The Scouts, in their federal suit, seek to stop the city from charging about $200,000 a year in rent or evicting them. The Scouts currently pay $1 annually for the space.
The U.S. Supreme Court ruled in 2000 that the Boy Scouts, as a private group, have a First Amendment right to bar gays.
However, taxpayers cannot keep subsidizing the rent of a group that discriminates, City Solicitor Shelley Smith said Tuesday.
"They're free to exercise their First Amendment rights," Smith said. "What they're not free to do is get a benefit from the city while violating our policy."
The city has given the Scouts until Saturday to revise their policy or start paying rent.
The Philadelphia chapter adopted an explicit nondiscrimination policy in 2003 after negotiations with the city, but was forced to rescind it when the Boy Scouts of America balked. The national group said Philadelphia Scout officials could not deviate from national rules barring participation by anyone who is openly gay.
The local chapter, called the Cradle of Liberty Council, then adopted what it considered compromise language that barred "unlawful discrimination" - the same standard used by Scout groups in New York, a council spokesman said Tuesday.
"If that's working and there haven't been any problems, why can't that continue?" spokesman Jeff Jubelirer said.
The suit accuses the city of censorship for targeting the Scouts but maintaining free or nominal leases with other groups that limit membership, such as Baptist and Roman Catholic church groups and The Colonial Dames of America.
The city owns the Beaux Arts headquarters constructed by the Scouts in 1928 and the land beneath it. The Scouts have spent about $60,000 a year to maintain the building, and another $1.5 million for renovations in 1994, the suit said.
The Scouts say the higher rent would force them to cut programs, and is equivalent to the cost of sending about 800 needy children to summer camp.
The Cradle of Liberty Council oversees about 300 troops in Philadelphia and suburban Delaware and Montgomery counties. The council serves about 70,000 children, including 50,000 in the city, the suit said.
The Boy Scouts of America promote a Scout oath "To keep myself physically strong, mentally awake, and morally straight."
The city passed its Fair Practices Ordinance, which bans discrimination based on sexual orientation and other grounds, in 1982.
