Potential Tax Changes Ahead for Pennsylvania Nonprofits

Pennsylvania charities that rely on exemptions from real property tax and sales and use tax may have good reason to be concerned. A recently released special report prepared by the Pennsylvania Auditor General quantifying potential tax revenues from currently exempt properties underscores the significance of an ongoing legislative initiative to give the General Assembly exclusive control over the rules that exempt certain Pennsylvania nonprofits from property tax and sales and use tax.

The Pennsylvania Constitution provides that the General Assembly may enact laws to exempt institutions of “purely public charity” from taxation, and many nonprofits do not pay property tax or sales and use tax under legislation now in effect. Certain efforts by the legislature to fine tune the applicability of the tax exemption have been thwarted, however, by the Pennsylvania Supreme Court’s ruling that it alone has the authority to define what constitutes “a purely public charity” under the Pennsylvania Constitution, and those Constitutional requirements must be satisfied before the scope of any tax exemptions under any statute passed by the General Assembly are considered. (Mesivtah Eitz Chaim of Bobov, Inc. v. Pike County Board of Assessment Appeals 615 Pa. 463, 473, 44 A.3d 3, 13 (2012)) In 1985 the Supreme Court identified five requirements for purely public charity status in Hospital Utilization Project v. Commonwealth (507 Pa. 1, 487 A.2d 1306 (1985)), commonly referred to as the “HUP test.” As recently as December 23, 2014, a unanimous three-judge panel of the Commonwealth Court ruled Fayette Resources, Inc., a nonprofit that operates group homes in Western Pennsylvania, should not have been granted tax-exempt status because the second of the five HUP test requirements was not satisfied. (Fayette Res., Inc. v. Fayette Cnty. Bd. of Assessment Appeals, No. 405 C.D. 2014, 2014 Pa. Commw. LEXIS 589 (Pa. Commw. Ct. Dec. 23, 2014)) The Court highlighted how the evidence supported a determination Resources satisfied the requirements of The Purely Public Charity Act, 10 PS §375, but held that fact did not make Resources a purely public charity where the Constitutional requirements were not met.

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Pennsylvania charities that rely on exemptions from
real property tax and sales and use tax may have good
reason to be concerned. A recently released special
report prepared by the Pennsylvania Auditor General
quantifying potential tax revenues from currently
exempt properties underscores the significance of an
ongoing legislative initiative to give the General
Assembly exclusive control over the rules that exempt
certain Pennsylvania nonprofits from property tax and
sales and use tax.
The Pennsylvania Constitution provides that the
General Assembly may enact laws to exempt
institutions of “purely public charity” from taxation,
and many nonprofits do not pay property tax or sales
and use tax under legislation now in effect. Certain
efforts by the legislature to fine tune the applicability
of the tax exemption have been thwarted, however,
by the Pennsylvania Supreme Court’s ruling that it
alone has the authority to define what constitutes “a
purely public charity” under the Pennsylvania
Constitution, and those Constitutional requirements
must be satisfied before the scope of any tax
exemptions under any statute passed by the General
Assembly are considered. (Mesivtah Eitz Chaim of
Bobov, Inc. v. Pike County Board of Assessment
Appeals 615 Pa. 463, 473, 44 A.3d 3, 13 (2012)) In
1985 the Supreme Court identified five requirements
for purely public charity status in Hospital Utilization
Project v. Commonwealth1 (507 Pa. 1, 487 A.2d 1306
(1985)), commonly referred to as the “HUP test.” As
recently as December 23, 2014, a unanimous three-
judge panel of the Commonwealth Court ruled Fayette
Resources, Inc., a nonprofit that operates group
homes in Western Pennsylvania, should not have been
granted tax-exempt status because the second of the
five HUP test requirements was not satisfied. (Fayette
Res., Inc. v. Fayette Cnty. Bd. of Assessment Appeals,
No. 405 C.D. 2014, 2014 Pa. Commw. LEXIS 589 (Pa.
Commw. Ct. Dec. 23, 2014)) The Court highlighted how
the evidence supported a determination Resources
satisfied the requirements of The Purely Public Charity
Act, 10 PS §375, but held that fact did not make
Resources a purely public charity where the
Constitutional requirements were not met.
The existence of two similar tests with potentially
different outcomes has led to efforts underway in the
Pennsylvania General Assembly to amend the
Commonwealth’s Constitution2 to give the General
Assembly, rather than the Pennsylvania Supreme
Court, exclusive control over what constitutes “a
purely public charity” under the Constitution. This
Constitutional amendment will require passage of the
proposed joint resolution in two sessions of the
General Assembly, followed by a voter referendum.
The first passage occurred in June of 2013, and the
Pennsylvania General Assembly’s current session
started on January 6th.
Against this backdrop, the Pennsylvania Auditor
General recently released a special report entitled “A
Review of Potential Lost Revenue Due to Property Tax
A L E R T
JANUARY
2015

N O N P R O F I T

Exemptions.”3 The report examines additional tax
revenues that could be collected in ten Pennsylvania
counties if all exempt properties were taxed. It also
specifically examines the tax revenues that could be
collected if medical facilities in those counties with
purely public charity status were taxed. The report
explains that “Medical facilities that are classified as
institutions of purely public charity were reviewed due
to reports of high revenues of some institutions in this
category, growth and consolidation in the industry,
and the fact that many for-profit medical facilities do
exist and pay property taxes.”
While the Auditor General’s report focused on the
impact of the property tax exemption, purely public
charities can also obtain exemption from the
Commonwealth’s sales and use tax. For some
charities, the sales and use tax exemption is more
important than the property tax exemption. The sales
and use tax exemption does not appear to be the
driving force behind the proposed Constitutional
amendment, but the amendment would give the
General Assembly exclusive control over which
charities would qualify for the sales and use tax
exemption as well.
Increased scrutiny of nonprofits, some of which have
previously made payments in lieu of taxes (PILOTS)
and provided services in lieu of taxes (SILOTS), is a
predictable consequence of pervasive government
deficits. At the same time, financial pressures on
nonprofits create an incentive for them to work with
their legislators to secure the maximum tax relief
available. The proposed Constitutional amendment
will mean nonprofits of all types should prepare
themselves for increased political debate over which
institutions should qualify as public charities entitled
to exemption from property taxes as well as sales and
use taxes.
This summary of legal issues is published for
informational purposes only. It does not dispense legal
advice or create an attorney-client relationship with
those who read it. Readers should obtain professional
legal advice before taking any legal action.

For more information regarding Schnader’s Nonprofit
Practice Group or its Business Services Department,
or to speak with a member of the firm, please
contact:

Marla K. Conley
Nonprofit Practice Group Co-Chair
215-751-2561
mconley@schnader.com

Cynthia G. Fischer
Nonprofit Practice Group Co-Chair
212-973-8175
cfischer@schnader.com

Joseph E. Lundy
215-751-2525
jlundy@schnader.com

Noel A. Fleming
215-751-2444
nfleming@schnader.com

Marilyn Z. Kutler
Business Services Department Chair
215-751-2684
Mkutler@schnader.com

H. Lee Schwartzberg, Jr.
Business Services Department
Vice-Chair
215-751-2283
lschwartzberg@schnader.com

www.schnader.com
© 2015 Schnader Harrison Segal & Lewis LLP
* See: www.schnader.com/jakarta

1 An entity qualifies as a purely public charity if it possesses the
following characteristics: (a) advances a charitable purpose; (b)
donates or renders gratuitously a substantial portion of its services; (c)
benefits a substantial and indefinite class of persons who are
legitimate subjects of charity; (d) relieves the government of some of
its burden; and (e) operates entirely free from private profit motive.
2 SB 4 JR-2 of 2013, PN 347
3http://www.auditorgen.state.pa.us/Media/Default/Reports/RPT_Prop
TaxExemptions_12182014_KGW2_Final2.pdf

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