The Changing Landscape Of Charitable Tax Exemption In Pennsylvania

Introduction

On February 17, 2015, the Pennsylvania Senate passed a bill that could have far reaching implications for all Pennsylvania nonprofit charitable organizations. The bill, S.B. 4, is a proposal to amend the Pennsylvania Constitution to give the General Assembly the authority to determine the qualification standards for so-called "institutions of purely public charity." To effect such an amendment, the bill must be passed in two consecutive legislative sessions before being approved by Pennsylvania voters in a general referendum. Prior to this most recent passage by the Senate, the bill was passed in the last legislative session of the General Assembly in June 2013. As such, it will now move to the House of Representatives for its second review and consideration. If approved by the House, the bill will likely be placed on Pennsylvania ballots in this November's general election.

S.B. 4 Back Story - What is an "Institution of Purely Public Charity" Anyway?

"Well, I never heard it before, but it sounds uncommon nonsense."

― Lewis Carroll, Alice in Wonderland

Although the Pennsylvania Constitution does not directly exempt any organization from taxation, it authorizes the General Assembly to enact laws to grant to "institutions of purely public charity" an exemption from state taxation. Thus, to be eligible for real estate or sales and use tax exemption under Pennsylvania law, a charitable nonprofit organization must first qualify as an "institution of purely public charity" within the meaning of the Pennsylvania Constitution. However, the Pennsylvania Constitution does not define the term "institution of purely public charity" nor does it currently give the General Assembly the authority to do so.

This lack of a clear definitional standard has spurred much litigation over the years. To help address the definitional void, in 1985 the Supreme Court established a multifactor test designed to identify organizations that qualified as institutions of purely public charity. The test, as announced in Hospital Utilization Project v. Commonwealth, 487 A.2d 1306, 1317 (Pa. 1985) (the HUP Test), requires nonprofit organizations to satisfy five criteria to be recognized as institutions of purely public charity. They must: (1) advance a charitable purpose; (2) donate or render gratuitously a substantial portion of their services; (3) benefit a substantial and indefinite class of persons who are legitimate subjects of charity; (4) relieve the...