ordinance in question.

The court en banc and the appellants both contend that the opposite conclusion is required by our recent decision in Phila. Tax Rev. Bd. v. Smith, Kline & F. Lab., 437 Pa. 197, 262 A. 2d 135 (1970).

We do not agree. In Smith, Kline we interpreted “state license fee” to mean only those fees imposed for purposes of raising revenue. By so doing, we ascribed to the General Assembly the same philosophy of preemption, as contained in the various tax-enabling acts, which we have followed in developing our own preemption doctrine in connection with other areas where state legislation and local ordinances must be reconciled, i.e., the philosophy of abstaining from striking down a local ordinance unless there is direct conflict with a state statute. In the area of taxation, that philosophy means that if the local tax is not imposed directly on specific transactions on which the state is dependent for revenues, then the local ordinance poses no real threat to the state’s revenue plans. Consequently, the local tax is permitted. However, when the state decides to enter a specific area for purposes of raising state revenues, a municipal tax in the same area could pose a threat, either by causing a diminution of the taxed activity or by increasing the costs of collection. Consequently, the state has preempted that area insofar as specially directed taxation is concerned.

In Smith, Kline, we held that the registration fee required by The Drug, Device and Cosmetic Act was a regulatory measure not designed to produce revenue. Consequently, because the state had not preempted the field for purposes of raising revenue, the city was not barred from enacting a tax. In the case of sales of liquor, however, there can be no doubt that the two taxes, one for eighteen percent, the other for six percent, are clearly designed to produce revenue for the state.

Appellants also contend that the ordinance in question does not violate the preemption provision of the Sterling Act because it is imposed on a different transaction than that on which the two state taxes are imposed. According to this argument the local tax would be imposed on the transaction between the holder of the retail liquor license, i.e., the owner of the hotel or bar, and the consumer, whereas the state taxes are imposed on the transaction between the holder of the liquor license and his distributor, the state liquor store.

We do not accept this view. In our view, the state taxes on liquor are classic sales taxes. The only reason that the definition of sales in the case of liquor is different from the definition with regard to other items covered by the sales tax is because the existence of a statewide system of state-operated distribution centers for liquor made it possible to assure effective collection of the tax by imposing the tax on the sale at the state store.

The case of Cahill v. Philadelphia, 381 Pa. 611, 114 A. 2d 99 (1955), cited by the appellants, is inapposite. In that case the Philadelphia Mercantile License Tax (Ordinance of December 9, 1952) was challenged as violative of the preemption provisions of the Sterling Act when imposed on the gross receipts of holders of state liquor licenses because of the license fees which such licensees are required to pay. However, that case dealt with a gross-receipt tax aimed at business generally, rather than specifically at liquor sales. Moreover, in Cahill we explained that even though the license fees which licensees are required to pay did generate revenue, that revenue was turned over to the municipality rather than being appropriated by the state. In this way, Cahill was similar to the case of McClelland v. Pittsburgh, 358 Pa. 448, 57 A. 2d 846 (1948), because the state statute which was said to have preempted the taxation field was not a “state tax” within the statutory preemption provision since the tax was expressly imposed for county purposes.

Here, the state taxes were clearly imposed for statewide purposes, the state has preempted the field and the city tax is invalid under the Sterling Act.

As to appellants’ argument that because the court en banc ruling was based on the finding that the liquor code generally had preempted the field rather than the specific taxes which the state had imposed on liquor, our scope of review is limited to a determination of that issue, we need only repeat our view expressed in Taylor v. Churchill V. Country Club, 425 Pa. 266, 268, 228 A. 2d 768, 769 (1967): “If a lower court makes a correct ruling, order, decision, or judgment or decree, but assigns an erroneous reason for its action, an appellate Court will affirm the lower Court’s action, order or ruling or decision or judgment or decree, and assign the proper reason therefor.”

The Decree of the lower Court is affirmed, each party to bear own costs.

Mr. Chief Justice Bell and Mr. Justice Roberts concur in the result.

Mr. Justice Jones took no part in the consideration or decision of this case.

Mr. Justice Cohen took no part in the decision of this case.