Pennsylvania Charitable Exemptions

Transcription

1 Pennsylvania Legislator s Municipal Deskbook, Third Edition (2006) Pennsylvania Charitable Exemptions Background The Pennsylvania Constitution empowers the General Assembly to provide for exemptions from taxation. Article VIII, Section 2(a) of the Constitution provides, among other things, that the General Assembly may exempt from taxation [i]nstitutions of purely public charity The General Assembly implemented the provisions of Article VIII, Section 2(a), 2 through the enactment of the General County Assessment Law 3 and the Fourth to Eighth Class County Assessment Law. 4 As a result of the amendatory Act 167 of 2006, the formal short title of this law is the Fourth to Eighth Class and Selective County Assessment Law. 5 However, for purposes of this article and accompanying footnotes, the law will be referred to as the Fourth to Eighth Class County Assessment Law. The General Assembly is constitutionally constrained to exempt only those charitable organizations that are institutions of purely public charity. 6 The assessment laws extend real property tax exemptions to qualifying institutions of purely public charity. 7 Although the Constitution and the assessment laws provide, generally, for real property tax exemptions for institutions of purely public charity, neither defines what constitutes this type of institution. Thus, since the term was first incorporated 2005 Microsoft Corporation 1 Section 2(v) states that real property tax exemptions granted for institutions of purely public charity may only be granted for that portion of real property that is actually and regularly used for the purpose of the institution. 2 The Pennsylvania Supreme Court has noted, The Constitution does not, of itself, exempt any property; it merely permits the legislature to do so within certain limits. Donohugh s Appeal, 86 Pa. 306, 309 (1878) P.S ( The General County Assessment Law, Section 204), generally. Section 204(a)(9) specifically addresses institutions of purely public charity P.S ( The Fourth to Eighth Class County Assessment Law, Section 202), generally. Section 202(a)(9) specifically addresses institutions of purely public charity. 5 Act 167 of 2006 amended the Fourth to Eighth Class County Assessment Law to delineate the method by which wind turbines would be assessed. Because this amendment applies to ALL counties, the name of the Fourth to Eighth Class County Assessment Law was changed to The Fourth to Eighth Class and Selective County Assessment Law Summ. Pa. Jur. 2d, Taxation 18:1 (2005). 7 In order to qualify for a property tax exemption, the real property owned by the institution of purely public charity must be necessary for the occupancy and enjoyment of such institutions so using it. 72 P.S (a)(9); 72 P.S (a)(9). Pennsylvania General Assembly * Local Government Commission Page 155

2 Pennsylvania Charitable Exemptions in the Pennsylvania Constitution of 1874, 8 the courts have had to determine the qualifications for exemption for institutions of purely public charity. The Pennsylvania Supreme Court in Hospital Utilization Project v. Commonwealth 9 (HUP) developed a five-part test based on over 100 years of judicial precedent 10 for the purpose of defining a purely public charity. The court stated: Although the term purely public charity has not been defined with exactness under Pennsylvania law, case law has provided criteria by which we can set forth the parameters of a purely public charity. 11 The five-part test established in HUP sets forth requirements that became the method of identifying institutions of purely public charity. The five factors were: 1. Advances a charitable purpose; 2. Donates or renders gratuitously a substantial portion of its services; 3. Benefits a substantial and indefinite class of persons who are legitimate subjects of charity; 4. Relieves the government of some of its burden; and 5. Operates entirely free from private profit motive. Even with the creation of the five-part test by the Pennsylvania Supreme Court in HUP, varying court decisions followed due, in part, to difficulty in reconciling the various exemption provisions in the assessment laws. In 1997, the General Assembly passed the Institutions of Purely Public Charity Act (IPPCA). 12 The General Assembly s purpose in enacting this statute was to eliminate the inconsistent application of eligibility standards for charitable tax exemptions by creating specific legislative standards that would define the term institutions of purely public charity. 13 The General Assembly found:... [there is] increasing confusion and confrontation among traditionally tax-exempt institutions and political subdivisions to the detriment of the public.... There is increasing concern that the eligibility standards for charitable tax exemptions are being applied inconsistently, which may violate the uniformity provision of the Constitution of Pennsylvania Pa. Const. Art. IX, A.2d 1306 (Pa. 1985). 10 In the HUP case, the Court reviewed decades of case law beginning with Episcopal Academy v. Philadelphia, 150 Pa. 565, 573, 25 A. 55, 56 (1892). In this 1892 case, the Supreme Court reviewed prior law and stated: [It] may be safely said that whatever is gratuitously done or given in relief of the public burdens or for the advancement of the public good is a public charity. In every such case as the public is the beneficiary, the charity is a public charity. As no private or pecuniary return is reserved to the giver or any particular person, but all the benefit resulting from the gift or act goes to the public, it is a purely public charity, the word purely being equivalent to the word wholly A.2d P.S ; the act of November 26, 1997, P.L. 508, No P.S. 372 (IPPCA, Section 2) P.S. 372(a)(4), (5). Page 156

3 Pennsylvania Legislator s Municipal Deskbook, Third Edition (2006) The IPPCA superficially incorporates the five-point HUP test, but now significantly redefines the method by which each of the five prongs is met and adds other requirements. The IPPCA states that an institution that meets the five criteria enumerated in the law shall be considered to be founded, endowed, and maintained by public or private charity. 15 The IPPCA also created new procedural provisions for challenging the tax-exempt status of an organization. Under the IPPCA, if a political subdivision challenges the tax-exempt status of an organization, and the organization possesses a valid sales and use tax exemption from the Pennsylvania Department of Revenue and has an annual program service revenue of less than $10 million, then the organization is entitled to assert a rebuttable presumption that it has satisfied all of the criteria for qualification as an institution of purely public charity. If the organization s annual service revenue is equal to or exceeds $10 million, the 2005 Microsoft Corporation organization may assert the presumption only if it possesses a valid sales and use tax exemption and has a voluntary agreement 16 with the political subdivision in which it conducts substantial business operations. 17 If an organization asserts a presumption, then a political subdivision challenging that organization before a government agency or court will bear the burden of proving, by a preponderance of the evidence, that the organization does not comply with the requirements of the act. 18 Purely Public Charity Status: Relationship of Constitutional Standard to Statutory Standard The Pennsylvania Supreme Court in Community Options, Inc. v. Board of Property Assessment 19 considered the relationship of the constitutional requirements for establishing a purely public charity under Article VIII, Section 2 of the Pennsylvania Constitution and the requirements for establishing a purely public charity under IPPCA. The court stated: An entity seeking a statutory exemption for taxation must first establish that it is a purely public charity under Article VIII, Section 2 of the Pennsylvania Constitution before the question of whether that entity meets the qualifications of a statutory exemption can be reached. G.D.L. Plaza Corp. v. Council Rock Sch. Dist., 515 Pa. 54, 526 A.2d 1173, 1175 (1987); P.S. 375(a) (IPPCA, Section 5(a)). 16 An organization may make, by agreement, contributions to the political subdivision for the purpose of defraying some of the cost of various local government services. See 10 P.S. 373 (Definitions), 377 (Voluntary Agreements) P.S Id Pa. 672, 813 A.2d 680 (2002). Page 157

4 Pennsylvania Charitable Exemptions Hospital Utilization Project, 487 A.2d at In Hospital Utilization Project, this Court set forth a five-part test for determining whether an entity qualifies as a purely public charity under the Pennsylvania Constitution. 20 Once the court found that the entity in question qualified as a purely public charity 21 under the constitutional standard, it recognized that the second step was to determine whether the entity qualifies for tax-exempt status under IPPCA. 22 In this regard, the intent of the IPPCA was considered. The court stated: Section 372 of the IPPCA states that the intent of the Act is to provide standards to be applied uniformly throughout this Commonwealth for determining eligibility for exemption from State and local taxation which are consistent with traditional legislative and judicial applications of the constitutional term institutions of purely public charity. 10 P.S. Section 372(b). Section 375(a) of the [IPPCA], entitled Criteria for institutions of purely public charity, states that an institution of purely public charity is an institution that meets the criteria set forth in subsections (b), (c), (d), (e), and (f). Each of the five subsections to which Section 375(a) refers has an opening sentence that tracks the language of one of the Hospital Utilization Project test prongs. 23 Moreover, at least with regard to the one element of the purely public charities test under consideration the relieve-the-government criterion it appears that the court saw no inconsistency between its prior decisions and the legislature s codification and quantification of the criteria for a purely public charity The five-part test referred to requires that to qualify as a purely public charity an entity must possess the following characteristics. (a) [a]dvances charitable purpose; (b) [d]onates or renders gratuitously a substantial portion of its services; (c) [b]enefits a substantial and indefinite class of persons who are legitimate subjects of charity; (d) [r]elieves the government of some of its burden; and (e) [o]perates entirely free from private profit motive. Community Options, Inc., 813 A.2d at 683, citing Hospital Utilization Project, 487 A.2d Only one prong of the test was an issue on appeal, i.e., whether the entity relieved the government of some of its burden. Community Options, Inc., 813 A.2d at Having concluded that Appellant qualifies as a purely public charity under Article VIII, Section 2 of the Pennsylvania Constitution, the question then becomes whether Appellant meets the qualifications for tax-exempt status under the Charity Act. Id. at Id. 24 See 27 Summ. Pa. Jur. 2d, Taxation 18:22 (2005). Page 158

5 Pennsylvania Legislator s Municipal Deskbook, Third Edition (2006) Use of the Property Affecting Its Exempt Status Even if an entity qualifies as a purely public charity, the particular property in question (or part of the property) might not qualify for a real property tax exemption if the property is not actually and regularly used for the purposes of the institution. The Pennsylvania Constitution states that the General Assembly may by law exempt from taxation: Institutions of purely public charity, but in the case of any real property tax exemptions only that portion of real property of such institution which is actually and regularly used for the purposes of the institution. 25 (Emphasis added.) Applicable provisions of the General County Assessment Law address the use of the property in determining the taxability of real property. Specifically, Section 204(a)(9) states: (a) The following property shall be exempt from all county, city, borough, town, township, road, poor and school tax, to wit:... (9) All real property owned by one or more institutions of purely public charity, used and occupied partly by such owner or owners and partly by other institutions of purely public charity, and necessary for the occupancy and enjoyment of such institutions so using it ; 26 (Emphasis added.) A similar provision exists in the Fourth to Eighth Class County Assessment Law. 27 These use requirements for property of purely public charities would appear to be valid despite the passage of the IPPCA. 28 Ownership of property, then, is not the sole determiner of taxable status. The use of the property must be in support of the purpose/mission of the tax-exempt institution. Consequently, an institution of purely public charity, though itself tax exempt, may find certain property owned by it to be liable for real estate taxes if the property is not used to advance the purpose of the institution in question. 25 Pa. Const. Art. VIII, 2(v) P.S (a)(9) ( The General County Assessment Law, Section 204(a)(9)). 27 All real property owned by one or more institutions of purely public charity, used and occupied partly by such owner or owners and partly by other institutions of purely public charity and necessary for the occupancy and enjoyment of such institutions so using it. 72 P.S (a)(9) ( The Fourth to Eighth Class County Assessment Law, Section 202(a)(9)). 28 See 27 Summ. Pa. Jur. 2d, Taxation 15:24 (2005). Page 159

6 Pennsylvania Charitable Exemptions A Problem of Inconsistency One area in which confusion often arises involves treatment of tax status of property owned and leased by a charity. Owing to inconsistency in statute and case law, resolution of this issue can be problematic. The difficulty begins with the statutory provisions in the assessment laws. As referenced above in Section 204(a)(9), the General County Assessment Law excludes from tax [a]ll real property owned by one or more institutions of purely public charity, used and occupied partly by such owner or owners and partly by other institutions of purely public charity, and necessary for the occupancy and enjoyment of such institutions so using it. 29 The statute further states: Except as otherwise provided in the clauses 11 and 13, 30 all property, real or personal, other than that which is actually and regularly used and occupied for the purposes specified in this section, and all such property from which any income or revenue is derived, other than from recipients of the bounty of the institution or charity, shall be subject to taxation, except where exempted by law for State purposes, and nothing herein contained shall exempt the same therefrom. 31 Thus, these sections of law state, somewhat inconsistently, that joint use and occupancy by two charities of property owned by one is permitted, that income from property is permitted only if it is derived from the recipients of the charity's bounty, and that the person using the property must own it. The courts have had difficulty dealing with the sometimes inconsistent statutory provisions P.S (a)(9) P.S (a)(11), (13), relating to libraries and fire and rescue stations, respectively. 31 Section 204(c) of the General County Assessment Law furthermore states that property is taxable unless the person using it is seized of the legal or equitable title in the realty. 72 P.S (c) 32 See 27 Summ. Pa. Jur. 2d, Taxation 15:27 (2005). Page 160