Property Tax Exemption for Pennsylvania Charities Under Review
The Constitution of Pennsylvania currently allows the Pennsylvania General Assembly (“General Assembly”) to exempt purely public charities from property taxes and sales and use taxes. There has been much debate in the Commonwealth over both the definition of a purely public charity and which governing legislative body has the right to define it. In an effort to quantify the cost of granting property tax-exemption within Pennsylvania, the Pennsylvania Department of the Auditor General (“Auditor General”), on December 18, 2014, released a special report entitled “A Review of Potential Lost Revenue Due to Property Tax Exemptions” (“Report”).
Background
The General Assembly is in the process of attempting to pass a constitutional amendment which would provide the legislature in Pennsylvania, rather than the courts, the sole authority to define what constitutes a purely public charity. This amendment was passed by the Pennsylvania House of Representatives in June of 2013 and is now in the hands of the Pennsylvania legislature to be passed and then affirmed by the Pennsylvania voters.
In 1985, the Pennsylvania Supreme Court, in Hospital Utilization Project v. Commonwealth, identified five requirements an organization must meet in order to be considered a purely public charity. This test has come to be known as the HUP Test and includes the following five requirements. In order to be considered a purely public charity, the organization must:
- Advance a charitable purpose;
- Donate or render gratuitously a substantial portion of its services;
- Benefit a substantial and indefinite class of persons who are legitimate subjects of charity;
- Relieve the government of some of its burden; and
- Operate entirely free from profit motive.
The General Assembly passed Act 55 in 1997 which altered these guidelines, making it easier for organizations to be considered purely public charities. In 2012 the Supreme Court reiterated the five requirements in Mesivtah Eitz Chaim of Bobov, Inc. v Pike County Board of Assessment Appeals and also ruled that the judiciary had the right to interpret the Pennsylvania Constitution.
Special Report
The Auditor General collected data from ten Pennsylvania counties in order to identify amounts of potential property tax liabilities that these charitable organizations could be subject to with respect to county, municipal and school district taxes. All of the data was obtained from each county office for the 2014 tax year and the databases were utilized to identify the following information:
- Total assessed value of all properties, regardless of tax exemption status;
- All properties that have been assigned exemption status; and
- Medical facilities that are classified as purely public charities.
The analysis was published in the Report and concluded that foregone revenue due to property tax exemptions granted to tax-exempt entities exceeded $1.5 billion per year. The Report does note that it is possible that some of the charitable organizations analyzed and included may make Payments in Lieu of Taxes (“PILOTs”) to one or more of the state taxing authorities. As PILOT payments are considered a voluntary payment, there is no standardization as to how these amounts are calculated. Each charitable organization negotiates their own PILOT payment and, accordingly, due to the lack of standardization, these amounts could not be taken into account when analyzing foregone revenue due to property tax exemptions.
The Report concludes by stating, “This report demonstrates why taxpayers, local governments, school districts, and the charitable institutions themselves have a major stake in the outcome of how this issue is resolved. Local governments forgo significant amounts of increasingly needed taxes, while some institutions’ exclusion from paying property taxes is a critical factor in their financial health and ability to provide charitable services.”
Tax-Exempt Medical Facilities
The Report includes a table which reflects the potential property tax liabilities, by county, for medical facilities with purely public charity status. These medical facilities range in size from large healthcare systems to smaller nursing care facilities. The Report indicates that the total potential property tax liability for these medical facilities is in excess of $177 million. Additionally, the Report contains a listing by county of the medical facilities which were analyzed and included in the calculation of foregone property tax revenues. The total potential tax liabilities for these medical facilities include county, municipal, and school district taxes for the properties owned by these medical facilities. In the event these medical facilities are required to remit property taxes, this lost revenue to the organizations would have a significant impact on the facilities as they continue to carryout their charitable missions.
Conclusion
The issue of property tax exemption granted to charitable organizations has been and will continue to be a controversial issue which will continue to be scrutinized by states and municipalities, as they continue to face financial pressures and stresses. The proposed Constitutional amendment would mean that tax-exempt organizations of all types, not just medical facilities, should be prepared for increased scrutiny as to which organizations should qualify as public charities and, accordingly, be afforded exemption from property taxes.
A copy of the Report may be accessed online.
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The information contained herein is not necessarily all-inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.
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