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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